-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, N215kNZT1YiSA7QPviRwfXtpUhxIuGHyOg3ebfqarA7LZOvABkv5JDs5qxaEu95u K8W6FCFyTTl4/99iXfg4Ng== 0000912057-96-010226.txt : 19960520 0000912057-96-010226.hdr.sgml : 19960520 ACCESSION NUMBER: 0000912057-96-010226 CONFORMED SUBMISSION TYPE: 497 PUBLIC DOCUMENT COUNT: 1 FILED AS OF DATE: 19960517 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: STI CLASSIC FUNDS CENTRAL INDEX KEY: 0000883939 STANDARD INDUSTRIAL CLASSIFICATION: [] STATE OF INCORPORATION: MA FISCAL YEAR END: 0531 FILING VALUES: FORM TYPE: 497 SEC ACT: 1933 Act SEC FILE NUMBER: 033-45671 FILM NUMBER: 96569036 BUSINESS ADDRESS: STREET 1: 2 OLIVER STREET CITY: BOSTON STATE: MA ZIP: 02109 BUSINESS PHONE: 6109896602 MAIL ADDRESS: STREET 1: 680 E SWEDESFORD ROAD STREET 2: 680 E SWEDESFORD ROAD CITY: WAYNE STATE: PA ZIP: 19087 497 1 497 STI CLASSIC FUNDS TRUST SHARES CAPITAL GROWTH FUND VALUE INCOME STOCK FUND AGGRESSIVE GROWTH FUND BALANCED FUND SUNBELT EQUITY FUND INTERNATIONAL EQUITY INDEX FUND INVESTMENT ADVISORS TO THE FUNDS: STI CAPITAL MANAGEMENT, N.A. TRUSCO CAPITAL MANAGEMENT, INC. The STI Classic Funds (the "Trust") is a mutual fund that offers shares in a number of separate investment portfolios. This Prospectus sets forth concisely the information about the Trust Shares of the above-referenced Funds (each a "Fund" and, collectively, the "Funds"). Investors are advised to read this Prospectus and retain it for future reference. A Statement of Additional Information relating to the Funds dated the same date as this Prospectus has been filed with the Securities and Exchange Commission and is available without charge through the Distributor, SEI Financial Services Company, 680 East Swedesford Road, Wayne, PA 19087-1658 or by calling 1-800-428-6970. The Statement of Additional Information is incorporated into this Prospectus by reference. THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. THE TRUST'S SHARES ARE NOT SPONSORED, ENDORSED, OR GUARANTEED BY, AND DO NOT CONSTITUTE OBLIGATIONS OR DEPOSITS OF, THE ADVISORS OR ANY OF THEIR AFFILIATES OR CORRESPONDENTS INCLUDING SUNTRUST BANKS, INC., ARE NOT GUARANTEED OR INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION, THE FEDERAL RESERVE BOARD OR ANY OTHER GOVERNMENTAL AGENCY, AND INVOLVE INVESTMENT RISKS, INCLUDING THE POSSIBLE LOSS OF THE PRINCIPAL AMOUNT INVESTED. OCTOBER 1, 1995 2 No person has been authorized to give any information or to make any representations not contained in this Prospectus, or in the Trust's Statement of Additional Information in connection with the offering made by this Prospectus and, if given or made, such information or representations must not be relied upon as having been authorized by the Trust or SEI Financial Services Company (the "Distributor"). This Prospectus does not constitute an offering by the Trust or by the Distributor in any jurisdiction in which such offering may not lawfully be made. The Trust Shares are offered primarily to financial institutions ("Shareholders"), including SunTrust Banks, Inc. and its affiliates and correspondents, for the investment of funds for which they act in a fiduciary, agency, investment advisory or custodial capacity. Fund shares may not be purchased directly by individuals, although institutions may purchase shares for accounts maintained by individuals. TABLE OF CONTENTS Expense Summary...................... 3 Financial Highlights................. 4 The Trust............................ 5 Funds and Investment Objectives...... 5 Investment Policies and Strategies... 5 General Investment Policies and Strategies.......................... 10 Investment Risks..................... 11 Investment Limitations............... 12 Performance Information.............. 13 General Performance Information...... 13 Purchase Of Fund Shares.............. 13 Redemption Of Fund Shares............ 14 Dividends And Distributions.......... 15 Tax Information...................... 15 STI Classic Funds Information........ 17 Board of Trustees.................... 17 Investment Advisors.................. 17 Portfolio Managers................... 18 Banking Laws......................... 19 Distribution......................... 19 Administration....................... 19 Transfer Agent and Dividend Disbursing Agent.................... 20 Custodian............................ 20 Legal Counsel........................ 20 Independent Public Accountants....... 20 Other Information.................... 20 Voting Rights........................ 20 Reporting............................ 20 Shareholder Inquiries................ 20 Description of Permitted Investments......................... 21 Appendix............................. A-1
3 EXPENSE SUMMARY TRUST SHARES Below is a summary of the annual operating expenses for Trust Shares of each Fund. A hypothetical example based on the summary is also shown. Actual expenses may vary. ANNUAL OPERATING EXPENSES (as a percentage of average net assets)
CAPITAL SUNBELT INTERNATIONAL GROWTH VALUE INCOME AGGRESSIVE BALANCED EQUITY EQUITY INDEX FUND STOCK FUND GROWTH FUND FUND FUND FUND - ----------------------------------------------------------------------------------------------------------------- Advisory Fees (After Voluntary Reductions)(1).................. 1.02% .80% .95% .77% .98% .64% All Other Expenses............... .13% .15% .20% .18% .17% .41% - ----------------------------------------------------------------------------------------------------------------- Total Operating Expenses (After Voluntary Reductions)(1)........ 1.15% .95% 1.15% .95% 1.15% 1.05% - ----------------------------------------------------------------------------------------------------------------- - -----------------------------------------------------------------------------------------------------------------
(1) Absent voluntary reductions and reimbursements by the Advisor and Administrator, advisory fees, other expenses, and total operating expenses expressed as a percentage of average net assets, respectively, for the Trust Shares of each Fund would be: Capital Growth Fund -- 1.15%, .13%, and 1.28%; Value Income Stock Fund -- .80%, .15%, and .95%; Aggressive Growth Fund -- 1.15%, .20%, and 1.35%; Balanced Fund -- .95%, .18%, and 1.13%; Sunbelt Equity Fund -- 1.15%, .17%, and 1.32%; and International Equity Index Fund -- .90%, .41%, and 1.31%. Fee reductions are voluntary and may be terminated at any time. Additional information may be found under "Investment Advisors" and "Administration." A person that purchases shares through an account with a financial institution may be charged separate fees by the financial institution.
CAPITAL SUNBELT INTERNATIONAL GROWTH VALUE INCOME AGGRESSIVE BALANCED EQUITY EQUITY INDEX EXAMPLE FUND STOCK FUND GROWTH FUND FUND FUND FUND - ----------------------------------------------------------------------------------------------------------------- An investor would pay the following expenses on a $1,000 investment assuming: (1) 5% annual return and (2) redemption at the end of each time period: One year..................... $ 12 $ 10 $ 12 $ 10 $ 12 $ 11 Three Years.................. 37 30 37 30 37 33 Five Years................... 63 53 63 53 65 58 Ten Years.................... 140 117 140 117 140 128 - ----------------------------------------------------------------------------------------------------------------- - -----------------------------------------------------------------------------------------------------------------
THE EXAMPLE IS BASED UPON THE TOTAL OPERATING EXPENSES OF A FUND AND SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE EXPENSES. ACTUAL EXPENSES MAY BE GREATER OR LESS THAN THOSE SHOWN. The purpose of this table is to assist the investor in understanding the various costs and expenses that may be directly or indirectly borne by investors in the Trust. The information set forth in the foregoing table and example relates only to Trust Shares. The Trust also offers Investor Shares and Flex Shares of each Fund which are subject to the same expenses except for different distribution fees and sales charges and different transfer agent fees. 4 FINANCIAL HIGHLIGHTS The following information has been audited by Arthur Andersen, LLP, the Trust's independent public accountants, as indicated in their report dated July 20, 1995 on the Trust's financial statements as of May 31, 1995 included in the Trust's Statement of Additional Information under "Financial Information." This table should be read in conjunction with the Trust's financial statements and notes thereto. Additional performance information regarding each Fund is contained in the Trust's Annual Report to Shareholders and is available without charge by calling 1-800-428-6970. For a Trust Share Outstanding Throughout the Period
NET ASSET NET REALIZED VALUE NET AND UNREALIZED DISTRIBUTIONS FROM DISTRIBUTIONS NET ASSET BEGINNING OF INVESTMENT GAINS (LOSSES) NET INVESTMENT FROM REALIZED VALUE END OF PERIOD INCOME (LOSS) ON INVESTMENTS INCOME CAPITAL GAINS PERIOD ------------ ------------- --------------- ------------------ --------------- ------------ - ------------------- CAPITAL GROWTH FUND - ------------------- TRUST SHARES 1995........................ $ 11.99 $ 0.16 $ 0.57 $ (0.14 ) $ (0.40 ) $ 12.18 1994........................ 11.95 0.16 0.31 (0.17 ) (0.26 ) 11.99 1993 (1).................... 10.36 0.12 1.57 (0.10 ) -- 11.95 - ------------------------ VALUE INCOME STOCK FUND - ------------------------ TRUST SHARES 1995........................ $ 10.54 $ 0.32 $ 1.56 $ (0.32 ) $ (0.51 ) $ 11.59 1994........................ 10.23 0.29 0.70 (0.32 ) (0.36 ) 10.54 1993 (2).................... 10.00 0.11 0.16 (0.04 ) -- 10.23 - ----------------------- AGGRESSIVE GROWTH FUND - ----------------------- TRUST SHARES 1995........................ $ 9.85 $ 0.08 $ 1.15 $ (0.08 ) -- $ 11.00 1994 (3).................... 10.00 0.02 (0.16 ) (0.01 ) -- 9.85 - -------------- BALANCED FUND - -------------- TRUST SHARES 1995........................ $ 9.76 $ 0.33 $ 0.49 $ (0.32 ) -- $ 10.26 1994 (4).................... 10.00 0.11 (0.29 ) (0.06 ) -- 9.76 - ------------------- SUNBELT EQUITY FUND - ------------------- TRUST SHARES 1995........................ $ 9.70 $ (0.01 ) $ 0.38 -- $ (0.04 ) $ 10.03 1994 (4).................... 10.00 -- (0.30 ) -- -- 9.70 - ----------------------------- INTERNATIONAL EQUITY INDEX FUND - ----------------------------- TRUST SHARES 1995 (5).................... $ 10.00 $ 0.08 $ 0.19 $ (0.02 ) $ (0.01 ) $ 10.24 RATIO OF NET RATIO OF INVESTMENT RATIO OF EXPENSES TO EXPENSES TO INCOME (LOSS) AVERAGE NET ASSETS NET ASSETS END AVERAGE NET TO AVERAGE NET (EXCLUDING WAIVERS TOTAL RETURN OF PERIOD (000) ASSETS ASSETS AND REIMBURSEMENTS) -------------- --------------- --------------- --------------- --------------------- - ------------------- CAPITAL GROWTH FUND - ------------------- TRUST SHARES 1995........................ 6.63 % $ 984,205 1.15 % 1.38 % 1.28 % 1994........................ 3.87 % 891,870 1.15 % 1.25 % 1.29 % 1993 (1).................... 17.90 %* 507,692 1.15 %* 1.43 %* 1.28 %* - ------------------------ VALUE INCOME STOCK FUND - ------------------------ TRUST SHARES 1995........................ 19.06 % $ 991,977 0.95 % 3.16 % 0.95 % 1994........................ 9.95 % 573,082 0.88 % 3.21 % 0.97 % 1993 (2).................... 9.05 %* 137,761 0.80 %* 4.32 %* 0.96 %* - ----------------------- AGGRESSIVE GROWTH FUND - ----------------------- TRUST SHARES 1995........................ 12.56 % $ 125,562 1.15 % 0.88 % 1.32 % 1994 (3).................... (1.39 %)+ 57,036 1.15 %* 1.20 %* 1.68 % * - -------------- BALANCED FUND - -------------- TRUST SHARES 1995........................ 8.72 % $ 89,051 0.95 % 3.44 % 1.11 % 1994 (4).................... (1.78 %)+ 90,579 0.95 %* 2.76 %* 1.25 % * - ------------------- SUNBELT EQUITY FUND - ------------------- TRUST SHARES 1995........................ 3.81 % $ 258,908 1.15 % (0.12 %) 1.30 % 1994 (4).................... (2.99 %)+ 128,280 1.15 %* (0.19 %)* 1.58 %* - ----------------------------- INTERNATIONAL EQUITY INDEX FUN - ----------------------------- TRUST SHARES 1995 (5).................... 2.69 %+ $ 89,446 1.05 %* 1.13 %* 1.31 %* RATIO OF NET INVESTMENT INCOME (LOSS) TO AVERAGE NET ASSETS (EXCLUDING WAIVERS AND PORTFOLIO REIMBURSEMENTS) TURNOVER RATE --------------------- ------------- - ------------------- CAPITAL GROWTH FUND - ------------------- TRUST SHARES 1995........................ 1.25 % 127.79 % 1994........................ 1.11 % 123.87 % 1993 (1).................... 1.30 %* 95.02 % - ------------------------ VALUE INCOME STOCK FUND - ------------------------ TRUST SHARES 1995........................ 3.16 % 125.71 % 1994........................ 3.12 % 149.28 % 1993 (2).................... 4.16 %* 34.71 % - ----------------------- AGGRESSIVE GROWTH FUND - ----------------------- TRUST SHARES 1995........................ 0.71 % 65.63 % 1994 (3).................... 0.67 %* 7.99 % - -------------- BALANCED FUND - -------------- TRUST SHARES 1995........................ 3.28 % 156.61 % 1994 (4).................... 2.46 %* 105.65 % - ------------------- SUNBELT EQUITY FUND - ------------------- TRUST SHARES 1995........................ (0.27 %) 80.03 % 1994 (4).................... (0.62 %)* 21.42 % - ----------------------------- INTERNATIONAL EQUITY INDEX FUN - ----------------------------- TRUST SHARES 1995 (5).................... 0.87 %* 10.37 %
* Annualized. + Cumulative since inception. (1) The Capital Growth Fund Trust Shares commenced operations on July 1, 1992. (2) The Value Income Stock Fund Trust Shares commenced operations on February 12, 1993. (3) The Aggressive Growth Fund Trust Shares commenced operations on February 2, 1994. (4) The Sunbelt Equity Fund Trust Shares and the Balanced Fund Trust Shares commenced operations on January 3, 1994. (5) The International Equity Index Fund Trust Shares commenced operations on June 6, 1994. 5 THE TRUST STI CLASSIC FUNDS (the "Trust") is a diversified, open-end management investment company that provides a convenient and economical means of investing in several professionally managed portfolios of securities. The Trust currently offers units of beneficial interest ("shares") in a number of separate Funds. Shareholders may purchase shares in each Fund through three separate classes (Trust Shares, Investor Shares and Flex Shares), which provide for variations in distribution and service fees and transfer agent fees, voting rights and dividends. Except for differences between classes, each share of each Fund represents an undivided, proportionate interest in that Fund. This Prospectus relates to the Trust Shares of the Funds described below. FUNDS AND INVESTMENT OBJECTIVES THE CAPITAL GROWTH FUND seeks to provide capital appreciation by investing primarily in a portfolio of common stocks, warrants and securities convertible into common stock which, in the Advisor's opinion, are undervalued in the marketplace at the time of purchase. THE VALUE INCOME STOCK FUND seeks to provide current income with the secondary goal of achieving capital appreciation by investing primarily in equity securities. THE AGGRESSIVE GROWTH FUND seeks to provide capital appreciation by investing primarily in a diversified portfolio of common stocks, preferred stocks and securities convertible into common stock of small to mid-sized companies with above-average growth of earnings. Current income will not be an important criterion of investment selection and any such income should be considered incidental. THE BALANCED FUND seeks to provide capital appreciation and current income by investing in common and preferred stocks, warrants, securities convertible into common stock and investment grade fixed income securities. THE SUNBELT EQUITY FUND seeks to provide capital appreciation by investing substantially all and under normal market conditions at least 65% of its assets in common stocks, preferred stocks, warrants and securities convertible into common stock of U.S. companies headquartered and/or conducting a substantial portion of their operations in the southern region of the United States. Current income will not be an important criterion of investment selection and any such income should be considered incidental. THE INTERNATIONAL EQUITY INDEX FUND seeks to provide investment results that correspond to the aggregate price and dividend performance of the securities included in the Gross Domestic Product Weighted Morgan Stanley Capital International Europe, Australasia and Far East Index (the "MSCI EAFE-GDP Index" or "EAFE-GDP Index").11"MSCI EAFE-GDP Index" is a registered service mark of Morgan Stanley Capital International, which does not sponsor and is in no way affiliated with the International Equity Index Fund. There can be no assurance that a Fund will achieve its investment objective. The investment objectives of each Fund are nonfundamental and may be changed without shareholder approval. INVESTMENT POLICIES AND STRATEGIES *CAPITAL GROWTH FUND The Capital Growth Fund invests primarily in a diversified portfolio of common stocks, 6 warrants, and securities convertible into common stocks which, in the Advisor's opinion, are undervalued in the marketplace at the time of purchase. In selecting securities for the Fund, the Advisor will evaluate factors believed to affect capital appreciation such as the issuer's background, industry position, historical returns on equity and experience and qualifications of the management team. Dividend and interest income is incidental to growth of capital. The Advisor will rotate the Capital Growth Fund's holdings between various market sectors based on economic analysis of the overall business cycle. Under normal conditions, at least 65% of the total assets of the Capital Growth Fund will be invested in common stocks. All of the common stocks in which the Fund invests are traded on registered exchanges or on the over-the-counter market in the United States. Assets of the Capital Growth Fund not invested in the securities described above may be invested in U.S. dollar denominated equity securities of foreign issuers (including sponsored American Depositary Receipts ("ADRs") that are traded on exchanges or listed on NASDAQ); securities issued by money market mutual funds; pay-in-kind securities; and bonds. The bonds that the Capital Growth Fund may purchase may be rated in any rating category or may be unrated, provided that no more than 10% of the Fund's total assets will be invested in bonds rated below BBB by Standard & Poor's Corporation ("S&P") or below Baa by Moody's Investors Services, Inc. ("Moody's") or unrated securities of comparable quality. See "Investment Risks -- High Yield -- Lower Rated Bonds." In addition, the Fund may invest up to 10% of its assets in restricted securities. The Fund's turnover rate for the fiscal year ended May 31, 1995 was 127.79%. This rate of turnover, if continued, will likely result in higher brokerage commissions and higher levels of realized capital gains than if the turnover rate was lower. *VALUE INCOME STOCK FUND The Value Income Stock Fund seeks to provide current income by structuring its investments in an attempt to maintain the Fund's yield at a level above the average dividend yield of the securities comprising the S&P 500 Stock Index. Achieving such a yield will be the Fund's primary consideration when purchasing securities. A secondary objective of the Fund will be capital appreciation. The Fund will invest at least 80% of its total assets in equity securities. Investments will consist primarily of common stocks, and, under normal market conditions, at least 65% of the Fund's assets will be invested in common stocks issued by corporations which have a history of paying regular dividends, although there can be no assurance that such corporations will continue to pay dividends. Other equity securities in which the Fund may invest are convertible debt securities; preferred stocks and warrants which are convertible into or exchangeable for common stocks; and U.S. dollar denominated equity securities of foreign issuers (including sponsored ADRs that are traded on exchanges or listed on NASDAQ). All of the common stocks in which the Fund invests are traded on registered exchanges such as the New York or American Stock Exchange or on the over-the-counter market in the United States (i.e., NASDAQ). The Fund may also purchase debt securities (corporate debt obligations and U.S. Treasury obligations) which may be rated in any rating category or may be unrated, provided that no more than 10% of the Fund's total assets will be invested 7 in bonds rated below BBB by S&P or below Baa by Moody's or unrated securities of comparable quality. The Fund will invest primarily in stocks of companies operating in all aspects of the U.S. and world economies that have a market capitalization of at least $500 million or more, that the Advisor believes possess fundamentally favorable long-term characteristics. However, stocks of companies with smaller market capitalizations and stocks that are out of favor in the financial community and in which little opportunity for price appreciation is recognized by the financial community may also be purchased if the Advisor believes they are undervalued. The Fund's turnover rate for the fiscal year ended May 31, 1995 was 125.71%. This rate of turnover, if continued, will likely result in higher brokerage commissions and higher levels of realized capital gains than if the turnover rate was lower. *AGGRESSIVE GROWTH FUND The Aggressive Growth Fund invests primarily in a diversified portfolio of common stocks, preferred stocks, and securities convertible into common stocks of small to midsize companies, (i.e., $50 million to $1 billion and $500 million to $5 billion, respectively, as measured by their market capitalization), with above-average growth of earnings. Current income will not be an important criterion of investment selection and any such income should be considered incidental. In selecting securities for the Fund, the Advisor will evaluate factors such as the issuer's background, industry position, historical returns on equity and experience and qualifications of the management team. Under normal conditions, at least 80% of the total assets of the Fund will be invested in equity securities. Most of the common stocks in which the Fund invests are traded on registered exchanges or on the over-the-counter market in the United States. Assets of the Fund not invested in the securities described above may be invested in U.S. dollar denominated equity securities of foreign issuers (including sponsored ADRs that are traded on exchanges or listed on NASDAQ); securities issued by mutual funds; repurchase agreements; and bonds. The bonds that the Fund may purchase, including any variable or floating rate instruments, must be rated B or better by S&P or Moody's, provided that this requirement shall not apply to the Fund's purchase of bonds issued by the government of Canada or by various supranational entities, and provided further that no more than 10% of the Fund's total assets will be invested in bonds rated below BBB by S&P or below Baa by Moody's or unrated securities of comparable quality. The Fund may invest up to 10% of its assets in restricted securities. *SUNBELT EQUITY FUND The Sunbelt Equity Fund seeks to provide capital appreciation by investing substantially all, and under normal market conditions at least 65%, of its assets in common stocks; preferred stocks; warrants; and securities convertible into common stock of U.S. companies headquartered and/or conducting a substantial portion of their operations in (i.e., maintaining at least 50% of their assets in or deriving at least 50% of their revenues and/or sales from) the southern region of the United States. Current income will not be an important criterion of investment selection and any such income should be considered incidental. The Advisor will seek to identify and purchase securities of companies that it believes to be undervalued 8 and that possess a strong balance sheet, a strong earnings record, and adequate market liquidity. Most of the common stocks in which the Fund invests are traded on registered exchanges such as the New York or American Stock Exchange or on the over-the-counter market in the United States (i.e., NASDAQ). The Fund will invest no more than 10% of its assets in convertible securities rated lower than BBB. (See "Investment Risks -- High Yield, Lower Rated Bonds.") The Fund may invest up to 10% of its total assets in restricted securities. The Fund may also purchase futures and options for hedging purposes. Obligations relating to futures contracts will be limited to not more than 20% of the Fund's total assets. The Fund will invest primarily in stocks of U.S. companies headquartered and/or operating in the following U.S. states: Texas, Arkansas, Alabama, Mississippi, Tennessee, Kentucky, Florida, Virginia, Georgia, North Carolina, South Carolina and Louisiana. To the extent that the Fund's investments are not as geographically dispersed across the U.S. as other funds with comparable objectives, Shareholders will be more subject to the impact of economic forces on and the relative economic conditions of these states. *BALANCED FUND The Balanced Fund seeks to provide capital appreciation and current income through investments in a diversified portfolio of common and preferred stocks, warrants, securities convertible into common stocks, and investment grade fixed income securities. Under normal conditions, no more than 70% of the total assets of the Fund will be invested in common stocks and other equity securities, and no more than 60% of the Fund's total assets will be invested in bonds and other fixed income securities. The Fund will maintain at least 25% of its total assets in senior fixed income securities. In selecting equity securities for the Fund, the Advisor will evaluate factors believed to affect capital appreciation such as the issuer's background, industry position, historical returns on equity and experience and qualifications of the management team. The Advisor will rotate the Fund's holdings between various market sectors based on economic analysis of the overall business cycle. All of the common stocks in which the Fund invests are traded on registered exchanges or on the over-the-counter market in the United States. Assets of the Fund not invested in the securities described above may be invested in U.S. dollar denominated equity securities of foreign issuers (including sponsored ADRs that are traded on exchanges or listed on NASDAQ), securities issued by investment companies, and bonds. The Fund will invest in investment grade fixed income securities rated BBB or better by S&P or Baa or better by Moody's or, if unrated, of comparable quality at the time of purchase as determined by the Advisor, including corporate debt obligations; mortgage-backed securities, collateralized mortgage obligations and asset-backed securities; obligations issued or guaranteed as to principal and interest by the U.S. Government or its agencies or instrumentalities; custodial receipts involving U.S. Treasury obligations; securities of the government of Canada and its provincial and local governments; securities issued or guaranteed by foreign governments, their political subdivisions, agencies or instrumentalities; and obligations of supranational entities. No more than 25% of the Fund's assets will be invested in securities 9 rated BBB by S&P or Baa by Moody's or, if unrated, of comparable quality at the time of purchase as determined by the Fund's Advisor. The Fund may purchase mortgage-backed securities issued or guaranteed as to the payment of principal and interest by the U.S. Government or its agencies or instrumentalities or, subject to a limit of 25% of the Fund's assets, mortgage-backed securities issued by private issuers. These mortgage-backed securities may be backed or collateralized by fixed, adjustable or floating rate mortgages. The Fund may also invest in asset backed securities which consist of securities backed by company receivables, truck and auto loans, leases, credit card receivables and home equity loans. In order to reduce interest rate risk, the Fund may purchase floating or variable rate securities. It may also buy securities on a when-issued basis, putable securities, pay-in-kind securities, and zero coupon securities. The Fund may also invest futures and options. Some floating or variable rate securities will be subject to interest rate "caps" or "floors." The Balanced Fund's turnover rate for the fiscal year ended May 31, 1995 was 128% for the equity portion of its portfolio and 193% for the fixed income portion of its portfolio. These rates of turnover, if continued, will likely result in higher transaction costs and brokerage commissions and higher levels of realized capital gains than if the turnover rate was lower. *INTERNATIONAL EQUITY INDEX FUND The Fund will invest substantially all and, under normal market conditions, at least 65% of its assets in common and preferred stocks; warrants; options; and securities convertible into common stock of companies headquartered or based in the approximately twenty foreign countries included in the Morgan Stanley Capital International EAFE-GDP Index. The Fund will invest only in the 1088 or so companies included in the EAFE-GDP Index. Because it is impractical to invest in every company included in the Index, the Fund will select a representative sample of securities in each country using a statistical-based optimization process. Morgan Stanley & Co. Incorporated maintains the optimization computer programs which will be utilized to select companies within each country. The Fund will be constructed to have aggregate investment characteristics similar to those of the EAFE-GDP Index. The Fund will invest in a statistically selected sample of the securities included in the EAFE-GDP Index, although not all countries nor all companies within a country will be represented in the Fund's portfolio of securities at any time. The Fund expects to invest in approximately 300 stocks so that the results fall within the targeted tracking error. From time to time, adjustments may be made in the Fund's portfolio because of changes in the composition of the EAFE-GDP Index. No attempt will be made to manage the portfolio using traditional economic, financial and market analyses. The Fund expects that there will be a close correlation between the Fund's performance and that of the EAFE-GDP Index. A 1.00 correlation would indicate perfect correlation, which would be achieved when the net asset value of the Fund, including the value of its dividend and capital gains distributions, increases or decreases in exact proportion to changes in the EAFE-GDP Index. The correlation between the Fund and the EAFE-GDP Index is expected to be over 0.95 on an annual basis. The Fund's ability to track the EAFE-GDP Index, however may be affected by, among other things, transaction costs, changes in either the composition of the EAFE-GDP 10 Index or number of shares outstanding for the component companies of the EAFE-GDP Index, and the timing and amount of purchases and redemptions. Securities of foreign issuers purchased by the Fund may be purchased in foreign markets, on United States registered exchanges, the over-the-counter market or in the form of sponsored or unsponsored ADRs traded on registered exchanges or NASDAQ, or sponsored or unsponsored European Depositary Receipts ("EDRs"). The Fund may enter into forward foreign currency contracts as a hedge against possible variations in foreign exchange rates. A forward foreign currency contract is a commitment to purchase or sell a specified currency, at a specified future date, at a specified price. The Fund may enter into forward foreign currency contracts to hedge a specific security transaction or to hedge a portfolio position. These contracts may be bought or sold to protect the Fund, to some degree, against a possible loss resulting from an adverse change in the relationship between foreign currencies and the U.S. dollar. The Fund expects to be fully invested in the investments, described above, but may invest up to 35% of its total assets in U.S. and non-U.S. denominated money market instruments; repurchase agreements; futures contracts, including stock index futures contracts; and options on futures contracts. Obligations relating to futures contracts will be limited to not more than 20% of the Fund's total assets. The Fund is also permitted to acquire floating and variable rate securities; purchase securities on a when-issued basis; and purchase illiquid securities. GENERAL INVESTMENT POLICIES AND STRATEGIES For temporary defensive purposes during periods when its Advisor determines that market conditions warrant, each Fund may invest up to 100% of its assets in money market instruments consisting of securities issued or guaranteed as to principal and interest by the U.S. Government, its agencies or instrumentalities, custodial receipts involving U.S. Treasury obligations, repurchase agreements, certificates of deposit, bankers' acceptances, and time deposits issued by banks or savings and loan associations and commercial paper rated in the highest rating category, and may hold a portion of its assets in cash. A Fund may not be pursuing its investment objective when it is engaged in temporary defensive investing. Each Fund may also invest in money market instruments for liquidity purposes. Each Fund may invest, subject to its investment objective and policies, in zero coupon obligations. Zero coupon obligations are sold at original issue discount and do not make periodic payments. Zero coupon obligations may be subject to greater fluctuations in value due to interest rate changes. Each Fund, except the International Equity Index Fund, may purchase restricted securities, including Rule 144A securities, that its Advisor determines are liquid pursuant to guidelines established by the Trust's Board of Trustees. In the event that a security owned by a Fund is downgraded below the stated rating categories, the Advisor will review and take appropriate action with regard to the security. Each Fund may borrow money for temporary or emergency purposes in an amount not to exceed one-third of the value of its total assets. 11 A Fund may not purchase additional securities while its outstanding borrowings exceed 5% of its assets. A Fund's purchase of shares of other investment companies is limited by the Investment Company Act of 1940 and will ordinarily result in an additional layer of charges and expenses. Each of the Funds may engage in securities lending and will limit such practice to 33 1/3% of its total assets. It is a non-fundamental policy of each Fund to invest no more than 15% of its net assets in illiquid securities. An illiquid security is a security which cannot be disposed of in the usual course of business within seven days at a price approximating its carrying value. For additional information regarding permitted investments, see "Description of Permitted Investments" in this Prospectus and in the Statement of Additional Information. INVESTMENT RISKS FOREIGN SECURITIES AND FOREIGN CURRENCY CONTRACTS Investing in the securities of foreign companies and the utilization of forward foreign currency contracts involve special risks and considerations not typically associated with investing in U.S. companies. These risks and considerations include differences in accounting, auditing and financial reporting standards, generally higher commission rates on foreign portfolio transactions, the possibility of expropriation or confiscatory taxation, adverse changes in investment or exchange control regulations, political instability which could affect U.S. investment in foreign countries and potential restrictions of the flow of international capital and currencies. Foreign companies may also be subject to less government regulation than U.S. companies. Moreover, the dividends payable on the foreign securities may be subject to foreign withholding taxes, thus reducing the net amount of income available for distribution to the Fund's Shareholders. Further, foreign securities often trade with less frequency and volume than domestic securities and, therefore, may exhibit greater price volatility. Changes in foreign exchange rates will affect, favorably or unfavorably, the value of those securities which are denominated or quoted in currencies other than the U.S. dollar. By entering into forward foreign currency contracts, the International Equity Index Fund will seek to protect the value of its investment securities against a decline in the value of a currency. However, these forward foreign currency contracts will not eliminate fluctuations in the underlying prices of the securities. Rather, they simply establish a rate of exchange which one can obtain at some future point in time. Although such contracts tend to minimize the risk of loss due to a decline in the value of the hedged currency, also, they tend to limit any potential gain which might result should the value of such currency increase. EQUITY SECURITIES Investments in equity securities are generally subject to market risks that may cause their prices to fluctuate over time. The values of convertible equity securities are 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 each Fund invests will cause the net asset value of the Fund to fluctuate. 12 MORTGAGE-BACKED SECURITIES Mortgage-backed securities are subject to the risk of prepayment of the underlying mortgages. During periods of declining interest rates, prepayment of mortgages underlying these securities can be expected to accelerate. When the mortgage-backed securities held by the Balanced Fund are prepaid, the Balanced Fund must reinvest the proceeds in securities the yield of which reflects prevailing interest rates, which may be lower than the prepaid security. FIXED INCOME SECURITIES The market value of a Fund's fixed income investments will change in response to interest rate changes and other factors. During periods of falling interest rates, the values of outstanding fixed income securities generally rise. Conversely, during periods of rising interest rates, the values of such securities generally decline. Securities with longer maturities are subject to greater fluctuations in value than securities with shorter maturities. Changes by a nationally recognized statistical rating organization ("NRSRO") to the rating of any fixed income security and in the ability of an issuer to make payments of interest and principal also affect the value of these investments. Changes in the value of a Fund's securities will not affect cash income derived from these securities but will affect the Fund's net asset value. There is a risk that the current interest rate on floating and variable rate instruments may not accurately reflect existing market interest rates. Fixed income securities rated BBB by S&P or Baa by Moody's (investment grade bonds) are deemed by these rating services to have speculative characteristics. HIGH YIELD, LOWER RATED BONDS A Fund's investments in high yield, lower rated bonds ("junk bonds") involve greater risk of default or price declines than investments in investment grade securities (securities rated BBB or higher by S&P or Baa or higher by Moody's) due to changes in the issuer's creditworthiness. The market for high risk, high yield securities may be thinner and less active, causing market price volatility and limited liquidity in the secondary market. This may limit the ability of the Fund to sell such securities at their fair market value either to meet redemption requests or in response to changes in the economy or the financial markets. Market prices for high risk, high yield securities may also be affected by investors' perception of the issuer's credit quality and the outlook for economic growth. Thus, prices for high risk, high yield securities may move independently of interest rates and the overall bond market. In addition, the market for high risk, high yield securities may be adversely affected by legislative and regulatory developments. INVESTMENT LIMITATIONS The following investment limitations constitute fundamental policies of each Fund. Fundamental policies cannot be changed with respect to a Fund without the consent of the holders of a majority of the Fund's outstanding shares. The term "majority of the outstanding shares" means the vote of (i) 67% or more of a Fund's shares present at a meeting, if more than 50% of the outstanding shares of the Fund are present or represented by proxy, or (ii) more than 50% of a Fund's outstanding shares, whichever is less. Each Fund may not: 1. Purchase securities of any issuer (except securities issued or guaranteed by the 13 United States, its agencies or instrumentalities and repurchase agreements involving such securities) if as a result more than 5% of the total assets of a Fund would be invested in the securities of such issuer; provided, however, that a Fund may invest up to 25% of its total assets without regard to this restriction as permitted by applicable law. 2. Purchase any securities which would cause more than 25% of the total assets of a Fund to be invested in the securities of one or more issuers conducting their principal business activities in the same industry, provided that this limitation does not apply to investments in obligations issued or guaranteed by the U.S. Government or its agencies and instrumentalities, repurchase agreements involving such securities or tax-exempt securities issued by governments or political subdivisions of governments. For purposes of this limitation, (i) utility companies will be divided according to their services, for example, gas, gas transmission, electric and telephone will each be considered a separate industry; (ii) financial service companies will be classified according to the end users of their services, for example, automobile finance, bank finance and diversified finance will each be considered a separate industry; and (iii) supranational entities will be considered to be a separate industry. The foregoing percentages will apply at the time of the purchase of a security. Additional investment limitations are set forth in the Statement of Additional Information. PERFORMANCE INFORMATION From time to time, the Funds may advertise performance (total return and yield). These figures will be historical and are not intended to indicate future performance. The yield of a Fund refers to the annualized income generated by an investment in that Fund over a specified 30-day period. The yield is calculated by assuming that the income generated by the investment during that period is generated over one year and is shown as a percentage of the investment. The total return of a Fund refers to the average compounded rate of return on a hypothetical investment, including any sales charge imposed, for designated time periods (including but not limited to, the period from which a Fund commenced operations through the specified date), assuming that the entire investment is redeemed at the end of each period and assuming the reinvestment of all dividend and capital gains distributions. GENERAL PERFORMANCE INFORMATION The performance of the Trust's Trust Shares will normally be higher than for Investor Shares and Flex Shares because Investor Shares and Flex Shares are subject to distribution, service and certain transfer agent fees not charged to Trust Shares. The performance of Flex Shares in comparison to Investor Shares will vary depending upon the investment time horizon. Each Fund may periodically compare its performance to other mutual funds tracked by mutual fund rating services, to broad groups of comparable mutual funds or to unmanaged indices which may assume reinvestment of dividends but generally do not reflect deductions for administrative and management costs. PURCHASE OF FUND SHARES Trust Shares of the Fund are sold primarily to financial institutions, including subsidiaries of SunTrust Banks, Inc. ("SunTrust"), for the investment of funds for which they act in a fiduciary, agency, investment advisory or custodial capacity. Individuals may not 14 purchase Trust Shares directly, although individuals may be able to purchase Trust Shares through accounts maintained with financial institutions. Trust Shares are sold without a sales charge, although financial institutions may charge their customer accounts for services provided in connection with the purchase of shares. Financial institutions may impose an earlier cut-off time for receipt of purchase orders directed through them to allow for processing and transmittal of these orders to the Transfer Agent for effectiveness the same day. Information concerning these services and any charges will be provided to customers by the financial institutions. Trust Shares will be held of record by the financial institutions, although customers may have or be given the right to vote the shares depending upon the terms of their relationship with the financial institution. Confirmations of share purchases and redemptions will be sent to the financial institution as the shareholder of record. Shares may be purchased on days on which the New York Stock Exchange is open for business ("business day"). A purchase order for any of the Funds will be effective as of the business day received by the Transfer Agent if the Transfer Agent receives the order before 4:00 p.m. Eastern time and payment is received within one day. The purchase price of shares of a Fund is the net asset value next determined after a purchase order is effective plus any applicable sales charge (the "offering price"). The net asset value per share of a Fund is determined by dividing the total market value of the Fund's investments and other assets, less any liabilities, by the total outstanding shares of the Fund. Net asset value per share is determined daily as of the close of business of the New York Stock Exchange (currently 4:00 p.m. Eastern time) on any business day. Pursuant to guidelines established by the Trustees, the Trust may use a pricing service to provide market quotations or valuations for securities owned by each Fund. Purchases will be made in full and fractional shares of the Trust calculated to three decimal places. The Trust reserves the right to reject a purchase order when the Distributor determines that it is not in the best interest of the Trust and/or Shareholder(s). Neither the Trust's Transfer Agent nor the Trust will be responsible for any loss, liability, cost or expense for acting upon telephone or wire instructions reasonably believed to be genuine. The Trust maintains procedures, including identification methods and other means, for ascertaining the identity of callers and authenticity of instructions. Shares of the Funds are offered only to residents of states in which the shares are eligible for purchase. Investors in certain states may be required to purchase shares through institutions registered as broker-dealers in such states. Although the methodology and procedures for calculating the net asset value for Trust Shares are identical to those of Investor Shares and Flex Shares, the net asset value per share of the classes of the Funds may differ because of the distribution, service, and certain transfer agent expenses charged to Investor Shares and Flex Shares. REDEMPTION OF FUND SHARES An order to redeem shares must be transmitted to the Transfer Agent by the financial institution as the record owner of Trust Shares. Financial institutions may establish procedures for their customers to request redemption of Trust Shares held in their account with the financial 15 institution. Customers should contact their financial institution for information concerning these procedures. Redemption orders must be received by the Transfer Agent before 4:00 p.m. Eastern time on any business day to be effective that day. Redemption proceeds are normally remitted in federal funds wired to the record owner of the shares within one business day, but in no event more than seven days following the effective date of the order. No charge for wiring redemption payments is imposed by the Trust. Redemption orders are effected at the net asset value per share next determined after an order is effective. The Trust intends to pay cash for all shares redeemed, but under abnormal conditions which make payment in cash unwise, payment may be made wholly or partly in liquid portfolio securities with a market value equal to the redemption price. In such circumstances, an investor may incur brokerage costs in converting such securities to cash. DIVIDENDS AND DISTRIBUTIONS Dividends from net investment income (exclusive of capital gains) are declared and paid quarterly by each of the Funds, except that dividends are declared and paid annually by the International Equity Index Fund. Each Fund's net realized capital gains (including net short-term capital gains) are distributed at least annually. Net income for dividend purposes consists of (i) interest accrued and original issue discount earned on the Fund's assets, (ii) plus the amortization of market discount and minus the amortization of market premium on such assets, (iii) plus dividend or distribution income on such assets, (iv) less accrued expenses directly attributable to the Fund and the general expenses of the Trust prorated to the Fund on the basis of its relative net assets. Shareholders of record on the record date will be entitled to receive dividends. The net asset value of Trust Shares of the Funds will be reduced by the amount of any dividend or distribution. Dividends and distributions are paid in the form of additional Trust Shares of the same Fund unless the customer has elected prior to the date of distribution to receive payment in cash. Such election, or any revocation thereof, must be made in writing prior to the date of distribution to the Trust's Transfer Agent and will become effective with respect to dividends paid after its receipt. Dividends and distributions are paid within ten days of the end of the time period to which the dividend relates. Dividends and distributions payable to a Shareholder are paid in cash within ten business days after a Shareholder's complete redemption of its Trust Shares in a Fund. The amount of dividends payable on Trust Shares will be more than the dividends payable on Investor Shares and Flex Shares because of the distribution and certain transfer agent expenses charged to Investor Shares and Flex Shares. The amount of dividends payable on Flex Shares generally will be less than the amount of dividends payable on Investor Shares due to the higher distribution and service expenses of Flex Shares. TAX INFORMATION The following summary of federal income tax consequences is based on current tax laws and regulations, which may be changed by legislative, judicial or administrative action. No attempt has been made to present a detailed explanation of the federal, state, or local income tax treatment of each Fund or its Shareholders. Shareholders are urged to 16 consult their tax advisors regarding specific questions as to federal, state and local income taxes. TAX STATUS OF EACH FUND: Each Fund is treated as a separate entity for federal tax purposes, and is not combined with the Trust's other Funds. Each Fund intends to qualify for the special tax treatment afforded regulated investment companies by the Internal Revenue Code of 1986, as amended, (the "Code") so that it will be relieved of federal income tax on that part of its net investment income and net capital gains (the excess of long-term capital gains over net short-term capital loss) which is distributed to Shareholders. Each Fund intends to make sufficient distributions prior to the end of each calendar year to avoid liability for the federal excise tax applicable to regulated investment companies. TAX STATUS OF DISTRIBUTIONS: Each Fund will distribute substantially all of its net investment income (including, for this purpose, net short-term capital gains) to Shareholders. Dividends from net investment income paid by the Funds will be taxable to Shareholders as ordinary income whether received in cash or in additional shares. Dividends from net investment income will qualify for the dividends received deduction for corporate Shareholders only to the extent such distributions are derived from dividends paid by domestic corporations. Any net capital gains will be distributed annually and will be taxed to Shareholders as long-term capital gains, regardless of how long the Shareholder has held shares and regardless of whether distributions are received in cash or in additional shares. For certain individual Shareholders, net long-term capital gains may be taxed at a lower rate than ordinary income. The Funds will make annual reports to Shareholders of the federal income tax status of all distributions. Dividends declared by a Fund in October, November or December of any year and payable to Shareholders of record on a date in that month will be deemed to have been paid by the Fund and received by the Shareholder on December 31 of that year, if paid by the Fund at any time during the following January. Income derived by a Fund from obligations of foreign issuers may be subject to foreign withholding taxes. The International Equity Index Fund expects to elect to treat Shareholders as having paid their proportionate share of such foreign taxes. The other Funds will not be able to make this election. Income received on direct U.S. obligations is exempt from tax at the state level when received directly by a Fund and may be exempt, depending on the state, when received by the Shareholder as income dividends from a Fund, provided certain state-specific conditions are satisfied. Not all states permit such income dividends to be tax exempt and some require that a certain minimum percentage of an investment company's income be derived from state tax-exempt interest. The Funds will inform Shareholders annually of the percentage of income and distributions derived from direct U.S. obligations. Shareholders should consult their tax advisors to determine whether any portion of the income dividends received from a Fund is considered tax-exempt in their particular state. A sale, exchange or redemption of Fund shares is a taxable event to the Shareholder. 17 STI CLASSIC FUNDS INFORMATION THE TRUST The Trust was organized as a Massachusetts Business Trust under a Declaration of Trust dated January 15, 1992. The Declaration of Trust permits the Trust to offer separate portfolios of shares and different classes of each Fund. All consideration received by the Trust for shares of any Fund and all assets of such Fund belong to that Fund and would be subject to liabilities related thereto. The Trust pays its expenses, including fees of its service providers, audit and legal expenses, expenses of preparing prospectuses, proxy solicitation material and reports to Shareholders, costs of custodial services and registering the shares under federal and state securities laws, pricing, insurance expenses, litigation and other extraordinary expenses, brokerage costs, interest charges, taxes and organization expenses. BOARD OF TRUSTEES The management and affairs of the Trust are supervised by the Trustees under the laws governing business trusts in the Commonwealth of Massachusetts. The Trustees have approved contracts under which, as described below, certain companies provide essential management services to the Trust. INVESTMENT ADVISORS The Advisors are indirect wholly-owned subsidiaries of SunTrust Banks, Inc. ("SunTrust"), a southeastern regional bank holding company with assets of $44.2 billion as of June 30, 1995. SunTrust ranks among the twenty largest U.S. banking companies. Its three principal subsidiaries -- SunTrust Banks of Florida, Inc. SunTrust Banks of Georgia, Inc. and SunTrust Banks of Tennessee, Inc. -- provide a wide range of personal and corporate banking, trust, and investment services through more than 600 locations in the three-state area. Total discretionary assets under management with SunTrust Banks, Inc. equalled approximately $42 billion as of December 31, 1994. STI Capital Management, N.A. ("STI Capital") (formerly SunBank Capital Management, Inc.) serves as the Advisor to the Capital Growth, Value Income Stock, Aggressive Growth and Balanced Fund and joint advisor to the International Equity Index Fund. As of June 30, 1995, STI Capital had discretionary management authority with respect to assets of approximately $11.1 billion. The principal business address of STI Capital is P.O. Box 3808, Orlando, FL 32802. Trusco Capital Management, Inc. ("Trusco") serves as the Advisor to the Sunbelt Equity Fund and as joint advisor to the International Equity Index Fund. As of June 30, 1995, Trusco had approximately $11.5 billion in assets under management. The principal business address of Trusco is 50 Hurt Plaza, Suite 1400, Atlanta, GA 30303. The Trust and the above Investment Advisors have entered into advisory agreements (the "Advisory Agreements"). Under the Advisory Agreements, the Advisors make the investment decisions for the assets of the Fund(s) they advise and continuously review, supervise and administer their respective Fund's investment program. The Advisors discharge their responsibilities subject to the supervision of, and policies established by, the Trustees of the Trust. STI CLASSIC FUNDS ARE NOT DEPOSITS, ARE NOT INSURED OR GUARANTEED BY THE FDIC OR ANY OTHER GOVERNMENT AGENCY, AND ARE NOT ENDORSED OR GUARANTEED BY AND DO NOT CONSTITUTE OBLIGATIONS OF SUNTRUST BANKS, INC. OR ANY OF ITS AFFILIATES. 18 INVESTMENTS IN THE FUNDS INVOLVE RISK, INCLUDING THE POSSIBLE LOSS OF PRINCIPAL. RETURNS AND PRINCIPAL VALUES WILL FLUCTUATE AND SHARES AT REDEMPTION MAY BE WORTH MORE OR LESS THAN THEIR ORIGINAL COST. THERE IS NO GUARANTEE THAT ANY STI CLASSIC FUND WILL ACHIEVE ITS INVESTMENT OBJECTIVE. With respect to all Funds, the Advisors may execute brokerage or other agency transactions through affiliates of the Advisors. For the services provided and expenses incurred pursuant to the Investment Advisory Agreements, STI Capital is entitled to receive advisory fees computed daily and paid monthly at the annual rate of 1.15%, .95%, 1.15% and .80% of the average daily net assets of the Capital Growth, Balanced, Aggressive Growth and Value Income Stock Funds, respectively. Trusco is entitled to receive an advisory fee computed daily and paid monthly at the annual rate of 1.15% of the average daily net assets of the Sunbelt Equity Fund. Trusco and STI Capital jointly are entitled to receive an advisory fee computed daily and paid monthly at the annual rate of .90% of the average daily net assets of the International Equity Index Fund. Although the advisory fee for each Fund is higher than advisory fees paid by other mutual funds, the Trust believes that each such fee is comparable to the advisory fee paid by many other mutual funds with similar investment objectives and policies. From time to time, an Advisor may waive (either voluntarily or pursuant to applicable state limitations) advisory fees payable by a Fund. Currently, the Advisors have agreed to voluntary reductions in their respective fees in amounts necessary to maintain the total operating expenses at the amounts set forth in the Expense Summary. Voluntary reductions of fees may be terminated at anytime. For the fiscal year ended May 31, 1995, STI Capital received advisory fees computed daily and paid monthly at the annual rate of 1.02%, .77%, .95%, and .80% of the average daily net assets of the Capital Growth, Balanced, Aggressive Growth and Value Income Stock Funds, respectively. Trusco received an advisory fee computed daily and paid monthly at the annual rate of .98% of the average daily net assets of Sunbelt Equity Fund. Trusco and STI Capital jointly received an advisory fee computed daily and paid monthly at the annual rate of .64% of the average daily net assets of the International Equity Index Fund. PORTFOLIO MANAGERS Mr. Anthony Gray has been responsible for the day-to-day management of the Capital Growth Fund since its inception. Mr. Gray has served as Chief Executive Officer and Chief Investment Officer of STI Capital since 1979. Mr. Gray has also been responsible for the day-to-day management of the equity portion of the Balanced Fund since its inception. Mr. Mills Riddick, CFA, has been responsible for the day-to-day management of the Value Income Stock Fund since April, 1995. Mr. Riddick has been a value portfolio manager at STI Capital since 1989. Mr. Thomas Edgar has been responsible for the day-to-day management of the Aggressive Growth Fund since its inception. Mr. Edgar has served as Senior Vice President of STI Capital since 1990 and served as Senior Vice President of First Union Bank from 1988 to 1990. Mr. L. Earl Denney CFA has been responsible for the day-to-day management of the fixed income portion of the Balanced Fund since its inception. Mr. Denney has served as Executive Vice President of STI Capital since 1983. 19 Mr. James Foster has been responsible for the day-to-day management of the Sunbelt Equity Fund since its inception. Mr. Foster has served as a Vice President of Trusco since 1989. BANKING LAWS Banking laws and regulations, including the Glass-Steagall Act as presently interpreted by the Board of Governors of the Federal Reserve System, presently (a) prohibit a bank holding company registered under the Federal Bank Holding Company Act of 1956 or its affiliates from sponsoring, organizing, controlling, or distributing the shares of a registered, open-end investment company continuously engaged in the issuance of its shares, and generally prohibit banks from underwriting securities, but (b) do not prohibit such a bank holding company or affiliate or banks generally from acting as an investment advisor, transfer agent, or custodian to such an investment company or from purchasing shares of such a company as agent for and upon the order of a customer. The Advisors believe that each may perform the services for STI Classic Funds contemplated by their agreements described in this Prospectus without violation of applicable banking laws or regulations. However, future changes in legal requirements relating to the permissible activities of banks and their affiliates, as well as future interpretations of present requirements, could prevent the Advisors from continuing to perform services for STI Classic Funds. If the Advisors were prohibited from providing services to STI Classic Funds, the Board of Trustees would consider selecting other qualified firms. Any new investment advisory agreements would be subject to Shareholder approval. If current restrictions preventing a bank or its affiliates from legally sponsoring, organizing, controlling, or distributing shares of an investment company were relaxed, the Advisors, or their affiliates, would consider the possibility of offering to perform additional services for STI Classic Funds. It is not possible, of course, to predict whether or in what form such legislation might be enacted or the terms upon which the Advisors, or such affiliates, might offer to provide such services. In addition, state securities laws on this issue may differ from the interpretations of federal law expressed herein and banks and financial institutions may be required to register as dealers pursuant to state law. DISTRIBUTION SEI Financial Services Company (the "Distributor"), a wholly-owned subsidiary of SEI Corporation ("SEI"), and the Trust are parties to a distribution agreement ("Distribution Agreement"). No compensation is paid to the Distributor for distribution services for the Trust Shares of each Fund. Trust Shares of the Fund are offered primarily to institutional investors, including affiliates and correspondents for the investment of funds in which they act in a fiduciary, agency or custodial capacity. It is possible that a financial institution may offer different classes of shares to its customers and thus receive different compensation with respect to different classes of shares. Each Fund may execute brokerage or other agency transactions through the Distributor for which the Distributor receives compensation. ADMINISTRATION SEI Financial Management Corporation (the "Administrator"), a wholly-owned subsidiary of SEI, and the Trust are parties to an Administration Agreement (the "Administration Agreement"). Under the terms of the Administration Agreement, the Administrator provides the Trust with certain administrative services, other than investment advisory 20 services, including regulatory reporting, all necessary office space, equipment, personnel, and facilities. The Administrator is entitled to a fee, which is calculated daily and paid monthly, at an annual rate as follows:
AVERAGE AGGREGATE DAILY NET ASSETS FEE - -------------------------------------------- --------- $1 - $1 billion .10% over $1 billion to $5 billion .07% over $5 billion to $8 billion .05% over $8 billion to $10 billion .045% over $10 billion .04%
From time to time, the Administrator may waive (either voluntarily or pursuant to applicable state limitations) all or a portion of the administration fee payable by the Trust. TRANSFER AGENT AND DIVIDEND DISBURSING AGENT Federated Services Company, Pittsburgh, PA is the Transfer Agent for the shares of the Trust and dividend disbursing agent for the Trust. CUSTODIAN SunTrust Bank, Atlanta, c/o STI Trust & Investment Operations, Inc., 303 Peacetree Street N.E., 14th Floor, Atlanta, GA 30308, serves as Custodian of the assets of each Fund of the Trust with the exception of the International Equity Index Fund. The Bank of California, 475 Sansome Street, Suite 1200, San Francisco, CA 94111, serves as Custodian for the International Equity Index Fund. Each Custodian holds cash, securities and other assets of the Trust as required by the Investment Company Act of 1940. LEGAL COUNSEL Morgan, Lewis & Bockius, LLP, Philadelphia, PA, serves as legal counsel to the Trust. INDEPENDENT PUBLIC ACCOUNTANTS The independent public accountants to the Trust are Arthur Andersen, LLP, Philadelphia, PA. OTHER INFORMATION VOTING RIGHTS Each share held entitles the Shareholder of record to one vote. Each Fund or class of a Fund will vote separately on matters relating solely to that Fund or class. As a Massachusetts business trust, the Trust is not required to hold annual meetings of Shareholders but approval will be sought for certain changes in the operation of the Trust and for the election of Trustees under certain circumstances. In addition, a Trustee may be removed by the remaining Trustees or by Shareholders at a special meeting called upon written request of Shareholders owning at least 10% of the outstanding shares of the Trust. In the event that such a meeting is requested the Trust will provide appropriate assistance and information to the Shareholders requesting the meeting. REPORTING The Trust issues unaudited financial information semi-annually and audited financial statements annually. The Trust furnishes proxy statements and other reports to Shareholders of record. SHAREHOLDER INQUIRIES Shareholders may contact their financial institution's representative in order to obtain information on account statements, procedures and other related information. 21 DESCRIPTION OF PERMITTED INVESTMENTS The following is a description of the permitted investments for the Funds. Further discussion is contained in the Statement of Additional Information. AMERICAN DEPOSITARY RECEIPTS ("ADRs") -- ADRs are securities, typically issued by a U.S. financial institution (a "depositary"), that evidence ownership interests in a security or a pool of securities issued by a foreign issuer and deposited with the depositary. ADRs may be available through "sponsored" or "unsponsored" facilities. A sponsored facility is established jointly by the issuer of the security underlying the receipt and a depositary, whereas an unsponsored facility may be established by a depositary without participation by the issuer of the underlying security. Holders of unsponsored depositary receipts generally bear all the costs of the unsponsored facility. The depositary of an unsponsored facility frequently is under no obligation to distribute shareholder communications received from the issuer of the deposited security or to pass through, to the holders of the receipts, voting rights with respect to the deposited securities. ASSET-BACKED SECURITIES--Asset-backed securities are securities secured by non- mortgage assets such as company receivables, truck and auto loans, leases and credit card receivables. Such securities are generally issued as pass-through certificates, which represent undivided fractional ownership interests in the underlying pools of assets. Such securities also may be debt instruments, which are also known as collateralized obligations and are generally issued as the debt of a special purpose entity, such as a trust, organized solely for the purpose of owning such assets and issuing such debt. Asset-backed securities are not issued or guaranteed by the U.S. Government or its agencies or instrumentalities; however, the payment of principal and interest on such obligations may be guaranteed up to certain amounts and for a certain period by a letter of credit issued by a financial institution (such as a bank or insurance company) unaffiliated with the issuers of such securities. The purchase of asset-backed securities raises risk considerations peculiar to the financing of the instruments underlying such securities. For example, there is a risk that another party could acquire an interest in the obligations superior to that of the holders of the asset-backed securities. There also is the possibility that recoveries on repossessed collateral may not, in some cases, be available to support payments on those securities. Asset-backed securities entail prepayment risk, which may vary depending on the type of asset, but is generally less than the prepayment risk associated with mortgage-backed securities. In addition, credit card receivables are unsecured obligations of the card holder. The market for asset-backed securities is at a relatively early stage of development. Accordingly, there may be a limited secondary market for such securities. BANKERS' ACCEPTANCES -- Bankers' acceptances are bills of exchange or time drafts drawn on and accepted by a commercial bank. Bankers' acceptances are used by corporations to finance the shipment and storage of goods. Maturities are generally six months or less. CERTIFICATES OF DEPOSIT-- Certificates of deposit are interest bearing instruments with a specific maturity. They are issued by banks and savings and loan institutions in exchange for the deposit of funds and normally can be 22 traded in the secondary market prior to maturity. Certificates of deposit with penalties for early withdrawal will be considered illiquid. COMMERCIAL PAPER -- Commercial paper is a term used to describe unsecured short-term promissory notes issued by banks, municipalities, corporations and other entities. Maturities on these issues vary from a few to 270 days. CONVERTIBLE SECURITIES -- Convertible securities are corporate securities that are exchangeable for a set number of another security at a prestated price. Convertible securities typically have characteristics similar to both fixed income and equity securities. Because of the conversion feature, the market value of a convertible security tends to move with the market value of the underlying stock. The value of a convertible security is also affected by prevailing interest rates, the credit quality of the issuer, and any call provisions. CORPORATE DEBT OBLIGATIONS -- Debt instruments issued by corporations with maturities exceeding 270 days. Such instruments may include putable corporate bonds and zero coupon bonds. CUSTODIAL RECEIPTS -- Interests in separately traded interest and principal component parts of U. S. Treasury obligations that are issued by banks or brokerage firms and are created by depositing U. S. Treasury obligations into a special account at custodian bank. The custodian holds the interest and principal payments for the benefit of the registered owners of the certificates or receipts. The custodian arranges for the issuance of the certificates or receipts evidencing ownership and maintains the register. Receipts include "Treasury Receipts" ("TRs"), "Treasury Investment Growth Receipts" ("TIGRs"), and "Certificates of Accrual on Treasury Securities" ("CATS"). TRs, TIGRs and CATS are sold as zero coupon securities. See "Zero Coupon Obligations." DERIVATIVES -- Derivatives are securities whose value is derived from an underlying contract, index or security, or any combination thereof. This includes: futures, swap agreements, and some mortgage-back securities (CMOs, REMICs, IOs and POs). See elsewhere in this "Description of Permitted Investments" for discussions of these various instruments, and see "Investment Policies and Strategies" for more information about any investment policies and limitations applicable to their use. EUROPEAN DEPOSITARY RECEIPTS ("EDRs") -- EDRs are securities, typically issued by a non-U.S. financial institution, that evidence ownership interests in a security or a pool of securities issued by either a U.S. or foreign issuer. EDRs may be available for investment through "sponsored" or "unsponsored" facilities. See "ADRs." FORWARD FOREIGN CURRENCY CONTRACTS -- A forward foreign currency contract involves an obligation to purchase or sell a specific currency amount at a future date, agreed upon by the parties, at a price set at the time of the contract. A Fund may also enter into a contract to sell, for a fixed amount of U.S. dollars or other appropriate currency, the amount of foreign currency approximating the value of some or all of the Fund's securities denominated in such foreign currency. At the maturity of a forward contract, the Fund may either sell a portfolio security and make delivery of the foreign currency, or it may retain the security and terminate its contractual obligation to deliver the foreign currency by purchasing an "offsetting" contract with the same currency trader, obligating it to purchase, 23 on the same maturity date, the same amount of the foreign currency. The Fund may realize a gain or loss from currency transactions. FUTURES CONTRACTS AND OPTIONS ON FUTURES CONTRACTS -- Futures contracts provide for the future sale by one party and purchase by another party of a specified amount of a specific security at a specified future time and at a specified price. An option on a futures contract gives the purchaser the right, in exchange for a premium, to assume a position in a futures contract at a specified exercise price during the term of the option. A Fund may use futures contracts and related options for bona fide hedging purposes, to offset changes in the value of securities held or expected to be acquired, to minimize fluctuations in foreign currencies, or to gain exposure to a particular market or instrument. A Fund will minimize the risk that it will be unable to close out a futures contract by only entering into futures contracts which are traded on national futures exchanges. Stock index futures are futures contracts for various stock indices that are traded on registered securities exchanges. A stock index futures contract obligates the seller to deliver (and the purchaser to take) an amount of cash equal to a specific dollar amount times the difference between the value of a specific stock index at the close of the last trading day of the contract and the price at which the agreement is made. There are risks associated with these activities, including the following: (1) the success of a hedging strategy may depend on an ability to predict movements in the prices of individual securities, fluctuations in markets and movements in interest rates, (2) there may be an imperfect or no correlation between the changes in market value of the securities held by the Fund and the prices of futures and options on futures, (3) there may not be a liquid secondary market for a futures contract or option, (4) trading restrictions or limitations may be imposed by an exchange, and (5) government regulations may restrict trading in futures contracts and futures options. ILLIQUID SECURITIES -- Illiquid securities are securities that cannot be disposed of within seven business days at approximately the price at which they are being carried on the Fund's books. An illiquid security includes a demand instrument with a demand notice period exceeding seven days, where there is no secondary market for such security, and repurchase agreements with durations (or maturities) over seven days in length. MEDIUM TERM NOTES -- Medium term notes are periodically or continuously offered corporate or agency debt that differs from traditionally underwritten corporate bonds only in the process by which they are issued. MORTGAGE-BACKED SECURITIES -- Mortgage-backed securities are instruments that entitle the holder to a share of all interest and principal payments from mortgages underlying the security. The mortgages backing these securities include conventional thirty-year fixed rate mortgages, graduated payment mortgages, and adjustable rate mortgages. During periods of declining interest rates, prepayment of mortgages underlying mortgage-backed securities can be expected to accelerate. Prepayment of mortgages which underlie securities purchased at a premium often results in capital losses, while prepayment of mortgages purchased at a discount often results in capital gains. Because of these unpredictable prepayment characteristics, it is often not possible to predict accurately the average life or realized yield of a particular issue. 24 GOVERNMENT PASS-THROUGH SECURITIES: These are securities that are issued or guaranteed by a U.S. Government agency representing an interest in a pool of mortgage loans. The primary issuers or guarantors of these mortgage-backed securities are GNMA, FNMA and FHLMC. FNMA and FHLMC obligations are not backed by the full faith and credit of the U.S. Government as GNMA certificates are, but FNMA and FHLMC securities are supported by the instrumentalities' right to borrow from the U.S. Treasury. GNMA, FNMA and FHLMC each guarantees timely distributions of interest to certificate holders. GNMA and FNMA also each guarantees timely distributions of scheduled principal. FHLMC has in the past guaranteed only the ultimate collection of principal of the underlying mortgage loan; however, FHLMC now issues mortgage-backed securities (FHLMC Gold PCs) which also guarantee timely payment of monthly principal reductions. Government and private guarantees do not extend to the securities' value, which is likely to vary inversely with fluctuations in interest rates. PRIVATE PASS-THROUGH SECURITIES: These are mortgage-backed securities issued by a non-governmental entity, such as a trust. These securities include collateralized mortgage obligations ("CMOs") and real estate mortgage investment conduits ("REMICs") that are rated in one of the top two rating categories. While they are generally structured with one or more types of credit enhancement, private pass-through securities typically lack a guarantee by an entity having the credit status of a governmental agency or instrumentality. COLLATERALIZED MORTGAGE OBLIGATIONS ("CMOS"): CMOs are debt obligations or multiclass pass-through certificates issued by agencies or instrumentalities of the U.S. Government or by private originators or investors in mortgage loans. In a CMO, series of bonds or certificates are usually issued in multiple classes. Principal and interest paid on the underlying mortgage assets may be allocated among the several classes of a series of a CMO in a variety of ways. Each class of a CMO, often referred to as a "tranche," is issued with a specific fixed or floating coupon rate and has a stated maturity or final distribution date. Principal payments on the underlying mortgage assets may cause CMOs to be retired substantially earlier then their stated maturities or final distribution dates, resulting in a loss of all or part of any premium paid. REMICS: A REMIC is a CMO that qualifies for special tax treatment under the Internal Revenue Code and invests in certain mortgages principally secured by interests in real property. Investors may purchase beneficial interests in REMICs, which are known as "regular" interests, or "residual" interests. Guaranteed REMIC pass-through certificates ("REMIC Certificates") issued by FNMA or FHLMC represent beneficial ownership interests in a REMIC trust consisting principally of mortgage loans or FNMA, FHLMC or GNMA-guaranteed mortgage pass-through certificates. For FHLMC REMIC Certificates, FHLMC guarantees the timely payment of interest, and also guarantees the payment of principal as payments are required to be made on the underlying mortgage participation certificates. FNMA REMIC Certificates are issued and guaranteed as to timely distribution of principal and interest by FNMA. STRIPPED MORTGAGE-BACKED SECURITIES ("SMBS"): SMBs are usually structured with two classes that receive specified proportions of the monthly interest and principal payments from a pool of mortgage securities. One class may receive all of the interest payments and is thus termed an interest-only class ("IO"), while the other class may receive all of the principal payments and is thus termed the principal-only class ("PO"). The value of IOs tends to 25 increase as rates rise and decrease as rates fall; the opposite is true of POs. SMBs are extremely sensitive to changes in interest rates because of the impact thereon of prepayment of principal on the underlying mortgage securities. The market for SMBs is not as fully developed as other markets; SMBs therefore may be illiquid. OBLIGATIONS OF SUPRANATIONAL ENTITIES -- Supranational entities are entities established through the joint participation of several governments, and include the Asian Development Bank, the Inter-American Development Bank, International Bank for Reconstruction and Development (World Bank), African Development Bank, European Economic Community, European Investment Bank and the Nordic Investment Bank. OPTIONS ON CURRENCIES -- The International Equity Index Fund may purchase and write put and call options on foreign currencies (traded on U.S. and foreign exchanges or over-the-counter markets) to manage the portfolio's exposure to changes in dollar exchange rates. Call options on foreign currency written by the Fund will be "covered," which means that the Fund will own an equal amount of the underlying foreign currency. With respect to put options on foreign currency written by the Fund, the Fund will establish a segregated account with its custodian bank consisting of cash, U.S. Government securities or other high grade liquid debt securities in an amount equal to the amount the Fund would be required to pay upon exercise of the put. PAY-IN-KIND SECURITIES -- Pay-in-kind securities are bonds or preferred stock that pay interest or dividends in the form of additional bonds or preferred stock. REPURCHASE AGREEMENTS -- Repurchase agreements are agreements by which a Fund obtains a security and simultaneously commits to return the security to the seller at an agreed upon price on an agreed upon date within a number of days from the date of purchase. The custodian will hold the security as collateral for the repurchase agreement. A Fund bears a risk of loss in the event the other party defaults on its obligations and the Fund is delayed or prevented from exercising its right to dispose of the collateral or if the Fund realizes a loss on the sale of the collateral. A Fund will enter into repurchase agreements only with financial institutions deemed to present minimal risk of bankruptcy during the term of the agreement based on established guidelines. Repurchase agreements are considered loans under the Investment Company Act of 1940. RESTRICTED SECURITIES -- Restricted securities are securities that may not be sold freely to the public absent registration under the Securities Act of 1933 or an exemption from registration. Rule 144A securities are securities that have not been registered under the Securities Act of 1933, but which may be traded between certain institutional investors, including investment companies. The Trust's Board of Trustees is responsible for developing guidelines and procedures for determining the liquidity of restricted securities and monitoring the Advisors' implementation of the guidelines and procedures. SECURITIES LENDING -- In order to generate additional income, a Fund may lend securities which it owns pursuant to agreements requiring that the loan be continuously secured by collateral consisting of cash, securities of the U.S. Government or its agencies equal to at least 100% of the market value of the securities lent. A Fund continues to receive interest on the securities lent while simultaneously earning interest on the investment of cash collateral. Collateral is marked to market daily. There may be risks of delay in recovery of the securities or even loss of rights in the collateral should the borrower of the securities fail financially or become insolvent. 26 STANDBY COMMITMENTS AND PUTS -- Standby commitments and puts are securities subject to standby commitments or puts permit the holder thereof to sell the securities at a fixed price prior to maturity. Securities subject to a standby commitment or put may be sold at any time at the current market price. However, unless the standby commitment or put was an integral part of the security as originally issued, it may not be marketable or assignable; therefore, the standby commitment or put would only have value to the Fund owning the security to which it relates. In certain cases, a premium may be paid for a standby commitment or put, which premium will have the effect of reducing the yield otherwise payable on the underlying security. The Fund will limit standby commitment or put transactions to institutions believed to present minimal credit risk. SWAPS, CAPS, FLOORS and COLLARS -- Interest rate swaps, mortgage swaps, currency swaps and other types of swap agreements such as caps, floors and collars are designed to permit the purchaser to preserve a return or spread on a particular investment or portion of its portfolio, and to protect against any increase in the price of securities the Fund anticipates purchasing at a later date. In a typical interest rate swap, one party agrees to make regular payments equal to a floating interest rate times a "notional principal amount," in return for payments equal to a fixed rate times the same amount, for a specific period of time. If a swap agreement provides for payment in different currencies, the parties might agree to exchange the notional principal amount as well. Swaps may also depend on other prices or rates, such as the value of an index or mortgage prepayment rates. In a typical cap or floor agreement, one party agrees to make payments only under specified circumstances, usually in return for payment of a fee by the other party. For example, the buyer of an interest rate cap obtains the right to receive payments to the extent that a specific interest rate exceeds an agreed-upon level, while the seller of an interest rate floor is obligated to make payments to the extent that a specified interest rate falls below an agreed-upon level. An interest rate collar combines elements of buying a cap and selling a floor. Swap agreements are sophisticated hedging instruments that typically involve a small investment of cash relative to the magnitude of risk assumed. As a result, swaps can be highly volatile and have a considerable impact on the Fund's performance. Swap agreements are subject to risks related to the counterparty's ability to perform, and may decline in value if the counterparty's creditworthiness deteriorates. The Fund may also suffer losses if it is unable to terminate outstanding swap agreements or reduce its exposure through offsetting transactions. Any obligation the Fund may have under these types of arrangements will be covered by setting aside liquid high grade securities in a segregated account. The Fund will enter into swaps only with counterparties believed to be creditworthy. TIME DEPOSITS -- Time deposits are non-negotiable receipts issued by a bank in exchange for the deposit of funds. Like a certificate of deposit, it earns a specified rate of interest over a definite period of time; however, it cannot be traded in the secondary market. Time deposits are considered to be illiquid securities. U.S. GOVERNMENT AGENCIES -- Obligations issued or guaranteed by agencies of the U.S. Government, including, among others, the Federal Farm Credit Bank, the Federal Housing Administration and the Small Business Administration, and obligations issued or guaranteed by instrumentalities of the U.S. Government, including, among others, the Federal Home Loan Mortgage Corporation, the 27 Federal Land Banks and the U.S. Postal Service. Some of these securities are supported by the full faith and credit of the U.S. Treasury (e.g., Government National Mortgage Association), others are supported by the right of the issuer to borrow from the Treasury (e.g., Federal Farm Credit Bank), while still others are supported only by the credit of the instrumentality (e.g., Federal National Mortgage Association). Guarantees of principal by agencies or instrumentalities of the U.S. Government may be a guarantee of payment at the maturity of the obligation so that in the event of a default prior to maturity there might not be a market and thus no means of realizing on the obligation prior to maturity. Guarantees as to the timely payment of principal and interest do not extend to the value or yield of these securities nor to the value of the Fund's shares. U.S. TREASURY OBLIGATIONS -- U.S. Treasury obligations consist of bills, notes and bonds issued by the U.S. Treasury and separately traded interest and principal component parts of such obligations that are transferable through the Federal book-entry system known as Separately Traded Registered Interest and Principal Securities ("STRIPS"). VARIABLE AND FLOATING RATE INSTRUMENTS -- Certain obligations may carry variable or floating rates of interest, and may involve a conditional or unconditional demand feature. Such instruments bear interest at rates which are not fixed, but which vary with changes in specified market rates or indices. The interest rates on these securities may be reset daily, weekly, quarterly or some other reset period, and may have a floor or ceiling on interest rate changes. There is a risk that the current interest rate on such obligations may not accurately reflect existing market interest rates. A demand instrument with a demand notice exceeding seven days may be considered illiquid if there is no secondary market for such security. WARRANTS -- Instruments giving holders the right, but not the obligation, to buy shares of a company at a given price during a specified period. WHEN-ISSUED AND DELAYED DELIVERY SECURITIES -- When-issued or delayed delivery basis transactions involve the purchase of an instrument with payment and delivery taking place in the future. Delivery of and payment for these securities may occur a month or more after the date of the purchase commitment. The Fund will segregate liquid high grade debt securities or cash in an amount at least equal to these commitments. The interest rate realized on these securities is fixed as of the purchase date and no interest accrues to the Fund before settlement. These securities are subject to market fluctuation due to changes in market interest rates and it is possible that the market value at the time of settlement could be higher or lower than the purchase price if the general level of interest rates has changed. Although a Fund generally purchases securities on a when-issued or forward commitment basis with the intention of actually acquiring securities for its portfolio, a Fund may dispose of a when-issued security or forward commitment prior to settlement if it deems appropriate. ZERO COUPON OBLIGATIONS -- Zero coupon obligations are debt securities that do not bear any interest, but instead are issued at a deep discount from par. The value of a zero coupon obligation increases over time to reflect the interest accreted. Such obligations will not result in the payment of interest until maturity, and will have greater price volatility than similar securities that are issued at par and pay interest periodically. A-1 APPENDIX I. BOND RATINGS *CORPORATE BONDS The following are descriptions of Standard & Poor's Corporation ("S&P's") and Moody's Investors Service, Inc. ("Moody's") corporate bond ratings. Bonds rated AAA have the highest rating S&P assigns to a debt obligation. Such a rating indicates an extremely strong capacity to pay principal and interest. Bonds rated AA also qualify as high-quality debt obligations. Capacity to pay principal and interest is very strong, and in the majority of instances they differ from AAA issues only in small degree. Debt rated A has a strong capacity to pay interest and repay principal although it is somewhat more susceptible to the adverse effects of changes in circumstances and economic conditions than debt in higher rated categories. Bonds which are rated BBB are considered to be medium-grade obligations (i.e., they are neither highly protected nor poorly secured). Interest payments and principal security appear adequate for the present but certain protective elements may be lacking or may be characteristically unreliable over any great length of time. Such bonds lack outstanding investment characteristics and in fact have speculative characteristics as well. Debt rated BB, B, CCC, CC and C is regarded as having predominately speculative characteristics with respect to capacity to pay interest and repay principal. BB indicates the least degree of speculation and C the highest degree of speculation. While such debt will likely have some quality and protective characteristics, these are outweighed by large uncertainties or major risk exposure to adverse conditions. Bonds which are rated Aaa by Moody's are judged to be of the best quality. They carry the smallest degree of investment risk and are generally referred to as "gilt edge." Interest payments are protected by a large, or an exceptionally stable, margin and principal is secure. While the various protective elements are likely to change, such changes as can be visualized are most unlikely to impair the fundamentally strong position of such issues. Bonds rated Aa by Moody's are judged by Moody's to be of high quality by all standards. Together with bonds rated Aaa, they comprise what are generally known as high-grade bonds. They are rated lower than the best bonds because margins of protection may not be as large as in Aaa securities or fluctuation of protective elements may be of greater amplitude or there may be other elements present which make the long-term risks appear somewhat larger than in Aaa securities. Bonds which are rated A possess many favorable investment attributes and are to be considered as upper-medium grade obligations. Factors giving security to principal and interest are considered adequate, but elements may be present which suggest a susceptibility to impairment sometime in the future. Debt rated Baa is regarded as having an adequate capacity to pay interest and repay principal. Whereas it normally exhibits adequate protection parameters, adverse economic conditions or changing circumstances are more likely to lead to a weakened capacity to pay interest and repay principal for debt in this category than in higher rated categories. Bonds which are rated Ba are judged to have speculative elements; their future cannot be considered as well-assured. Often the protection of interest and principal payments may be very moderate and thereby not well safeguarded during both good and bad times A-2 over the future. Uncertainty of position characterizes bonds in this class. Bonds which are rated B generally lack characteristics of the desirable investment. Assurance of interest and principal payments or of maintenance of other terms of the contract over any long period of time may be small. Bonds which are rated Caa are of poor standing. Such issues may be in default or there may be present elements of danger with respect to principal and interest. Bonds which are rated Ca represent obligations which are speculative in a high degree. Such issues are often in default or have other marked shortcomings. Bonds which are rated C are the lowest rated class of bonds and issues so rated can be regarded as having extremely poor prospects of ever attaining any real investment standing. II. COMMERCIAL PAPER AND SHORT-TERM RATINGS The following descriptions of commercial paper ratings have been published by S&P, Moody's, Fitch Investors Service, Inc. ("Fitch"), Duff and Phelps ("Duff") and IBCA Limited ("IBCA"), respectively. Commercial paper rated A by S&P is regarded by S&P as having the greatest capacity for timely payment. Issues rated A are further refined by use of the numbers 1+ and 1. Issues rated A-1+ are those with an "overwhelming degree" of credit protection. Those rated A-1 reflect a "very strong" degree of safety regarding timely payment. Those rated A-2 reflect a safety regarding timely payment but not as high as A-1. Commercial paper issues rated Prime-1 and Prime-2 by Moody's are judged by Moody's to have superior ability and strong ability for repayment, respectively. The rating Fitch-1 (Highest Grade) is the highest commercial rating assigned by Fitch. Paper rated Fitch-1 is regarded as having the strongest degree of assurance for timely payment. The rating Fitch-2 (Very Good Grade) is the second highest commercial paper rating assigned by Fitch which reflects an assurance of timely payment only slightly less in degree than the strongest issues. The rating Duff-1 is the highest commercial paper rating assigned by Duff. Paper rated Duff-1 is regarded as having very high certainty of timely payment with excellent liquidity factors which are supported by ample asset protection. Risk factors are minor. Paper rated Duff-2 is regarded as having good certainty of timely payment, good access to capital markets and sound liquidity factors and company fundamentals. Risk factors are small. The designation A1 by IBCA indicates that the obligation is supported by a very strong capacity for timely repayment. Those obligations rated A1+ are supported by the highest capacity for timely repayment. Obligations rated A2 are supported by a strong capacity for timely repayment, although such capacity may be susceptible to adverse changes in business, economic or financial conditions. (THIS PAGE INTENTIONALLY LEFT BLANK) STI CLASSIC FUNDS ORGANIZATIONAL OVERVIEW * INVESTMENT ADVISORS Trusco Capital Management, Inc. 50 Hurt Plaza Suite 1400 Atlanta, GA 30303 STI Capital Management, N.A. P.O. Box 3808 Orlando, FL 32802 * DISTRIBUTOR SEI Financial Services Company 680 E. Swedesford Road Wayne, PA 19087 * ADMINISTRATOR SEI Financial Management Corporation 680 E. Swedesford Road Wayne, PA 19087 * TRANSFER AGENT Federated Services Company Federated Investors Tower Pittsburgh, PA 15222-3779 * CUSTODIAN SunTrust Bank, Atlanta c/o STI Trust & Investment Operations, Inc. 303 Peachtree Street N.E. 14th Floor Atlanta, GA 30308 The Bank of California 475 Sansome Street (International Equity Index Fund Suite 1200 only) San Francisco, CA 94111 * LEGAL COUNSEL Morgan, Lewis & Bockius LLP 2000 One Logan Square Philadelphia, PA 19103 * INDEPENDENT PUBLIC ACCOUNTANTS Arthur Andersen, LLP 1601 Market Street Philadelphia, PA 19103
100093/10-95 DISTRIBUTOR SEI Financial Services Company / / / / / / / / / / PROSPECTUS TRUST SHARES CAPITAL GROWTH FUND VALUE INCOME STOCK FUND AGGRESSIVE GROWTH FUND BALANCED FUND SUNBELT EQUITY FUND INTERNATIONAL EQUITY INDEX FUND INVESTMENT ADVISORS STI CAPITAL MANAGEMENT, N.A. TRUSCO CAPITAL MANAGEMENT, INC. OCTOBER 1, 1995 STI CLASSIC FUNDS TRUST SHARES INVESTMENT GRADE BOND FUND INVESTMENT GRADE TAX-EXEMPT BOND FUND U.S. GOVERNMENT SECURITIES FUND LIMITED-TERM FEDERAL MORTGAGE SECURITIES FUND SHORT-TERM BOND FUND SHORT-TERM U.S. TREASURY SECURITIES FUND FLORIDA TAX-EXEMPT BOND FUND GEORGIA TAX-EXEMPT BOND FUND TENNESSEE TAX-EXEMPT BOND FUND PRIME QUALITY MONEY MARKET FUND U.S. GOVERNMENT SECURITIES MONEY MARKET FUND TAX-EXEMPT MONEY MARKET FUND INVESTMENT ADVISORS TO THE FUNDS: TRUSCO CAPITAL MANAGEMENT, INC. STI CAPITAL MANAGEMENT, N.A. SUNTRUST BANK, CHATTANOOGA, N.A. SUNTRUST BANK, ATLANTA The STI Classic Funds (the "Trust") is a mutual fund that offers shares in a number of separate investment portfolios. This Prospectus sets forth concisely the information about the Trust Shares of the above-referenced Funds (each a "Fund" and, collectively, the "Funds"). Investors are advised to read this Prospectus and retain it for future reference. A Statement of Additional Information relating to the Funds dated the same date as this Prospectus has been filed with the Securities and Exchange Commission and is available without charge through the Distributor, SEI Financial Services Company, 680 East Swedesford Road, Wayne, PA 19087-1658 or by calling 1-800-428-6970. The Statement of Additional Information is incorporated into this Prospectus by reference. THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. AN INVESTMENT IN A MONEY MARKET FUND IS NEITHER INSURED NOR GUARANTEED BY THE U.S. GOVERNMENT. THERE CAN BE NO ASSURANCE THAT A MONEY MARKET FUND WILL BE ABLE TO MAINTAIN A STABLE NET ASSET VALUE OF $1.00 PER SHARE. THE TRUST'S SHARES ARE NOT SPONSORED, ENDORSED, OR GUARANTEED BY, AND DO NOT CONSTITUTE OBLIGATIONS OR DEPOSITS OF, THE ADVISORS OR ANY OF THEIR AFFILIATES OR CORRESPONDENTS INCLUDING SUNTRUST BANKS, INC., ARE NOT GUARANTEED OR INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION, THE FEDERAL RESERVE BOARD OR ANY OTHER GOVERNMENTAL AGENCY, AND INVOLVE INVESTMENT RISKS, INCLUDING THE POSSIBLE LOSS OF THE PRINCIPAL AMOUNT INVESTED. OCTOBER 1, 1995 2 (THIS PAGE INTENTIONALLY LEFT BLANK) 3 No person has been authorized to give any information or to make any representations not contained in this Prospectus, or in the Trust's Statement of Additional Information in connection with the offering made by this Prospectus and, if given or made, such information or representations must not be relied upon as having been authorized by the Trust or SEI Financial Services Company (the "Distributor"). This Prospectus does not constitute an offering by the Trust or by the Distributor in any jurisdiction in which such offering may not lawfully be made. Throughout this Prospectus, the Investment Grade Bond Fund, Investment Grade Tax-Exempt Bond Fund, Short-Term U.S. Treasury Securities Fund, Short-Term Bond Fund, U.S. Government Securities Fund and Limited-Term Federal Mortgage Securities Fund, which invest primarily in bonds and other fixed income instruments, may be referred to as the "Bond Funds;" and the Florida Tax-Exempt Bond Fund, Georgia Tax-Exempt Bond Fund and Tennessee Tax-Exempt Bond Fund, which invest primarily in tax-exempt bonds and other fixed income instruments, may be referred to as the "State Tax-Exempt Bond Funds" and the Prime Quality Money Market Fund, U.S. Government Securities Money Market Fund and Tax-Exempt Money Market Fund may be referred to as the "Money Market Funds." The Trust Shares are offered primarily to financial institutions ("Shareholders"), including SunTrust Banks, Inc. and its affiliates and correspondents, for the investment of funds for which they act in a fiduciary, agency, investment advisory or custodial capacity. Fund shares may not be purchased directly by individuals, although institutions may purchase shares for accounts maintained by individuals. TABLE OF CONTENTS Expense Summary...................... 4 Financial Highlights................. 6 The Trust............................ 8 Funds and Investment Objectives...... 8 Investment Policies and Strategies... 9 General Investment Policies and Strategies.......................... 18 Investment Risks..................... 18 Investment Limitations............... 20 Performance Information.............. 21 General Performance Information...... 22 Purchase of Fund Shares.............. 22 Redemption of Fund Shares............ 23 Dividends and Distributions.......... 24 Tax Information...................... 25 STI Classic Funds Information........ 27 Board of Trustees.................... 27 Investment Advisors.................. 27 Portfolio Managers................... 29 Banking Laws......................... 30 Distribution......................... 30 Administration....................... 31 Transfer Agent and Dividend Disbursing Agent.................... 31 Custodian............................ 31 Legal Counsel........................ 31 Independent Public Accountants....... 31 Other Information.................... 31 Voting Rights........................ 31 Reporting............................ 32 Shareholder Inquiries................ 32 Description of Permitted Investments......................... 32 Appendix............................. A-1
4 EXPENSE SUMMARY TRUST SHARES Below is a summary of the annual operating expenses for Trust Shares of each Fund. A hypothetical example based on the summary is also shown. Actual expenses may vary. ANNUAL OPERATING EXPENSES (as a percentage of average net assets)
LIMITED-TERM INVESTMENT FEDERAL SHORT-TERM INVESTMENT GRADE U.S. MORTGAGE SHORT-TERM U.S. TREASURY GRADE BOND TAX-EXEMPT GOVERNMENT SECURITIES BOND SECURITIES FUND BOND FUND SECURITIES FUND FUND FUND FUND - ----------------------------------------------------------------------------------------- Advisory Fees (After Voluntary Reductions)(1)... .62% .61% .00% .33% .42% .19% All Other Expenses (After Voluntary Reductions)(1)... .13% .14% .75% .32% .23% .46% - ----------------------------------------------------------------------------------------- Total Operating Expenses (After Voluntary Reductions)(1)... .75% .75% .75% .65% .65% .65% - ----------------------------------------------------------------------------------------- - -----------------------------------------------------------------------------------------
(1) Absent voluntary reductions and reimbursements by the Advisor and Administrator, advisory fees, other expenses, and total operating expenses expressed as a percentage of average net assets, respectively, for the Trust Shares of each Fund would be: Investment Grade Bond Fund -- .74%, .14%, and .88%; Investment Grade Tax Exempt Bond Fund -- .74%, .17%, and .91%; US Government Securities Fund -- .74%, 2.49%, and 3.33%; Limited-Term Federal Mortgage Securities Fund -- .65%, .32%, and .97%; Short-Term Bond Fund -- .65%, .23%, and .88%; and Short-Term US Treasury Securities Fund -- .65%, .46%, and 1.11%. Fee reductions are voluntary and may be terminated at any time. Additional information may be found under "Investment Advisor" and "Administration." A person that purchases shares through an account with a financial institution may be charged separate fees by the financial institution.
LIMITED-TERM INVESTMENT FEDERAL SHORT-TERM INVESTMENT GRADE U.S. MORTGAGE SHORT-TERM U.S. TREASURY GRADE BOND TAX-EXEMPT GOVERNMENT SECURITIES BOND SECURITIES FUND BOND FUND SECURITIES FUND FUND FUND FUND - --------------------------------------------------------------------------------------------------------------------------- An investor would pay the following expenses on a $1,000 investment assuming: (1) 5% annual return and (2) redemption at the end of each time period: One year........................ $ 8 $ 8 $ 8 $ 7 $ 7 $ 7 Three Years..................... 24 24 24 21 21 21 Five Years...................... 42 42 42 36 36 36 Ten Years....................... 93 93 93 81 81 81 - --------------------------------------------------------------------------------------------------------------------------- - ---------------------------------------------------------------------------------------------------------------------------
THE EXAMPLE IS BASED UPON THE TOTAL OPERATING EXPENSES OF A FUND AND SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE EXPENSES. ACTUAL EXPENSES MAY BE GREATER OR LESS THAN THOSE SHOWN. The purpose of this table is to assist the investor in understanding the various costs and expenses that may be directly or indirectly borne by investors in the Trust. The information set forth in the foregoing table and example relates only to Trust Shares. The Trust also offers Investor Shares and Flex Shares of each Fund which are subject to the same expenses except for different distribution fees and sales charges and different transfer agent fees. 5 ANNUAL OPERATING EXPENSES (as a percentage of average net assets)
U.S. PRIME GOVERNMENT FLORIDA GEORGIA TENNESSEE QUALITY SECURITIES TAX-EXEMPT TAX-EXEMPT TAX-EXEMPT TAX-EXEMPT MONEY MARKET MONEY MARKET MONEY MARKET BOND FUND BOND FUND BOND FUND FUND FUND FUND - ------------------------------------------------------------------------------------- Advisory Fees (After Voluntary Reductions)(1)... .08% .27% .00% .50% .50% .46% All Other Expenses (After Voluntary Reductions)(1)... .57% .38% .65% .08% .11% .14% - ------------------------------------------------------------------------------------- Total Operating Expenses (After Voluntary Reductions)(1)... .65% .65% .65% .58% .61% .60% - ------------------------------------------------------------------------------------- - -------------------------------------------------------------------------------------
(1) Absent voluntary reductions and reimbursements by the Advisor and Administrator, advisory fees, other expenses, and total operating expenses expressed as a percentage of average net assets, respectively, for the Trust Shares of each Fund would be: Florida Tax-Exempt Bond Fund -- .65%, .53%, and 1.18%; Georgia Tax Exempt Bond Fund -- .65%, .38%, and 1.03%; Tennessee Tax-Exempt Bond Fund -- .65%, 2.00%, and 2.65%; Prime Quality Money Market Fund -- .65%, .14%, and .79%; US Government Securities Money Market Fund -- .65%, .15%, and .80%; and Tax-Exempt Money Market Fund -- .55%, .15% and .70%. Total operating expenses for the Tax-Exempt Money Market Fund have been restated to reflect current expenses. Fee reductions are voluntary and may be terminated at any time. Additional information may be found under "Investment Advisor" and "Administration." A person that purchases shares through an account with a financial institution may be charged separate fees by the financial institution.
U.S. PRIME GOVERNMENT FLORIDA GEORGIA TENNESSEE QUALITY SECURITIES TAX-EXEMPT TAX-EXEMPT TAX-EXEMPT TAX-EXEMPT MONEY MARKET MONEY MARKET MONEY MARKET EXAMPLE BOND FUND BOND FUND BOND FUND FUND FUND FUND - ---------------------------------------------------------------------------------------------------------------------- An investor would pay the following expenses on a $1,000 investment assuming: (1) 5% annual return and (2) redemption at the end of each time period: One year....................... $ 7 $ 7 $ 7 $ 6 $ 6 $ 6 Three Years.................... 21 21 21 19 20 19 Five Years..................... 36 36 36 32 34 33 Ten Years...................... 81 81 81 73 76 75 - ---------------------------------------------------------------------------------------------------------------------- - ----------------------------------------------------------------------------------------------------------------------
THE EXAMPLE IS BASED UPON THE TOTAL OPERATING EXPENSES OF A FUND AND SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE EXPENSES. ACTUAL EXPENSES MAY BE GREATER OR LESS THAN THOSE SHOWN. The purpose of this table is to assist the investor in understanding the various costs and expenses that may be directly or indirectly borne by investors in the Trust. The information set forth in the foregoing table and example relates only to Trust Shares. The Trust also offers Investor Shares of each Fund and Flex Shares of each non-money market fund which are subject to the same expenses except for different distribution fees and sales charges and different transfer agent fees. 6 FINANCIAL HIGHLIGHTS The following information has been audited by Arthur Andersen, LLP, the Trust's independent public accountants, as indicated in their report dated July 20, 1995 on the Trust's financial statements as of May 31, 1995 included in the Trust's Statement of Additional Information under "Financial Information." This table should be read in conjunction with the Trust's financial statements and notes thereto. Additional performance information regarding each Fund is contained in the Trust's Annual Report to Shareholders and is available without charge by calling 1-800-428-6970. For a Trust Share Outstanding Throughout the Period
NET REALIZED AND NET ASSET NET UNREALIZED DISTRIBUTIONS VALUE INVESTMENT GAINS FROM NET DISTRIBUTIONS NET ASSET BEGINNING INCOME (LOSSES) ON INVESTMENT FROM REALIZED VALUE END TOTAL OF PERIOD (LOSS) INVESTMENTS INCOME CAPITAL GAINS OF PERIOD RETURN --------- ---------- ------------ -------------- ------------- --------- -------- - ---------------------------- INVESTMENT GRADE BOND FUND - ---------------------------- TRUST SHARES 1995.......................... $ 9.89 $0.61 $ 0.37 $ (0.61) -- $10.26 10.39% 1994.......................... 10.45 0.50 (0.36) (0.50) $ (0.20) 9.89 1.17% 1993 (1)...................... 10.09 0.45 0.36 (0.45) -- 10.45 9.34%* - --------------------------------------- INVESTMENT GRADE TAX-EXEMPT BOND FUND - --------------------------------------- TRUST SHARES 1995.......................... $10.68 $0.46 $ 0.60 $ (0.46) -- $11.28 10.21% 1994 (2)...................... 11.37 0.22 (0.34) (0.22) $ (0.35) 10.68 (1.10%)+ - -------------------------------- U. S. GOVERNMENT SECURITIES FUND - -------------------------------- TRUST SHARES 1995 (3)...................... $ 9.98 $0.53 $ 0.29 $ (0.53) -- $10.27 8.64%+ - --------------------------------------------- LIMITED-TERM FEDERAL MORTGAGE SECURITIES FUND - --------------------------------------------- TRUST SHARES 1995 (4)...................... $10.00 $0.58 $ 0.13 $ (0.60) -- $10.11 7.50%+ - --------------------- SHORT-TERM BOND FUND - --------------------- TRUST SHARES 1995.......................... $ 9.79 $0.53 $ 0.19 $ (0.53) -- $ 9.98 7.60% 1994.......................... 10.01 0.42 (0.21) (0.42) $ (0.01) 9.79 2.02% 1993 (5)...................... 10.00 0.08 0.01 (0.08) -- 10.01 4.45%* - --------------------------------------- SHORT-TERM U.S. TREASURY SECURITIES FUND - --------------------------------------- TRUST SHARES 1995.......................... $ 9.82 $0.47 $ 0.11 $ (0.47) -- $ 9.93 6.11% 1994.......................... 9.98 0.33 (0.11) (0.33) $ (0.05) 9.82 2.17% 1993 (6)...................... 10.00 0.07 (0.02) (0.07) -- 9.98 2.22%* - ----------------------------- FLORIDA TAX-EXEMPT BOND FUND - ----------------------------- TRUST SHARES 1995.......................... $ 9.75 $0.44 $ 0.43 $ (0.44) -- $10.18 9.26% 1994 (7)...................... 10.00 0.13 (0.25) (0.13) -- 9.75 (1.19%)+ RATIO OF NET RATIO OF INVESTMENT EXPENSES TO INCOME (LOSS) RATIO OF NET AVERAGE NET TO AVERAGE NET RATIO OF INVESTMENT ASSETS ASSETS NET ASSETS EXPENSES INCOME (LOSS) (EXCLUDING (EXCLUDING PORTFOLIO END OF TO AVERAGE TO AVERAGE NET WAIVERS AND WAIVERS AND TURNOVER PERIOD (000) NET ASSETS ASSETS REIMBURSEMENTS) REIMBURSEMENTS) RATE ------------ ---------- -------------- --------------- --------------- -------- - ---------------------------- INVESTMENT GRADE BOND FUND - ---------------------------- TRUST SHARES 1995.......................... $543,308 0.75% 6.22% 0.88% 6.09% 237.66% 1994.......................... 460,538 0.75% 4.77% 0.88% 4.64% 259.19% 1993 (1)...................... 336,132 0.74%* 5.14%* 0.87%* 5.01%* 299.32% - ------------------------------ INVESTMENT GRADE TAX-EXEMPT BO - ------------------------------ TRUST SHARES 1995.......................... $ 78,208 0.75% 4.34% 0.91% 4.18% 591.91% 1994 (2)...................... 44,595 0.75%* 3.46%* 0.95%* 3.26%* 432.46% - ------------------------------ U. S. GOVERNMENT SECURITIES FU - ------------------------------ TRUST SHARES 1995 (3)...................... $ 3,291 0.75%* 6.67%* 3.33%* 4.09%* 30.39% - ------------------------------ LIMITED-TERM FEDERAL MORTGAGE - ------------------------------ TRUST SHARES 1995 (4)...................... $ 41,823 0.65%* 6.43%* 0.93%* 6.15%* 67.63% - --------------------- SHORT-TERM BOND FUND - --------------------- TRUST SHARES 1995.......................... $ 60,952 0.65% 5.49% 0.85% 5.29% 200.49% 1994.......................... 34,772 0.65% 4.15% 0.85% 3.95% 74.85% 1993 (5)...................... 25,334 0.64%* 3.88%* 1.11%* 3.41%* 63.89% - ------------------------------ SHORT-TERM U.S. TREASURY SECUR - ------------------------------ TRUST SHARES 1995.......................... $ 9,599 0.65% 4.91% 1.08% 4.48% 87.98% 1994.......................... 12,723 0.65% 3.23% 0.81% 3.07% 116.57% 1993 (6)...................... 30,336 0.63%* 3.34%* 1.04%* 2.93%* 36.44% - ----------------------------- FLORIDA TAX-EXEMPT BOND FUND - ----------------------------- TRUST SHARES 1995.......................... $ 10,118 0.65% 4.63% 1.13% 4.15% 105.01% 1994 (7)...................... 3,192 0.65%* 3.86%* 1.12%* 3.39%* 53.24%
7
NET REALIZED AND NET ASSET NET UNREALIZED DISTRIBUTIONS VALUE INVESTMENT GAINS FROM NET DISTRIBUTIONS NET ASSET BEGINNING INCOME (LOSSES) ON INVESTMENT FROM REALIZED VALUE END TOTAL OF PERIOD (LOSS) INVESTMENTS INCOME CAPITAL GAINS OF PERIOD RETURN --------- ---------- ------------ -------------- ------------- --------- -------- - ------------------------------ GEORGIA TAX-EXEMPT BOND FUND - ------------------------------ TRUST SHARES 1995.......................... $ 9.42 $0.42 $ 0.21 $ (0.42) -- $ 9.63 6.94% 1994 (8)...................... 10.00 0.14 (0.58) (0.14) -- 9.42 (4.43%)+ - -------------------------------- TENNESSEE TAX-EXEMPT BOND FUND - -------------------------------- TRUST SHARES 1995.......................... $ 9.22 $0.44 $ 0.28 $ (0.44) -- $ 9.50 8.17% 1994 (9)...................... 10.00 0.12 (0.77) (0.13) -- 9.22 (6.52%)+ - -------------------------------- PRIME QUALITY MONEY MARKET FUND - -------------------------------- TRUST SHARES 1995.......................... $ 1.00 $0.05 -- $ (0.05) -- $ 1.00 4.79% 1994.......................... 1.00 0.03 -- (0.03) -- 1.00 2.88% 1993 (10)..................... 1.00 0.03 -- (0.03) -- 1.00 2.92%* - ---------------------------------------------- U.S. GOVERNMENT SECURITIES MONEY MARKET FUND - ---------------------------------------------- TRUST SHARES 1995.......................... $ 1.00 $0.05 -- $ (0.05) -- $ 1.00 4.67% 1994.......................... 1.00 0.03 -- (0.03) -- 1.00 2.77% 1993 (10)..................... 1.00 0.03 -- (0.03) -- 1.00 2.79%* - ------------------------------ TAX-EXEMPT MONEY MARKET FUND - ------------------------------ TRUST SHARES 1995.......................... $ 1.00 $0.03 -- $ (0.03) -- $ 1.00 3.10% 1994.......................... 1.00 0.02 -- (0.02) -- 1.00 2.08% 1993 (10)..................... 1.00 0.02 -- (0.02) -- 1.00 2.12%* RATIO OF NET RATIO OF INVESTMENT EXPENSES TO INCOME (LOSS) RATIO OF NET AVERAGE NET TO AVERAGE NET RATIO OF INVESTMENT ASSETS ASSETS NET ASSETS EXPENSES INCOME (LOSS) (EXCLUDING (EXCLUDING PORTFOLIO END OF TO AVERAGE TO AVERAGE NET WAIVERS AND WAIVERS AND TURNOVER PERIOD (000) NET ASSETS ASSETS REIMBURSEMENTS) REIMBURSEMENTS) RATE ------------ ---------- -------------- --------------- --------------- -------- - ------------------------------ GEORGIA TAX-EXEMPT BOND FUND - ------------------------------ TRUST SHARES 1995.......................... $ 13,187 0.65% 4.56% 0.98% 4.23% 24.50% 1994 (8)...................... 4,338 0.65%* 4.12%* 1.06%* 3.71%* 25.90% - ------------------------------ TENNESSEE TAX-EXEMPT BOND FUND - ------------------------------ TRUST SHARES 1995.......................... $ 1,664 0.65% 4.90% 2.65% 2.90% 27.73% 1994 (9)...................... 594 0.65%* 4.24%* 1.43%* 3.46%* 13.05% - ------------------------------ PRIME QUALITY MONEY MARKET FUN - ------------------------------ TRUST SHARES 1995.......................... $799,189 0.58% 4.77% 0.79% 4.56% -- 1994.......................... 583,399 0.58% 2.86% 0.79% 2.65% -- 1993 (10)..................... 410,991 0.58%* 2.85%* 0.78%* 2.65%* -- - ------------------------------ U.S. GOVERNMENT SECURITIES MON - ------------------------------ TRUST SHARES 1995.......................... $434,111 0.61% 4.64% 0.80% 4.45% -- 1994.......................... 309,228 0.61% 2.69% 0.77% 2.53% -- 1993 (10)..................... 453,567 0.61%* 2.71%* 0.78%* 2.54%* -- - ------------------------------ TAX-EXEMPT MONEY MARKET FUND - ------------------------------ TRUST SHARES 1995.......................... $215,413 0.45% 3.12% 0.70% 2.87% -- 1994.......................... 143,982 0.42% 2.05% 0.71% 1.76% -- 1993 (10)..................... 78,416 0.41%* 2.07%* 0.70%* 1.78%* --
* Annualized. + Cumulative since inception. (1) The Investment Grade Bond Fund Trust Shares commenced operations on July 16, 1992. (2) The Investment Grade Tax-Exempt Bond Fund Trust Shares commenced operations on October 21, 1993. (3) The U.S. Government Securities Fund Trust Shares commenced operations on July 31, 1994. (4) The Limited Term Federal Mortgage Securities Fund Trust Shares commenced operations on June 7, 1994. (5) The Short-Term Bond Fund Trust Shares commenced operations on March 15, 1993. (6) The Short-Term U.S. Treasury Securities Fund Trust Shares commenced operations on March 15, 1993. (7) The Florida Tax-Exempt Bond Fund Trust Shares commenced operations on January 25, 1994. (8) The Georgia Tax-Exempt Bond Fund Trust Shares commenced operations on January 18, 1994. (9) The Tennessee Tax-Exempt Bond Fund Trust Shares commenced operations on January 27, 1994. (10) The Prime Quality Money Market Fund Trust Shares, the U.S. Government Securities Money Market Fund Trust Shares, and the Tax-Exempt Money Market Fund Trust Shares commenced operations on June 8, 1992. 8 THE TRUST STI CLASSIC FUNDS (the "Trust") is a diversified, open-end management investment company that provides a convenient and economical means of investing in several professionally managed portfolios of securities. The Trust currently offers units of beneficial interest ("shares") in a number of separate Funds. Shareholders may purchase shares in each Fund through three separate classes (Trust Shares, Investor Shares and Flex Shares), which provide for variations in distribution and service fees and transfer agent fees, voting rights and dividends. Except for differences between classes, each share of each Fund represents an undivided, proportionate interest in that Fund. This Prospectus relates to the Trust Shares of the Funds described below. FUNDS AND INVESTMENT OBJECTIVES BOND FUNDS: THE INVESTMENT GRADE BOND FUND seeks to provide as high a level of total return through current income and capital appreciation as is consistent with the preservation of capital primarily through investment in investment grade fixed income securities. THE INVESTMENT GRADE TAX-EXEMPT BOND FUND seeks to provide as high a level of total return through federally tax-exempt current income and capital appreciation as is consistent with the preservation of capital primarily through investment in investment grade tax-exempt obligations. THE U.S. GOVERNMENT SECURITIES FUND seeks to provide as high a level of current income as is consistent with the preservation of capital by investing primarily in obligations issued or guaranteed by the U.S. Government or its agencies or instrumentalities. THE LIMITED-TERM FEDERAL MORTGAGE SECURITIES FUND seeks to provide as high a level of current income as is consistent with the preservation of capital by investing primarily in mortgage-related securities issued or guaranteed by U.S. Government agencies and instrumentalities. THE SHORT-TERM BOND FUND seeks to provide as high a level of current income, relative to funds with like investment objectives, as is consistent with the preservation of capital primarily through investment in short- to intermediate-term investment grade fixed income securities. THE SHORT-TERM U.S. TREASURY SECURITIES FUND seeks to provide as high a level of current income, relative to funds with like investment objectives, as is consistent with the preservation of capital through investment exclusively in short-term U.S. Treasury securities. STATE TAX-EXEMPT BOND FUNDS: THE FLORIDA TAX-EXEMPT BOND FUND seeks to provide current income exempt from federal income tax for Florida residents without undue investment risk. THE GEORGIA TAX-EXEMPT BOND FUND seeks to provide current income exempt from federal and state income tax for Georgia residents without undue investment risk. THE TENNESSEE TAX-EXEMPT BOND FUND seeks to provide current income exempt from federal and state income tax for Tennessee residents without undue investment risk. MONEY MARKET FUNDS: THE PRIME QUALITY MONEY MARKET FUND seeks to provide as high a level of current 9 income as is consistent with preservation of capital and liquidity by investing exclusively in high quality money market instruments. THE U.S. GOVERNMENT SECURITIES MONEY MARKET FUND seeks to provide as high a level of current income as is consistent with preservation of capital and liquidity by investing exclusively in bills, notes and bonds issued by the U.S. Treasury and separately traded interest and principal component parts of such obligations that are transferable through the Federal Reserve Book-Entry System ("U.S. Treasury obligations"), U.S. Government Subsidiary Corporation securities that are backed by the full faith and credit of the U.S. Government and repurchase agreements ("Repos") with approved dealers collateralized by U.S. Treasury obligations, and U.S. Government Subsidiary Corporation securities. THE TAX-EXEMPT MONEY MARKET FUND seeks to provide as high a level of current interest income exempt from federal income tax as is consistent with preservation of capital and liquidity. The Fund invests primarily in high quality short-term municipal obligations. Each Money Market Fund's ability to generate high current income will be limited by the fact that it is only permitted to invest in high quality securities. It is a fundamental policy of each Money Market Fund to use its best efforts to maintain a constant net asset value of $1.00 per share. There can be no assurance that a Money Market Fund will achieve its investment objective or that the Money Market Funds will be able to maintain a net asset value of $1.00 per share on a continuous basis. In addition, each Money Market Fund intends to comply with federal regulations applicable to money market funds using the amortized cost method for calculating net asset value which require each Fund to invest only in U.S. dollar denominated obligations, to maintain an average maturity on a dollar-weighted basis of 90 days or less and to acquire eligible securities that present minimal credit risk and have a maturity of 397 days or less. These requirements will also limit a Money Market Fund's ability to generate high current income. For a further discussion of these rules, see "Description of Permitted Investments." There can be no assurance that a Fund will achieve its investment objective. The investment objectives of the Investment Grade Bond Fund, U.S. Government Securities Fund, Limited-Term Federal Mortgage Securities Fund, Short-Term Bond Fund and Short-Term U.S. Treasury Securities Fund are non-fundamental and may be changed without a shareholder vote. INVESTMENT POLICIES AND STRATEGIES *INVESTMENT GRADE BOND FUND The Investment Grade Bond Fund will invest exclusively in investment grade obligations rated BBB or better by Standard & Poor's Corporation ("S&P") or Baa or better by Moody's Investors Services, Inc. ("Moody's") or, if unrated, of comparable quality at the time of purchase as determined by the Fund's Advisor, including corporate debt obligations; mortgage-backed securities, collateralized mortgage obligations ("CMOs") and asset-backed securities; obligations issued or guaranteed as to principal and interest by the U.S. Government or its agencies or instrumentalities; custodial receipts involving U.S. Treasury obligations; securities of the government of Canada and its provincial and local governments; securities issued or guaranteed by foreign governments, their political subdivisions, agencies or instrumentalities; obligations of supranational entities and sponsored American Depositary 10 Receipts ("ADRs") that are traded on exchanges or listed on NASDAQ. Under normal circumstances, at least 65% of the Fund's total assets will be invested in corporate and government bonds and debentures. No more than 25% of the Fund's assets will be invested in securities rated BBB by S&P or Baa by Moody's or, if unrated, of comparable quality at the time of purchase as determined by the Advisor. The Fund may purchase mortgage-backed securities issued or guaranteed as to the payment of principal and interest by the U.S. Government or its agencies or instrumentalities or, subject to a limit of 25% of the Fund's assets, mortgage-backed securities issued by private issuers. These mortgage-backed securities may be backed or collateralized by fixed, adjustable or floating rate mortgages. The Fund may also invest in asset-backed securities which consist of securities backed by company receivables, truck and auto loans, leases, credit card receivables and home equity loans. In order to reduce interest rate risk, and subject to a general limit of 25% of the Fund's assets, the Fund may purchase floating or variable rate securities. It may also buy securities on a when-issued basis, putable securities, medium term notes, and zero coupon securities. The Fund may also invest up to 10% of its assets in restricted securities that the Advisor determines are liquid under guidelines adopted by the Trust's Board of Trustees. The Fund may also engage in futures and options transactions and may engage in securities lending. Some floating or variable rate securities will be subject to interest rate "caps" or "floors." Under normal market conditions, it is anticipated that the Fund's average weighted maturity will range from 4 to 10 years. In the case of mortgage related securities and asset-backed securities, maturity will be determined based on the expected average life of the security. The Fund may shorten its average weighted maturity to as little as 90 days if deemed appropriate for temporary defensive purposes. By so limiting the maturity of its investments, the Fund expects that its net asset value will experience less price movement in response to changes in interest rates than the net asset values of mutual funds investing in similar credit quality securities with longer maturities. The Fund's portfolio turnover rate was 237.66% for the fiscal year ended May 31, 1995. This rate of turnover, if continued, will likely result in higher transaction costs and higher levels of realized capital gains than if the turnover rate was lower. *INVESTMENT GRADE TAX-EXEMPT BOND FUND The Investment Grade Tax-Exempt Bond Fund intends to be fully invested in municipal securities the interest on which is exempt from federal income taxes in the opinion of bond counsel to the issuer. The issuers of these securities can be located in all fifty states, the District of Columbia, Puerto Rico and other U.S. territories and possessions. It is a fundamental policy of the Investment Grade Tax-Exempt Bond Fund to invest at least 80% of its total assets in securities the income from which is exempt from federal income tax and treated as a preference item for purposes of the alternative minimum tax. At least 65% of the Fund's assets will be invested in municipal bonds and debentures, and at least 75% of its total assets invested in municipal bonds will be in securities rated A or better by S&P or Moody's. Municipal securities must be rated BBB or better by S&P or Baa or better by Moody's in the case of bonds; SP-1, SP-2 or MIG-1, MIG-2 in the case of notes; A-1, A-2, P-1, P-2 in the case of tax-exempt commercial 11 paper; and VMIG-1 or VMIG-2 in the case of variable rate demand obligations. The Fund will only acquire unrated securities if, at the time of purchase, the Advisor determines that such unrated obligations are of comparable quality to rated obligations that may be acquired by the Fund. The Fund may invest in floating or variable rate securities and commitments to purchase the above securities on a when-issued or delayed delivery basis, and may purchase municipal forwards, medium term notes, putable securities, and zero coupon securities. The Advisor has discretion to invest up to 20% of the Fund's total assets in taxable debt securities rated at least BBB or better by S&P or Baa or better by Moody's or, if unrated, of comparable quality at the time of purchase as determined by the Advisor, repurchase agreements, and securities subject to the alternative minimum tax. The Fund may also invest up to 10% of its assets in restricted securities that the Advisor determines are liquid under guidelines adopted by the Trust's Board of Trustees and may engage in futures and options transactions. Under normal market conditions, it is anticipated that the Fund's average weighted maturity will range from 4 to 10 years. The Fund may shorten its average weighted maturity to as little as 90 days if deemed appropriate for temporary defensive purposes. By so limiting the maturity of its investments, the Fund's net asset value is expected to experience less price movement in response to changes in interest rates than the net asset values of mutual funds investing in similar credit quality securities with longer maturities. The Fund's portfolio turnover rate was 591.91% for the fiscal year ended May 31, 1995. This rate of turnover, if continued, will likely result in higher transaction costs and higher levels of realized capital gains than if the turnover rate was lower. *U.S. GOVERNMENT SECURITIES FUND Under normal market conditions, the Fund will invest at least 65% of its assets in obligations issued or guaranteed by the U.S. Government or its agencies or instrumentalities, including mortgage-backed securities issued or guaranteed by U.S. Government agencies such as the Government National Mortgage Association ("GNMA"), the Federal National Mortgage Association ("FNMA") or the Federal Home Loan Mortgage Corporation ("FHLMC"). Mortgage-backed securities consisting of CMOs and real estate mortgage investment conduits ("REMICs") purchased by the Fund will be issued or guaranteed as to payment of principal and interest by the U.S. Government or its agencies or instrumentalities or, if issued by private issuers, rated in one of the two highest rating categories by an NRSRO. The principal governmental issuers or guarantors of mortgage-backed securities are GNMA, FNMA and FHLMC. Obligations of GNMA are backed by the full faith and credit of the U.S. Government while obligations of FNMA and FHLMC are supported by the respective agency only. The Fund may purchase mortgage-backed securities that are backed or collateralized by fixed, adjustable or floating rate mortgages. Mortgage-backed securities that are not issued or guaranteed by the U.S. Government or its agencies or instrumentalities, including securities nominally issued by a governmental entity (such as the Resolution Trust Corporation), are not obligations of a governmental entity and thus may bear a risk of nonpayment. The timely payment of principal and interest normally is supported, at least 12 partially, by various forms of insurance or guarantees. There can be no assurance, however, that such credit enhancement will support full payment of the principal and interest on such obligations. The average maturity of the Fund's investment portfolio will typically range from 7 to 14 years. With respect to the remaining 35% of its assets, the Fund may invest in corporate or government bonds that carry a rating of Baa or better by Moody's or BBB or better by S&P, or that are deemed by the Advisor to be of comparable quality; commercial paper rated at the time of purchase within the two highest ratings categories of an NRSRO; bankers' acceptances; certificates of deposit and time deposits; and U.S. Treasury obligations which includes custodial receipts and repurchase agreements involving securities that constitute permissible investments for the Fund. The Fund intends to invest in privately issued, mortgage-backed securities only if they are rated in one of the two highest rating categories. The Fund may purchase securities on a forward commitment or when-issued basis, which means that delivery and payment for such securities generally takes place after the customary securities settlement period. The Fund may purchase floating or variable rate securities, and may engage in dollar rolls. *LIMITED-TERM FEDERAL MORTGAGE SECURITIES FUND Under normal market conditions, the Limited-Term Federal Mortgage Securities Fund will invest at least 65% of its assets in mortgage-related securities issued or guaranteed by U.S. Government agencies such as GNMA, FNMA or the FHLMC. Obligations of GNMA are backed by the full faith and credit of the U.S. Government while obligations of FNMA and FHLMC are supported by the respective agency only. The Fund may purchase mortgage-backed securities that are backed or collateralized by fixed, adjustable or floating rate mortgages. The Fund's holdings of mortgage-backed securities will typically have an average life of from one to five years. Mortgage-backed securities consisting of CMOs and REMICs purchased by the Fund will be either issued or guaranteed as to payment of principal and interest by the U.S. Government or its agencies or instrumentalities or, if issued by private issuers, rated in one of the two highest rating categories by an NRSRO. Mortgage-backed securities that are not issued or guaranteed by the U.S. Government or its agencies or instrumentalities, including securities nominally issued by a governmental entity (such as the Resolution Trust Corporation), are not obligations of the U.S. Government and thus bear a risk of nonpayment. The timely payment of principal and interest normally is supported, at least partially, by various forms of insurance or guarantees. There can be no assurance, however, that such credit enhancement will support full payment of the principal and interest on such obligations. With respect to the remaining 35% of its assets, the Fund may invest in corporate or government bonds that carry a rating of Baa or better by Moody's or BBB or better by S&P, or that are deemed by the Advisor to be of comparable quality; asset backed securities; commercial paper rated at the time of purchase in the two highest ratings categories of an NRSRO rating bankers' acceptances; certificates of deposit and time deposits; U.S. Treasury obligations and custodial receipts; and repurchase agreements involving securities that constitute permissible investments for the Fund. The Fund may purchase securities on a forward commitment or when-issued basis, which 13 means that delivery and payment for such securities generally takes place after the customary securities settlement period. The Fund may purchase floating or variable rate securities and engage in dollar roll transactions. The Fund may also purchase stripped mortgage-backed securities, but will limit such purchase to 5% of its net assets. *SHORT-TERM BOND FUND Under normal circumstances, the Short-Term Bond Fund will invest solely in investment grade obligations rated BBB or better by S&P or Baa or better by Moody's or, if unrated, of comparable quality at the time of purchase as determined by the Advisor consisting of debt obligations of U.S. and foreign corporations; mortgage-backed securities; CMOs; asset-backed securities; obligations (including mortgage-backed securities) issued or guaranteed as to principal and interest by the U.S. Government or its agencies or instrumentalities; and custodial receipts involving U.S. Treasury obligations; (including STRIPS and CUBES). Under normal circumstances, at least 65% of the Fund's total assets will be invested in corporate and government bonds and debentures. No more than 25% of the Fund's assets will be invested in securities rated BBB by S&P or Baa by Moody's or, if unrated, of comparable quality at the time of purchase by the Advisor. The Fund may purchase, without limitation, mortgage-backed securities issued or guaranteed as to the payment of principal and interest by the U.S. Government or its agencies or instrumentalities and, subject to a limit of 25% of the Fund's assets, mortgage-backed securities issued by private issuers. These mortgage-backed securities may be backed or collateralized by fixed, adjustable or floating rate mortgages. The Fund may also invest in asset-backed securities, which consist of securities backed by company receivables, truck and auto loans; leases; credit card receivables; and home equity loans. The Fund will purchase mortgage-backed and asset-backed securities only if they are rated at least AA by S&P or Aa by Moody's or, if unrated, determined to be of comparable quality at the time of purchase by the Advisor. The Fund may purchase securities on a when-issued basis and may acquire floating or variable rate securities, medium term notes, putable securities, and zero coupon securities. The Fund may also purchase securities issued by foreign governments and supranational agencies. The Fund may also invest in municipal securities when the Advisor feels it is consistent with the Fund's investment objective. The Fund will not invest in municipal securities unless the Advisor believes that the yield will be higher than the yield for comparable taxable investments in which the Fund is permitted to invest. The following quality criteria apply to the Fund's investments in municipal securities. The Fund's investments in municipal notes will be limited to those obligations (i) where both principal and interest are backed by the full faith and credit of the United States, (ii) which are rated MIG-2 or V-MIG-2 at the time of investment by Moody's, (iii) which are rated SP-2 at the time of investment by S&P, or (iv) which, if not rated, are of equivalent quality to MIG-2, V-MIG-2, or SP-2 in the Advisor's judgment. The Fund's investment in municipal bonds will be limited to bonds rated BBB or better by S&P or Baa or better by Moody's, or, if unrated, deemed by the Advisor to be of comparable quality. For the Fund's investments in other types of tax-exempt municipal investments, such as participation interests in municipal lease/purchase agreements, the quality of the underlying credit or of the bank providing a credit support arrangement must, in 14 the Advisor's opinion, be equivalent to the municipal note or bond ratings stated above. The Fund is also authorized to invest up to 10% of its assets in restricted securities, including Rule 144A securities, that the Advisor determines are liquid under guidelines adopted by the Trust's Board of Trustees. The Fund may also enter into bond futures contracts and options on bond futures contracts and engage in securities lending. The Fund intends to maintain a dollar-weighted average maturity of 3 years or less, and the maximum remaining maturity for any security held by the Fund is 7 years. Under normal market conditions it is anticipated that the Fund's dollar-weighted average maturity will range from 2 to 3 years. In the case of mortgage related securities and asset-backed securities, maturity will be determined based on the expected average life of the security. The Fund may shorten its average weighted maturity to as little as 90 days if deemed appropriate for temporary defensive purposes. By so limiting the maturity of its investments, the Fund expects that its net asset value will experience less price movement in response to changes in interest rates than the net asset values of mutual funds investing in similar credit quality securities with longer maturities. The Fund's turnover rate was 200.49% for the fiscal year ended May 31, 1995. This rate of turnover, if continued, will likely result in higher transaction costs and higher levels of realized capital gains than if the turnover rate was lower. *SHORT-TERM U.S. TREASURY SECURITIES FUND The Short-Term U.S. Treasury Securities Fund will invest exclusively in obligations issued by the U.S. Treasury with maximum remaining maturities of 3 years or less. U.S. Treasury securities are considered to be among the safest investments available. The Fund will not invest in repurchase agreements. The Fund may borrow money for temporary or emergency purposes in an amount not exceeding one-third of its total assets, but has no present intention to do so. Under normal market conditions, it is anticipated that the Fund's average maturity will range from one to two years. Furthermore, for temporary defensive purposes during periods when the Advisor determines that market conditions warrant, the Short-Term U.S. Treasury Securities Fund may reduce its average weighted maturity to less than one year. *FLORIDA TAX-EXEMPT BOND FUND The Florida Tax-Exempt Bond Fund intends to be fully invested in municipal securities the interest on which is exempt from federal income taxes based on opinions from bond counsel to the issuers. The issuers of these securities can be located in Florida, the District of Columbia, Puerto Rico and other U.S. territories and possessions. It is a fundamental policy of the Fund to invest at least 80% of its total assets in securities the income from which is exempt from federal income tax and not treated as a preference item for purposes of the alternative minimum tax. At least 65% of the Fund's assets will be invested in Florida municipal bonds and debentures, and at least 75% of its total assets invested in municipal bonds will be in securities rated A or better by S&P or Moody's. Municipal securities must be rated BBB or better by S&P or Baa or better by Moody's in the case of bonds; SP-1, SP-2 or MIG-1, MIG-2 in the case of notes; A-1, A-2, or P-1, P-2 in the case of tax-exempt commercial paper; and VMIG-1 or VMIG-2 in the case of variable rate demand obligations. No more than 25% of the Fund's assets will be invested in bonds rated BBB by S&P or Baa by Moody's. The Fund will only acquire unrated securities if, 15 at the time of purchase, the Advisor determines that such unrated obligations are of comparable quality to rated obligations that may be acquired by the Fund. The Fund may invest in floating or variable rate securities, commitments to purchase the above securities on a when-issued or delayed delivery basis, and may purchase municipal forwards, putable securities, medium term notes, and zero coupon securities. The Advisor has discretion to invest up to 20% of the Fund's total assets in taxable debt securities rated at least BBB or better by S&P or Baa or better by Moody's or, if unrated, of comparable quality at the time of purchase as determined by the Advisor, repurchase agreements, and securities subject to the alternative minimum tax. The Fund may also invest in futures and options, but has no present intention to do so for other than hedging purposes. Under normal market conditions, it is anticipated that the Fund's average weighted maturity will range from 6 to 25 years. The Fund may shorten its average weighted maturity to as little as 90 days if deemed appropriate for temporary defensive purposes. The Fund's portfolio turnover rate was 105.01% for the fiscal year ended May 31, 1995. This rate of turnover, if continued, will likely result in higher transaction costs and higher levels of realized capital gains than if the turnover rate was lower. *GEORGIA TAX-EXEMPT BOND FUND The Georgia Tax-Exempt Bond Fund intends to be fully invested in municipal securities the interest on which is exempt from federal income taxes and substantially exempt from State of Georgia income taxes based on opinions from bond counsel to the issuers. The issuers of these securities can be located in Georgia, the District of Columbia, Puerto Rico and other U.S. territories and possessions. It is a fundamental policy of the Fund to invest at least 80% of its total assets in securities the income from which is exempt from federal income tax and not treated as a preference item for purposes of the alternative minimum tax. At least 65% of the Fund's assets will be invested in Georgia municipal bonds and debentures, and at least 75% of its total assets invested in municipal bonds will be in securities rated A or better by S&P or Moody's. Municipal securities must be rated BBB or better by S&P or Baa or better by Moody's in the case of bonds; SP-1, SP-2 or MIG-1, MIG-2 in the case of notes; A-1, A-2, or P-1, P-2 in the case of tax-exempt commercial paper; and VMIG-1 or VMIG-2 in the case of variable rate demand obligations. No more than 25% of the Fund's assets will be invested in bonds rated BBB by S&P or Baa by Moody's. The Fund will only acquire unrated securities if, at the time of purchase, the Advisor determines that such unrated obligations are of comparable quality to rated obligations that may be acquired by the Fund. The Fund may invest in floating or variable rate securities, commitments to purchase the above securities on a when-issued or delayed delivery basis, and may purchase municipal forwards, putable securities, medium term notes, and zero coupon securities. The Advisor has discretion to invest up to 20% of the Fund's total assets in taxable debt securities rated at least BBB or better by S&P or Baa or better by Moody's or, if unrated, of comparable quality at the time of purchase as determined by the Advisor, repurchase agreements, and securities subject to the alternative minimum tax. The Fund may also invest in futures and options, but has no present intention to do so for other than hedging purposes. 16 Under normal market conditions, it is anticipated that the Fund's average weighted maturity will range from 6 to 25 years. The Fund may shorten its average weighted maturity to as little as 90 days if deemed appropriate for temporary defensive purposes. *TENNESSEE TAX-EXEMPT BOND FUND The Tennessee Tax-Exempt Bond Fund intends to be fully invested in municipal securities the interest on which is exempt from federal income taxes and substantially exempt from State of Tennessee income taxes based on opinions from bond counsel to the issuers. The issuers of these securities can be located in Tennessee, the District of Columbia, Puerto Rico and other U.S. territories and possessions. It is a fundamental policy of the Fund to invest at least 80% of its total assets in securities the income from which is exempt from federal income tax and not treated as a preference item for purposes of the alternative minimum tax. At least 65% of the Fund's assets will be invested in Tennessee municipal bonds and debentures, and at least 75% of its total assets invested in municipal bonds will be in securities rated A or better by S&P or Moody's. Municipal securities must be rated BBB or better by S&P or Baa or better by Moody's in the case of bonds; SP-1, SP-2 or MIG-1, MIG-2 in the case of notes; A-1, A-2, or P-1, P-2 in the case of tax-exempt commercial paper; and VMIG-1 or VMIG-2 in the case of variable rate demand obligations. No more than 25% of the Fund's assets will be invested in bonds rated BBB by S&P or Baa by Moody's. The Fund will only acquire unrated securities if, at the time of purchase, the Advisor determines that such unrated obligations are of comparable quality to rated obligations that may be acquired by the Fund. The Fund may invest in floating or variable rate securities, commitments to purchase the above securities on a when-issued or delayed delivery basis, and may purchase municipal forwards, putable securities, medium term notes, and zero coupon securities. The Advisor has discretion to invest up to 20% of the Fund's total assets in taxable debt securities rated at least BBB or better by S&P or Baa or better by Moody's or, if unrated, of comparable quality at the time of purchase as determined by Advisor, repurchase agreements, and securities subject to the alternative minimum tax. The Fund may also invest in futures and options, but has no present intention to do so for other than hedging purposes. Under normal market conditions, it is anticipated that the Fund's average weighted maturity will range from 6 to 25 years. The Fund may shorten its average weighted maturity to as little as 90 days if deemed appropriate for temporary defensive purposes. *PRIME QUALITY MONEY MARKET FUND The Prime Quality Money Market Fund will invest in money market instruments denominated in U.S. dollars consisting of (i) U.S. Treasury obligations; (ii) custodial receipts representing interests in component parts of U.S. Treasury obligations; (iii) obligations issued or guaranteed as to principal and interest by agencies and instrumentalities of the U.S. Government; (iv) commercial paper issued by domestic and foreign issuers rated in the highest short-term rating category by one or more nationally recognized statistical rating organizations ("NRSROs") as described in the "Appendix" or, if not rated, determined by the Advisor to be of comparable quality; (v) high quality obligations (including certificates of deposit, time deposits, bankers' acceptances, Eurodollar and Yankee bank obligations) of U.S. commercial banks (including foreign branches of such banks), and 17 U.S. and London branches of foreign banks or savings and loan and thrift institutions that are members of the Federal Reserve System, the Federal Deposit Insurance Corporation, or the Federal Savings and Loan Insurance Corporation; (vi) high quality short-term corporate obligations issued by companies with commercial paper meeting the ratings indicated in (iv), above, or, if not rated, determined by the Advisor to be of comparable quality; (vii) repurchase agreements involving such obligations; (viii) high quality obligations of supranational entities satisfying the credit ratings described in (iv), above, or, if not rated, determined by the Advisor to be of comparable quality; (ix) medium term notes and (x) investments in guaranteed investment contracts ("GICs") issued by U.S. insurance companies that are determined by the Advisor to be of comparable quality to the securities with the ratings described above (subject to a limit of 10% of the Fund's assets). The Fund may not invest more than 25% of its total assets in obligations issued by foreign branches of U.S. banks and London branches of foreign banks. The Fund may purchase securities subject to standby commitments. As a Money Market Fund, the Fund is subject to limitations on the percentage of its assets that may be invested in any one issuer and on the percentage that may be invested in securities carrying the second highest rating assigned by the requisite NRSROs. *U.S. GOVERNMENT SECURITIES MONEY MARKET FUND The U.S. Government Securities Money Market Fund will invest exclusively in U.S. Treasury obligations, U.S. Government Subsidiary Corporation securities which are backed by the full faith and credit of the U.S. Government (e.g., the Government National Mortgage Association) and repurchase agreements with dealers selected pursuant to guidelines adopted by the Trust's Board of Trustees and collateralized by U.S. Treasury securities and U.S. Government Subsidiary Corporation securities. *TAX-EXEMPT MONEY MARKET FUND The Tax-Exempt Money Market Fund intends to be fully invested in securities the interest on which is exempt from federal income taxes in the opinion of bond counsel to the issuer. It is a fundamental policy of the Tax-Exempt Money Market Fund to invest at least 80% of its total assets in securities the income from which is exempt from federal income taxes and not treated as a preference item for purposes of the alternative minimum tax. The Fund may invest in high quality, U.S. dollar denominated municipal securities of issuers located in all fifty states, the District of Columbia, Puerto Rico and other U.S. territories rated in one of the two highest short-term rating categories by S&P or Moody's or, if not rated, determined by the Advisor to be of comparable quality. The Fund will primarily purchase municipal bonds with a remaining maturity of 397 days or less, and will also acquire municipal notes and tax-exempt commercial paper with similar maturities. The Fund may agree to purchase short-term securities on a when-issued basis and may invest in securities subject to standby commitments. Securities purchased on a when-issued basis are subject to settlement within 45 days of the purchase date. The Advisor has discretion to invest up to 20% of the Fund's assets in U.S. dollar denominated obligations consisting of taxable money market instruments, obligations issued or guaranteed by the U.S. Government or its agencies and instrumentalities, repurchase agreements, and securities subject to the alternative minimum tax. 18 GENERAL INVESTMENT POLICIES AND STRATEGIES For temporary defensive purposes during periods when its Advisor determines that market conditions warrant, each Fund, except the U.S. Government Securities Money Market Fund and Short-Term U.S. Treasury Securities Fund, may invest up to 100% of its assets in money market instruments consisting of securities issued or guaranteed as to principal and interest by the U.S. Government, its agencies or instrumentalities, custodial receipts involving U.S. Treasury obligations, repurchase agreements, certificates of deposit, bankers' acceptances, and time deposits issued by banks or savings and loan associations and commercial paper rated in the highest rating category, and may hold a portion of its assets in cash. A Fund may not be pursuing its investment objective when it is engaged in temporary defensive investing. The municipal bonds that the Investment Grade Tax-Exempt Bond Fund and State Tax-Exempt Bond Funds may purchase include general obligation bonds, revenue or special obligation bonds, and private activity and industrial development bonds. General obligation bonds are backed by the taxing power of the issuing municipality while revenue or special obligation bonds are backed by a specific project or facility. The State Tax-Exempt Bond Funds may also purchase certificates of participation which represent an interest in an underlying obligation or commitment such as an obligation issued in connection with a leasing arrangement. The payment of principal and interest on private activity and industrial development bonds generally is dependent solely on the ability of the facility's user to meet its obligation and the pledge, if any, of real or personal property as security for such payment. The Advisor to a State Tax-Exempt Bond Fund or the Investment Grade Tax-Exempt Bond Fund may buy or sell portfolio securities with the intention of generating capital gains. Such gains will increase the Fund's total return and will be taxable upon distribution to Shareholders. See "Tax Information." In the event that a security owned by a Fund is downgraded below the stated rating categories, the Advisor will review and take appropriate action with regard to the security. A Fund's purchase of shares of other investment companies is limited by the Investment Company Act of 1940 and will ordinarily result in an additional layer of charges and expenses. Each of the Funds may engage in securities lending and will limit such practice to 33 1/3% of its total assets. No Fund may purchase additional securities while its outstanding borrowings exceed 5% of its assets. It is a non-fundamental policy of each Fund to invest no more than 15% of its net assets in illiquid securities (10% of the total assets of each Money Market Fund). An illiquid security is a security which cannot be disposed of in the usual course of business within seven days at a price approximating its carrying value. For additional information regarding permitted investments, see "Description of Permitted Investments" in this Prospectus and in the Statement of Additional Information. INVESTMENT RISKS ZERO COUPON OBLIGATIONS Each Fund, except the Tax-Exempt Money Market Fund, may invest, subject to its investment objective and policies, in zero coupon obligations. Zero coupon obligations are sold at original issue discount and do not 19 make periodic payments. Zero coupon obligations may be subject to greater fluctuations in value due to interest rate changes than interest bearing obligations. A Fund will be required to include the imputed interest in zero coupon obligations in its current income. Because each Fund distributes all of its net investment income to Shareholders, a Fund may have to sell portfolio securities to distribute the income attributable to these obligations and securities at a time when the Advisor would not have chosen to sell such obligations or securities and which may result in a taxable gain or loss. FOREIGN SECURITIES Investing in the securities of foreign companies involves special risks and considerations not typically associated with investing in U.S. companies. These risks and considerations include differences in accounting, auditing and financial reporting standards, generally higher commission rates on foreign portfolio transactions, the possibility of expropriation or confiscatory taxation, adverse changes in investment or exchange control regulations, political instability which could affect U.S. investment in foreign countries and potential restrictions of the flow of international capital and currencies. Foreign companies may also be subject to less government regulation than U.S. companies. Moreover, the dividends payable on the foreign securities may be subject to foreign withholding taxes, thus reducing the net amount of income available for distribution to the Fund's Shareholders. Further, foreign securities often trade with less frequency and volume than domestic securities and, therefore, may exhibit greater price volatility. Changes in foreign exchange rates will affect, favorably or unfavorably, the value of those securities which are denominated or quoted in currencies other than the U.S. dollar. MORTGAGE-BACKED SECURITIES Mortgage-backed securities are subject to the risk of prepayment of the underlying mortgages. During periods of declining interest rates, prepayment of mortgages underlying these securities can be expected to accelerate. When the mortgage-backed securities held by a Fund are prepaid, the Fund must reinvest the proceeds in securities the yield of which reflects prevailing interest rates, which may be lower than the prepaid security. FIXED INCOME SECURITIES The market value of a Fund's fixed income investments will change in response to interest rate changes and other factors. During periods of falling interest rates, the values of outstanding fixed income securities generally rise. Conversely, during periods of rising interest rates, the values of such securities generally decline. Securities with longer maturities are subject to greater fluctuations in value than securities with shorter maturities. Changes by an NRSRO to the rating of any fixed income security and in the ability of an issuer to make payments of interest and principal also affect the value of these investments. Changes in the value of a Fund's securities will not affect cash income derived from these securities but will affect the Fund's net asset value. 20 Fixed income securities rated BBB by S&P or Baa by Moody's (investment grade bonds) are deemed by these rating services to have speculative characteristics. Guarantees of a Fund's securities by the U.S. Government or its agencies or instrumentalities guarantee only the payment of principal and interest on the guaranteed securities, and do not guarantee the securities' yield or value or the yield or value of a Fund's shares. There is a risk that the current interest rate on floating and variable rate instruments may not accurately reflect existing market interest rates. MUNICIPAL SECURITIES Since each State Tax-Exempt Bond Fund invests in municipal securities issued by governmental entities of each of their specific states, the performance of each State Tax-Exempt Bond Fund may be especially affected by factors pertaining to such state's economy and other factors specifically affecting the ability of issuers in that state to meet their obligations. As a result, the value of each State Tax-Exempt Bond Fund's shares may fluctuate more widely than the value of shares of a portfolio investing in securities relating to a number of different states. The ability of state, county, or local governments to meet their obligations will depend primarily on the availability of tax and other revenues to those governments and on their fiscal conditions generally. Municipal securities may be affected from time to time by economic, political, geographic and demographic conditions. In addition, constitutional amendments, legislative measures, executive orders, administrative regulations and voter initiatives may limit a government's power to raise revenues or increase taxes and thus could adversely affect the ability to meet financial obligations. INVESTMENT LIMITATIONS The following investment limitations constitute fundamental policies of each Fund. Fundamental policies cannot be changed with respect to a Fund without the consent of the holders of a majority of the Fund's outstanding shares. The term "majority of the outstanding shares" means the vote of (i) 67% or more of a Fund's shares present at a meeting, if more than 50% of the outstanding shares of the Fund are present or represented by proxy, or (ii) more than 50% of a Fund's outstanding shares, whichever is less. Each Fund may not: 1. Purchase securities of any issuer (except securities issued or guaranteed by the United States, its agencies or instrumentalities and repurchase agreements involving such securities) if as a result more than 5% of the total assets of a Fund would be invested in the securities of such issuer; provided, however, that a Fund may invest up to 25% of its total assets without regard to this restriction as permitted by applicable law. 2. Purchase any securities which would cause more than 25% of the total assets of a Fund to be invested in the securities of one or more issuers conducting their principal business activities in the same industry, provided that this limitation does not apply to investments in obligations issued or guaranteed by the U.S. Government or its agencies and instrumentalities, repurchase agreements involving such securities or tax-exempt securities issued by governments or political subdivisions of governments and, with respect to only the Money Market Funds, obligations issued by domestic branches of U.S. banks or U.S. branches of foreign banks subject to the same regulations as U.S. banks. For purposes of this limitation, (i) utility companies will be divided according to their services, for example, 21 gas, gas transmission, electric and telephone will each be considered a separate industry; (ii) financial service companies will be classified according to the end users of their services, for example, automobile finance, bank finance and diversified finance will each be considered a separate industry; and (iii) supranational entities will be considered to be a separate industry. It is a non-fundamental policy of the Tax-Exempt Money Market Fund and Investment Grade Tax-Exempt Bond Fund that they will not invest more than 25% of their net assets in securities of one or more issuers conducting their principal activities in the same state. In addition, the Tax-Exempt Money Market Fund, Investment Grade Tax-Exempt Bond Fund and State Tax-Exempt Bond Funds will not invest more than 25% of their total assets in securities the interest on which is derived from revenues of similar type projects. The foregoing percentages will apply at the time of the purchase of a security. Additional investment limitations are set forth in the Statement of Additional Information. PERFORMANCE INFORMATION *MONEY MARKET FUNDS From time to time each Money Market Fund may advertise its "current yield" and "effective compound yield." Both yield figures are based on historical earnings and are not intended to indicate future performance. The "current yield" of each Fund refers to the income generated by an investment in a Fund over a seven-day period (which period will be stated in the advertisement). This income is then "annualized." That is, the amount of income generated by the investment during that week is assumed to be generated each week over a 52-week period and is shown as a percentage of the investment. The "effective yield" is calculated similarly but, when annualized, the income earned by an investment in a Fund is assumed to be reinvested. The "effective yield" will be slightly higher than the "current yield" because of the compounding effect of this assumed reinvestment. The Tax-Exempt Money Market Fund may also advertise a "tax-equivalent yield," which is calculated by determining the rate of return that would have been achieved on a fully taxable investment to produce the after tax equivalent of the Fund's yield, assuming certain tax brackets for the Shareholder. *BOND AND STATE TAX-EXEMPT BOND FUNDS From time to time, the Bond and State Tax-Exempt Bond Funds may advertise yield and total return. These figures will be based on historical earnings and are not intended to indicate future performance. The yield of a Fund refers to the annualized income generated by an investment in that Fund over a specified 30-day period. The yield is calculated by assuming that the income generated by the investment during that period is generated over one year and is shown as a percentage of the investment. The Investment Grade Tax-Exempt and State Tax-Exempt Bond Funds may also advertise a "tax-equivalent yield," which is calculated by determining the rate of return that would have been achieved on a fully taxable investment to produce the after tax equivalent of the Fund's yield, assuming certain tax brackets for the Shareholder. The total return of a Fund refers to the average compounded rate of return to a hypothetical investment, including any sales charge imposed, for designated time periods (including but not limited to, the period from which a Fund commenced operations through the specified 22 date), assuming that the entire investment is redeemed at the end of each period and assuming the reinvestment of all dividend and capital gains distributions. GENERAL PERFORMANCE INFORMATION The performance of the Trust's Trust Shares will normally be higher than for Investor Shares and Flex Shares because Investor Shares and Flex Shares are subject to distribution, service, and certain transfer agent fees not charged to Trust Shares. The performance of Flex Shares in comparison to Investor Shares will vary depending upon the investment time horizon. Each Fund may periodically compare its performance to other mutual funds tracked by mutual fund rating services, to broad groups of comparable mutual funds or to unmanaged indices which may assume reinvestment of dividends but generally do not reflect deductions for administrative and management costs. PURCHASE OF FUND SHARES Trust Shares of the Fund are sold primarily to financial institutions, including subsidiaries of SunTrust Banks, Inc. ("SunTrust"), for the investment of funds for which they act in a fiduciary, agency, investment advisory or custodial capacity. Individuals may not purchase Trust Shares directly, although individuals may be able to purchase Trust Shares through accounts maintained with financial institutions. Trust Shares are sold without a sales charge, although financial institutions may charge their customer accounts for services provided in connection with the purchase of shares. Financial institutions may impose an earlier cut-off time for receipt of purchase orders directed through them to allow for processing and transmittal of the reorders to the Transfer Agent for effectiveness the same day. Information concerning these services and any charges will be provided to customers by the financial institutions. Trust Shares will be held of record by the financial institutions, although customers may have or be given the right to vote the shares depending upon the terms of their relationship with the financial institution. Confirmations of share purchases and redemptions will be sent to the financial institution as the shareholder of record. Shares may be purchased on days on which the New York Stock Exchange is open for business ("business day"). However, money market mutual fund shares cannot be purchased or redeemed for same day settlement on days the Federal Reserve is closed. Purchase orders for Money Market Funds will be effective as of the business day received by the Transfer Agent and eligible to receive dividends declared the same day if the Transfer Agent receives the order before 11:00 a.m. Eastern time for the Tax-Exempt Money Market Fund or before 1:00 p.m. Eastern time for the Prime Quality Money Market Fund and U.S. Government Securities Money Market Fund and the Custodian receives federal funds before 4:00 p.m. Eastern time on such day. Otherwise, purchase orders for the Money Market Funds will be effective the next business day provided the Custodian receives readily available funds before 4:00 p.m. Eastern time on the next such business day. The purchase price is the net asset value per share next computed after the order is received and accepted by the Trust. The net asset value per share of each Fund is determined by dividing the total value of its investments and other assets, less any liabilities, by its total outstanding shares. The net asset value per share is calculated as of the close of business of the New York Stock Exchange (currently 4:00 p.m. Eastern time) 23 each business day based on the amortized cost method described in the Statement of Additional Information and is expected to remain constant at $1.00 per share. A purchase order for any of the Bond and State Tax-Exempt Bond Funds will be effective as of the business day it is received by the Transfer Agent if the Transfer Agent receives the order before 4:00 p.m. Eastern time and payment is received within one day. The purchase price of shares of a Fund is the net asset value next determined after a purchase order is effective plus any applicable sales charge (the "offering price"). The net asset value per share of a Fund is determined by dividing the total market value of the Fund's investments and other assets, less any liabilities, by the total outstanding shares of the Fund. Net asset value per share is determined daily as of 4:00 p.m. Eastern time on any business day. Pursuant to guidelines established by the Trustees, the Trust may use a pricing service to provide market quotations or valuations for securities owned by each Fund. Purchases will be made in full and fractional shares of the Trust calculated to three decimal places. The Trust reserves the right to reject a purchase order when the Distributor determines that it is not in the best interest of the Trust and/or Shareholder(s). Neither the Trust's Transfer Agent nor the Trust will be responsible for any loss, liability, cost or expense for acting upon telephone or wire instructions reasonably believed to be genuine. The Trust maintains procedures, including identification methods and other means, for ascertaining the identity of callers and authenticity of instructions. Shares of the Funds are offered only to residents of states in which the shares are eligible for purchase. Investors in certain states may be required to purchase shares through institutions registered as brokers/dealers in such states. Although the methodology and procedures for calculating the net asset value of the Trust Shares are identical to those of the Investor Shares and Flex Shares, the net asset value per share of the classes may differ because of the distribution, service, and certain transfer agent expenses charged to Investor Shares and Flex Shares. REDEMPTION OF FUND SHARES An order to redeem shares must be transmitted to the Transfer Agent by the financial institution as the record owner of Trust Shares. Financial institutions may establish procedures for their customers to request redemption of Trust Shares held in their account with the financial institution. Customers should contact their financial institution for information concerning these procedures. With respect to the Money Market Funds, redemption orders must be received by the Transfer Agent on a business day before 1:00 p.m. Eastern time for the Prime Quality and U.S. Government Securities Money Market Funds and before 11:00 a.m. Eastern time for the Tax-Exempt Money Market Fund. Redemption orders received after the times noted above will normally be executed the following day. STI Classic Funds reserves the right to wire redemption proceeds within five business days after receiving the redemption orders if, in the judgment of the Advisor, an earlier payment could adversely impact a Fund. With respect to the Bond and State Tax-Exempt Bond Funds, redemption orders must be received by the Transfer Agent before 4:00 p.m. 24 Eastern time on any business day. Redemption proceeds are normally remitted within five business days following receipt of the order. The Trust intends to pay cash for all shares redeemed, but under abnormal conditions which make payment in cash unwise, payment may be made wholly or partly in liquid portfolio securities with a market value equal to the redemption price. In such circumstances, an investor may incur brokerage costs in converting such securities to cash. DIVIDENDS AND DISTRIBUTIONS MONEY MARKET FUNDS Dividends from net investment income (exclusive of capital gains) of each of the Money Market Funds are declared on each business day to Shareholders at the close of business on the day of declaration. Net income for dividend purposes consists of (i) interest accrued and original issue discount earned on the Fund's assets, (ii) plus the amortization of market discount (except in the case of the Tax-Exempt Money Market Fund) and minus the amortization of market premium on such assets, (iii) less accrued expenses directly attributable to the Fund and the general expenses of the Trust prorated to the Fund on the basis of its relative net assets. Trust Shares begin earning dividends on the business day the purchase order is effective and continue earning dividends through and including the business day before the redemption order is effective. Dividends are paid within ten business days after the end of each month in the form of additional Trust Shares of the same Fund unless the Shareholder has elected prior to the date of distribution to receive payment in cash. Such election, or any revocation thereof, must be made in writing at least 15 days prior to the date of distribution to the Trust's transfer agent and will become effective with respect to dividends paid after its receipt. Dividends are paid within ten business days after a Shareholder's complete redemption of its Trust Shares in a Fund. BOND AND STATE TAX-EXEMPT BOND FUNDS Dividends from net investment income (exclusive of capital gains) are declared on each business day and paid monthly by each of the Bond and State Tax-Exempt Bond Funds. Each Fund's net realized capital gains (including net short-term capital gains) are distributed at least annually. Net income for dividend purposes consists of (i) interest accrued and original issue discount earned on the Fund's assets, (ii) plus the amortization of market discount (except in the case of the Investment Grade Tax-Exempt Bond and State Tax-Exempt Bond Funds) and minus the amortization of market premium on such assets, (iii) plus dividend or distribution income on such assets, (iv) less accrued expenses directly attributable to the Fund and the general expenses of the Trust prorated to the Fund on the basis of its relative net assets. Investor Shares and Flex Shares invested in the Bond and State Tax-Exempt Bond Funds are eligible to begin earning dividends that are declared on the business day after the purchase order is effective and continue to be eligible for dividends through and including the day the redemption order is effective. The net asset value of Trust Shares of the Funds will be reduced by the amount of any dividend or distribution. Dividends and distributions are paid in the form of additional Trust Shares of the same Fund unless the customer has elected prior to the date of distribution to receive payment in cash. Such election, or any revocation thereof, must be made in writing prior to the date of distribution to the Trust's transfer agent and will become 25 effective with respect to dividends paid after its receipt. Dividends and distributions are paid within ten days of the end of the time period to which the dividend relates. Dividends and distributions payable to a Shareholder are paid in cash within ten business days after a Shareholder's complete redemption of its Trust Shares in a Fund. The amount of dividends payable on Trust Shares will be more than the dividends payable on Investor Shares and Flex Shares because of the distribution and certain transfer agent expenses charged to Investor Shares and Flex Shares. The amount of dividends payable on Flex Shares generally will be less than the amount of dividends payable on Investor Shares due to the higher distribution and service expenses of Flex Shares. TAX INFORMATION The following summary of federal income tax consequences is based on current tax laws and regulations, which may be changed by legislative, judicial or administrative action. No attempt has been made to present a detailed explanation of the federal, state, or local income tax treatment of each Fund or its Shareholders. In particular, no attempt has been made herein to provide information on the tax laws of Florida, Georgia or Tennessee. Accordingly, Shareholders are urged to consult their tax advisors regarding specific questions as to federal, state and local income taxes. TAX STATUS OF EACH FUND Each Fund is treated as a separate entity for federal tax purposes, and is not combined with the Trust's other Funds. Each Fund intends to qualify for the special tax treatment afforded regulated investment companies by the Internal Revenue Code of 1986, as amended (the "Code"), so that it will be relieved of federal income tax on that part of its net investment income and net capital gains (the excess of long-term capital gains over net short-term capital loss) which is distributed to Shareholders. Each Fund intends to make sufficient distributions prior to the end of each calendar year to avoid liability for the federal excise tax applicable to regulated investment companies. TAX STATUS OF DISTRIBUTIONS: MONEY MARKET FUNDS The Prime Quality Money Market Fund and the U.S. Government Securities Money Market Fund will each distribute all of their net investment income (including, for this purpose, net short-term capital gains) to Shareholders. Dividends from net investment income will be taxable to Shareholders as ordinary income whether received in cash or in additional shares. The Tax-Exempt Money Market Fund will distribute all of its net investment income (including net short-term capital gains) to Shareholders. If, at the close of each quarter of its taxable year, at least 50% of the value of the Fund's assets consists of obligations the interest on which is excludable from gross income, the Fund may pay exempt-interest dividends to its Shareholders. Those dividends constitute the portion of the aggregate dividends as designated by the Fund, equal to the excess of the excludable interest over certain amounts disallowed as deductions. Exempt-interest dividends are excludable from a Shareholder's gross income for regular federal income tax purposes, but may have alternative minimum tax consequences. See the Statement of Additional Information. Current federal tax law limits the types and volume of bonds qualifying for the federal income tax exemption of interest, which may 26 have an effect on the ability of the Tax-Exempt Money Market Fund to purchase sufficient amounts of tax-exempt securities to satisfy the Code's requirements for the payment of exempt-interest dividends. TAX STATUS OF DISTRIBUTIONS: BOND AND STATE TAX-EXEMPT BOND FUNDS Each Fund will distribute substantially all of its net investment income (including, for this purpose, net short-term capital gains) to Shareholders. Dividends from net investment income paid by the Funds will be taxable to Shareholders as ordinary income whether received in cash or in additional shares. Each of the Investment Grade Tax-Exempt Bond and State Tax-Exempt Bond Funds will distribute all of its net investment income (including net short-term capital gains) to Shareholders. If, at the close of each quarter of its taxable year, at least 50% of the value of each of the Fund's assets consist of obligations the interest on which is excludable from gross income, the Fund may pay exempt-interest dividends to its Shareholders. Those dividends constitute the portion of the aggregate dividends as designated by the Fund, equal to the excess of the excludable interest over certain amounts disallowed as deductions. Exempt-interest dividends are excludable from a Shareholder's gross income for regular federal income tax purposes, but may have alternative minimum tax consequences. See the Statement of Additional Information. Current federal tax law limits the types and volume of bonds qualifying for the federal income tax exemption of interest, which may have an effect on the ability of the Investment Grade Tax-Exempt Bond and State Tax-Exempt Bond Funds to purchase sufficient amounts of tax-exempt securities to satisfy the Code's requirements for the payment of exempt-interest dividends. TAX STATUS OF DISTRIBUTIONS: ALL FUNDS Dividends from net investment income will qualify for the dividends received deduction for corporate Shareholders only to the extent such distributions are derived from dividends paid by domestic corporations. Dividends from net capital gains (the excess of net long-term capital gains over net short-term capital loss) will be treated as long-term capital gains, regardless of how long the Shareholder has held shares and regardless of whether distributions are received in cash or in additional shares. For certain individual Shareholders net long-term capital gains may be taxed at a lower rate than ordinary income. Each Fund will make annual reports to Shareholders of the federal income tax status of all distributions. Dividends declared by a Fund in October, November or December of any year and payable to Shareholders of record on a date in that month will be deemed to have been paid by the Fund and received by the Shareholders on December 31, of that year, if paid by the Fund any time during the following January. Income received on direct U.S. obligations is exempt from tax at the state level when received directly by a Fund and may be exempt, depending on the state, when received by a Shareholder from a Fund provided certain state specific conditions are satisfied. Not all states permit such income dividends to be tax-exempt and some require that a certain minimum percentage of an investment company's income be derived from state tax-exempt interest. Each Fund will inform Shareholders annually of the percentage of 27 income and distributions derived from direct U.S. obligations. Shareholders should consult their tax advisors to determine whether any portion of the income dividends received from a Fund is considered tax exempt in their particular states. Income derived by a Fund from obligations of foreign issuers may be subject to foreign withholding taxes. No Fund will be able to treat Shareholders as having paid their proportionate share of such foreign taxes. Interest on indebtedness incurred or continued by a Shareholder in order to purchase shares of a "tax-exempt" Fund is not deductible. Furthermore, entities or persons who are "substantial users" (or persons related to "substantial users") of facilities financed by "private activity bonds" or certain industrial development bonds should consult their tax advisors before purchasing shares. For these purposes, the term "substantial user" is defined generally to include a "non-exempt person" who regularly uses in trade or business a part of a facility financed from the proceeds of such bonds. See the Statement of Additional Information. A sale, exchange or redemption of Fund shares is a taxable event to the Shareholder. STI CLASSIC FUNDS INFORMATION THE TRUST The Trust was organized as a Massachusetts Business Trust under a Declaration of Trust dated January 15, 1992. The Declaration of Trust permits the Trust to offer separate portfolios of shares and different classes of each Fund. All consideration received by the Trust for shares of any Fund and all assets of such Fund belong to that Fund and would be subject to liabilities related thereto. The Trust pays its expenses, including fees of its service providers, audit and legal expenses, expenses of preparing prospectuses, proxy solicitation material and reports to Share- holders, costs of custodial services and registering the shares under federal and state securities laws, pricing, insurance expenses, litigation and other extraordinary expenses, brokerage costs, interest charges, taxes and organization expenses. BOARD OF TRUSTEES The management and affairs of the Trust are supervised by the Trustees under the laws governing business trusts in the Commonwealth of Massachusetts. The Trustees have approved contracts under which, as described below, certain companies provide essential management services to the Trust. INVESTMENT ADVISORS The Advisors are indirect wholly-owned subsidiaries of SunTrust Banks, Inc. ("SunTrust"), a southeastern regional bank holding company with assets of $44.2 billion as of June 30, 1995. SunTrust ranks among the twenty largest U.S. banking companies. Its three principal subsidiaries-- SunTrust Banks of Florida, Inc., SunTrust Banks of Georgia, Inc. and SunTrust Banks of Tennessee, Inc.-- provide a wide range of personal and corporate banking, trust, and investment services through more than 600 locations in the three-state area. Total discretionary assets under management with SunTrust Banks, Inc. equalled approximately $42 billion as of December 31, 1994. Trusco Capital Management, Inc. ("Trusco") serves as the Advisor to the Money Market, Short-Term U.S. Treasury Securities, Short-Term Bond and U.S. Government Securities Funds. 28 As of June 30, 1995, Trusco had approximately $11.5 billion in assets under management. The principal business address of Trusco is 50 Hurt Plaza, Suite 1400, Atlanta, GA 30303. STI Capital Management, N.A. ("STI Capital") (formerly SunBank Capital Management, N.A.) serves as the Advisor to the Limited-Term Federal Mortgage Securities, Investment Grade Bond, Investment Grade Tax-Exempt Bond and Florida Tax-Exempt Bond Funds. As of June 30, 1995, STI Capital had discretionary management authority with respect to assets of approximately $11.1 billion. The principal business address of STI Capital is P.O. Box 3808, Orlando, FL 32802. SunTrust Bank, Chattanooga, N.A. ("SunTrust Bank, Chattanooga") (formerly American National Bank & Trust Company) serves as the Advisor to the Tennessee Tax-Exempt Bond Fund. SunTrust Bank, Chattanooga had approximately $1.5 billion in assets under management as of June 30, 1995. The principal business address of SunTrust Bank, Chattanooga is 736 Market Street, Chattanooga, TN 37402. SunTrust Bank, Atlanta (formerly Trust Company Bank) serves as the Advisor to the Georgia Tax-Exempt Bond Fund. As of December 31, 1994, SunTrust Bank, Atlanta had approximately $17.4 billion in assets under management. The principal address for SunTrust Bank, Atlanta is 25 Park Place, Atlanta, GA 30303. The Trust and the above Advisors have entered into advisory agreements (the "Advisory Agreements"). Under the Advisory Agreements, the Advisors make the investment decisions for the assets of the Fund(s) they advise and continuously review, supervise and administer their respective Fund's investment program. The Advisors discharge their responsibilities subject to the supervision of, and policies established by, the Trustees of the Trust. STI CLASSIC FUNDS ARE NOT DEPOSITS, ARE NOT INSURED OR GUARANTEED BY THE FDIC OR ANY OTHER GOVERNMENT AGENCY, AND ARE NOT ENDORSED OR GUARANTEED BY AND DO NOT CONSTITUTE OBLIGATIONS OF SUNTRUST BANKS, INC. OR ANY OF ITS AFFILIATES. INVESTMENTS IN THE FUNDS INVOLVE RISK, INCLUDING THE POSSIBLE LOSS OF PRINCIPAL. RETURNS AND PRINCIPAL VALUES WILL FLUCTUATE AND SHARES AT REDEMPTION MAY BE WORTH MORE OR LESS THAN THEIR ORIGINAL COST. THERE IS NO GUARANTEE THAT ANY STI CLASSIC FUND WILL ACHIEVE ITS INVESTMENT OBJECTIVE. With respect to all Funds, the Advisors may execute brokerage or other agency transactions through affiliates of the Advisors. For the services provided and expenses incurred pursuant to the Investment Advisory Agreements: Trusco is entitled to receive advisory fees computed daily and paid monthly at the annual rate of .74%, .65%, .65%, .55%, .65% and .65% of the average daily net assets of the U.S. Government Securities Fund, Prime Quality Money Market Fund, U.S. Government Securities Money Market Fund, Tax-Exempt Money Market Fund, Short-Term U.S. Treasury Securities Fund and Short-Term Bond Fund, respectively; STI Capital is entitled to receive advisory fees computed daily and paid monthly at the annual rate of .65%, .74%, .74% and .65% of the average daily net assets of the Florida Tax-Exempt Bond Fund, Investment Grade Bond Fund, Investment Grade Tax-Exempt Bond Fund and Limited-Term Federal Mortgage Securities Fund, respectively; SunTrust Bank, Chattanooga, N.A. is entitled to receive advisory fees computed daily and paid monthly at the annual rates of .65% of the average daily net assets of the Tennessee Tax-Exempt Bond Fund and SunTrust Bank, Atlanta is entitled to receive advisory fees computed 29 daily and paid monthly at the annual rate of .65% of the average daily net assets of the Georgia Tax-Exempt Bond Fund. From time to time, an Advisor may waive (either voluntarily or pursuant to applicable state limitations) advisory fees payable by a Fund. Currently, the Advisors have agreed to voluntary reductions in their respective fees in amounts necessary to maintain the total operating expenses at the amounts set forth in the Expense Summary. Voluntary reductions of fees may be terminated at anytime. For the fiscal year ended May 31, 1995: Trusco received advisory fees computed daily and paid monthly at the annual rate of .50%, .50%, .46%, .19%, .42%, and .0% of the average daily net assets of the Prime Quality Money Market Fund, U.S. Government Securities Money Market Fund, Tax-Exempt Money Market Fund, Short-Term U.S. Treasury Securities Fund, Short-Term Bond Fund, and U.S. Government Securities Fund, respectively; STI Capital received advisory fees computed daily and paid monthly at the annual rate of .12%, .62%, .61%, and .33% of the average daily net assets of the Florida Tax-Exempt Bond Fund, Investment Grade Bond Fund, Investment Grade Tax-Exempt Bond Fund, and Limited-Term Mortgage Federal Securities Fund, respectively; SunTrust Bank, Chattanooga received advisory fees computed daily and paid monthly at the annual rates of .0% of the average daily net assets of the Tennessee Tax-Exempt Bond Fund and SunTrust Bank, Atlanta received advisory fees computed daily and paid monthly at the annual rate of .27% of the average daily net assets of the Georgia Tax- Exempt Bond Fund. PORTFOLIO MANAGERS Mr. Charles B. Leonard, CFA, First Vice President of Trusco, and Michael L. Ford, an Associate of Trusco have been responsible for the day-to-day management of the U.S. Government Securities Fund since its inception. Mr. Leonard has been with Trusco since 1986 as the senior fixed income manager. Mr. Ford has been with Trusco since April, 1994. Prior to joining Trusco, Mr. Ford served as a senior securities analyst with Liberty Capital Advisors from January, 1992 to April, 1994 and served as a securities analyst at Southern Farm Bureau Life Insurance Company from 1990 to 1992. Mr. Ford was a graduate student at Milsaps College from 1989 to 1991. Mr. L. Earl Denney CFA and Mr. Dave E. West CFA have been responsible for the day-to-day management of the Limited-Term Federal Mortgage Securities Fund since its inception. Mr. Denney has served as Executive Vice President of STI Capital since 1983. Mr. West has served as a fixed income portfolio manager with STI Capital since 1989. Mr. Denney has also been responsible for the day-to-day management of the Investment Grade Bond Fund since its inception. Ms. Gay Cash has been responsible for the day-to-day management of the Georgia Tax-Exempt Bond Fund since its inception. Ms. Cash has served as a Vice President of SunTrust Bank, Atlanta since January 1, 1987. Mr. Ronald Schwartz has been responsible for the day-to-day management of the Florida Tax-Exempt Bond and Investment Grade Tax-Exempt Bond Funds since their inception. Mr. Schwartz joined STI Capital in 1988 and currently serves as a Senior Vice President. Mr. Schwartz, has also been responsible for the day-to-day management of the Tennessee Tax-Exempt Bond Fund since July, 1995. Mr. Schwartz serves as Vice President and Trust Investment Officer of SunTrust Bank, Chattanooga. 30 Starting September, 1995, Patricia Love became co-portfolio manager of the Tennessee Tax-Exempt Bond Fund. Ms. Love serves as Vice President and Trust Investment Officer of SunTrust Bank, Chattanooga. Ms. Love also is a portfolio manager at STI Capital. Ms. Love has been with SunTrust Bank, Chattanooga since 1993 and prior to that served as a portfolio analyst with First City Texas from 1986 to 1993. Ms. Agnes Pampush has been responsible for the day-to-day management of the Short-Term Bond and Short-Term U.S. Treasury Securities Funds since their inception. Ms. Pampush has served as Vice President and Fixed Income Portfolio Manager of Trusco since 1988. BANKING LAWS Banking laws and regulations, including the Glass-Steagall Act as presently interpreted by the Board of Governors of the Federal Reserve System, presently (a) prohibit a bank holding company registered under the Federal Bank Holding Company Act of 1956 or its affiliates from sponsoring, organizing, controlling, or distributing the shares of a registered, open-end investment company continuously engaged in the issuance of its shares, and generally prohibit banks from underwriting securities, but (b) do not prohibit such a bank holding company or affiliate or banks generally from acting as an investment advisor, transfer agent, or custodian to such an investment company or from purchasing shares of such a company as agent for and upon the order of a customer. The Advisors believe that each may perform the services for STI Classic Funds contemplated by their agreements described in this Prospectus without violation of applicable banking laws or regulations. However, future changes in legal requirements relating to the permissible activities of banks and their affiliates, as well as future interpretations of present requirements, could prevent the Advisors from continuing to perform services for STI Classic Funds. If the Advisors were prohibited from providing services to STI Classic Funds, the Board of Trustees would consider selecting other qualified firms. Any new investment advisory agreements would be subject to Shareholder approval. If current restrictions preventing a bank or its affiliates from legally sponsoring, organizing, controlling, or distributing shares of an investment company were relaxed, the Advisors, or their affiliates, would consider the possibility of offering to perform additional services for STI Classic Funds. It is not possible, of course, to predict whether or in what form such legislation might be enacted or the terms upon which the Advisors, or such affiliates, might offer to provide such services. In addition, state securities laws on this issue may differ from the interpretations of federal law expressed herein and banks and financial institutions may be required to register as dealers pursuant to state law. DISTRIBUTION SEI Financial Services Company (the "Distributor"), a wholly-owned subsidiary of SEI Corporation ("SEI"), and the Trust are parties to a distribution agreement ("Distribution Agreement"). No compensation is paid to the Distributor for distribution services for the Trust Shares of each Fund. Trust Shares of the Fund are offered primarily to institutional investors, including affiliates and correspondents for the investment of funds in which they act in a fiduciary, agency or custodial capacity. It is possible that a financial institution may offer different classes of shares to its customers and thus receive different compensation with respect to different classes of shares. 31 Each Fund may execute brokerage or other agency transactions through the Distributor for which the Distributor receives compensation. ADMINISTRATION SEI Financial Management Corporation (the "Administrator"), a wholly-owned subsidiary of SEI, and the Trust are parties to an Administration Agreement (the "Administration Agreement"). Under the terms of the Administration Agreement, the Administrator provides the Trust with certain administrative services, other than investment advisory services, including regulatory reporting, all necessary office space, equipment, personnel, and facilities. The Administrator is entitled to a fee, which is calculated daily and paid monthly, at an annual rate as follows:
AVERAGE AGGREGATE DAILY NET ASSETS FEE - --------------------------------------------- --------- $1 - $1 billion .10% over $1 billion to $5 billion .07% over $5 billion to $8 billion .05% over $8 billion to $10 billion .045% over $10 billion .04%
From time to time, the Administrator may waive (either voluntarily or pursuant to applicable state limitations) all or a portion of the administration fee payable with respect to the Trust. TRANSFER AGENT AND DIVIDEND DISBURSING AGENT Federated Services Company, Pittsburgh, PA is the Transfer Agent for the shares of the Trust and dividend disbursing agent for the Trust. CUSTODIAN SunTrust Bank, Atlanta, c/o STI Trust & Investment Operations, Inc., 303 Peachtree Street N.E., 14th Floor, Atlanta, GA 30308 serves as Custodian of the assets of each Fund of the Trust except the International Equity Index Fund. The Bank of California, 475 Sansome Street, Suite 1200, San Francisco, CA 94111, serves as Custodian for the International Equity Index Fund. The Custodians hold cash, securities and other assets of the Trust as required by the Investment Company Act of 1940. LEGAL COUNSEL Morgan, Lewis & Bockius, LLP, Philadelphia, PA, serves as legal counsel to the Trust. INDEPENDENT PUBLIC ACCOUNTANTS The independent public accountants to the Trust are Arthur Andersen, LLP, Philadelphia, PA. OTHER INFORMATION VOTING RIGHTS Each share held entitles the Shareholder of record to one vote. Each Fund or class of a Fund will vote separately on matters relating solely to that Fund or class. As a Massachusetts business trust, the Trust is not required to hold annual meetings of Shareholders but approval will be sought for certain changes in the operation of the Trust and for the election of Trustees under certain circumstances. In addition, a Trustee may be removed by the remaining Trustees or by Shareholders at a special meeting called upon written request of Shareholders owning at least 10% of the outstanding shares of the Trust. In the event that such a meeting is requested the Trust will provide appropriate assistance and information to the Shareholders requesting the meeting. 32 REPORTING The Trust issues unaudited financial information semi-annually and audited financial statements annually. The Trust furnishes proxy statements and other reports to Shareholders of record. SHAREHOLDER INQUIRIES Shareholders may contact their financial institution's representative in order to obtain information on account statements, procedures and other related information. DESCRIPTION OF PERMITTED INVESTMENTS The following is a description of the permitted investments for the Funds. Further discussion is contained in the Statement of Additional Information. AMERICAN DEPOSITARY RECEIPTS ("ADRs") -- ADRs are securities, typically issued by a U.S. financial institution (a "depositary"), that evidence ownership interests in a security or a pool of securities issued by a foreign issuer and deposited with the depositary. ADRs may be available through "sponsored" or "unsponsored" facilities. A sponsored facility is established jointly by the issuer of the security underlying the receipt and a depositary, whereas an unsponsored facility may be established by a depositary without participation by the issuer of the underlying security. Holders of unsponsored depositary receipts generally bear all the costs of the unsponsored facility. The depositary of an unsponsored facility frequently is under no obligation to distribute shareholder communications received from the issuer of the deposited security or to pass through, to the holders of the receipts, voting rights with respect to the deposited securities. ASSET-BACKED SECURITIES -- Asset-backed securities are securities secured by non-mortgage assets such as company receivables, truck and auto loans, leases and credit card receivables. Such securities are generally issued as pass-through certificates, which represent undivided fractional ownership interests in the underlying pools of assets. Such securities also may be debt instruments, which are also known as collateralized obligations and are generally issued as the debt of a special purpose entity, such as a trust, organized solely for the purpose of owning such assets and issuing such debt. Asset-backed securities are not issued or guaranteed by the U.S. Government or its agencies or instrumentalities; however, the payment of principal and interest on such obligations may be guaranteed up to certain amounts and for a certain period by a letter of credit issued by a financial institution (such as a bank or insurance company) unaffiliated with the issuers of such securities. The purchase of asset-backed securities raises risk considerations peculiar to the financing of the instruments underlying such securities. For example, there is a risk that another party could acquire an interest in the obligations superior to that of the holders of the asset-backed securities. There also is the possibility that recoveries on repossessed collateral may not, in some cases, be available to support payments on those securities. Asset-backed securities entail prepayment risk, which may vary depending on the type of asset, but is generally less than the prepayment risk associated with mortgage-backed securities. In addition, credit card receivables are unsecured obligations of the card holder. The market for asset-backed securities is at a relatively early stage of development. Accordingly, there may be a limited secondary market for such securities. 33 BANKERS' ACCEPTANCES -- Bankers' acceptances are bills of exchange or time drafts drawn on and accepted by a commercial bank. Bankers' acceptances are used by corporations to finance the shipment and storage of goods. Maturities are generally six months or less. CERTIFICATES OF DEPOSIT -- Certificates of deposit are interest bearing instruments with a specific maturity. They are issued by banks and savings and loan institutions in exchange for the deposit of funds and normally can be traded in the secondary market prior to maturity. Certificates of deposit with penalties for early withdrawal will be considered illiquid. COMMERCIAL PAPER -- Commercial paper is a term used to describe unsecured short-term promissory notes issued by banks, municipalities, corporations and other entities. Maturities on these issues vary from a few to 270 days. CORPORATE DEBT OBLIGATIONS -- Corporate debt obligations are debt instruments issued by corporations with maturities exceeding 270 days. Such instruments may include putable corporate bonds and zero coupon bonds. CUSTODIAL RECEIPTS -- Custodial receipts are interests in separately traded interest and principal component parts of U.S. Treasury obligations that are issued by banks or brokerage firms and are created by depositing U.S. Treasury obligations into a special account at a custodian bank. The custodian holds the interest and principal payments for the benefit of the registered owners of the certificates or receipts. The custodian arranges for the issuance of the certificates or receipts evidencing ownership and maintains the register. Receipts include Treasury Receipts ("TRs"), Treasury Investment Growth Receipts ("TIGRs"), and Certificates of Accrual on Treasury Securities ("CATS"). Receipts are sold as zero coupon securities which means that they are sold at a substantial discount and redeemed at face value at their maturity date without interim cash payments of interest or principal. This discount is accreted over the life of the security, and such accretion will constitute the income earned on the security for both accounting and tax purposes. Because of these features, such securities may be subject to greater interest rate volatility than interest paying investments. See "Zero Coupon Obligations." DERIVATIVES -- Derivatives are securities whose value is derived from an underlying contract, index or security, or any combination thereof. This includes: futures, swap agreements, and some mortgage-back securities (CMOs, REMICs, IOs and POs). See elsewhere in this "Description of Permitted Investments" for discussions of these various instruments, and see "Investment Policies and Strategies" for more information about any investment policies and limitations applicable to their use. DOLLAR ROLLS -- Dollar rolls are transactions in which securities are sold for delivery in the current month and the seller simultaneously contracts to repurchase substantially similar securities on a specified future date. Any difference between the sale price and the purchase price is netted against the interest income foregone on the securities sold to arrive at an implied borrowing rate. Alternatively, the sale and purchase transactions can be executed at the same price, with the Fund being paid a fee as consideration for entering into the commitment to purchase. Dollar rolls may be renewed prior to cash settlement and initially may involve only a firm commitment 34 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. EURODOLLAR AND YANKEE BANK OBLIGATIONS -- Eurodollar bank obligations are U.S. dollar-denominated certificates of deposit or time deposits issued outside the United States by foreign branches of U.S. banks or by foreign banks. Yankee bank obligations are U.S. dollar denominated obligations issued in the United States by foreign banks. FUTURES CONTRACTS AND OPTIONS ON FUTURES CONTRACTS -- Futures contracts provide for the future sale by one party and purchase by another party of a specified amount of a specific security at a specified future time and at a specified price. An option on a futures contract gives the purchaser the right, in exchange for a premium, to assume a position in a futures contract at a specified exercise price during the term of the option. A Fund may use futures contracts and related options for BONA FIDE hedging purposes, to offset changes in the value of securities held or expected to be acquired, to minimize fluctuations in foreign currencies, or to gain exposure to a particular market or instrument. A Fund will minimize the risk that it will be unable to close out a futures contract by only entering into futures contracts which are traded on national futures exchanges. Stock index futures are futures contracts for various stock indices that are traded on registered securities exchanges. A stock index futures contract obligates the seller to deliver (and the purchaser to take) an amount of cash equal to a specific dollar amount times the difference between the value of a specific stock index at the close of the last trading day of the contract and the price at which the agreement is made. There are risks associated with these activities, including the following: (1) the success of a hedging strategy may depend on an ability to predict movements in the prices of individual securities, fluctuations in markets and movements in interest rates, (2) there may be an imperfect or no correlation between the changes in market value of the securities held by the Fund and the prices of futures and options on futures, (3) there may not be a liquid secondary market for a futures contract or option, (4) trading restrictions or limitations may be imposed by an exchange, and (5) government regulations may restrict trading in futures contracts and futures options. GUARANTEED INVESTMENT CONTRACTS ("GICs") -- GICs are contracts issued by U.S. insurance companies. Pursuant to such contracts, the Fund makes cash contributions to a deposit fund of the insurance company's general account. The insurance company then credits to the Fund on a monthly basis guaranteed interest at either a fixed, variable or floating rate. A GIC provides that this guaranteed interest will not be less than a certain minimum rate. A GIC is a general obligation of the issuing insurance company and not a separate account. The purchase price paid for a GIC becomes part of the 35 general assets of the issuer, and the contract is paid at maturity from the general assets of the issuer. Generally, GICs are not assignable or transferable without the permission of the issuing insurance company. For this reason, an active secondary market in GICs does not currently exist and GICs are considered to be illiquid investments. ILLIQUID SECURITIES -- Illiquid securities are securities that cannot be disposed of within seven business days at approximately the price at which they are being carried on the Fund's books. An illiquid security includes a demand instrument with a demand notice period exceeding seven days, where there is no secondary market for such security, and repurchase agreements with durations (or maturities) over seven days in length. LOAN PARTICIPATIONS -- Loan participations are interests in loans to U.S. corporations which are administered by the lending bank or agent for a syndicate of lending banks, and sold by the lending bank or syndicate member ("intermediary bank"). In a loan participation, the borrower corporation will be deemed to be 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 such borrower as a result of improper conduct by the intermediary bank. In addition, in the event the underlying corporate borrower fails to pay principal and interest when due, the Fund may be subject to delays, expenses and risks that are greater than those that would have been involved if the Fund had purchased a direct obligation of such 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. MEDIUM TERM NOTES -- Medium term notes are periodically or continuously offered corporate or agency debt that differs from traditionally underwritten corporate bonds only in the process by which they are issued. MORTGAGE-BACKED SECURITIES -- Mortgage-backed securities are instruments that entitle the holder to a share of all interest and principal payments from mortgages underlying the security. The mortgages backing these securities include conventional thirty-year fixed rate mortgages, graduated payment mortgages, and adjustable rate mortgages. During periods of declining interest rates, prepayment of mortgages underlying mortgage-backed securities can be expected to accelerate. Prepayment of mortgages which underlie securities purchased at a premium often results in capital losses, while prepayment of mortgages purchased at a discount often results in capital gains. Because of these unpredictable prepayment characteristics, it is often not possible to predict accurately the average life or realized yield of a particular issue. GOVERNMENT PASS-THROUGH SECURITIES: These are securities that are issued or guaranteed by a U.S. Government agency representing an interest in a pool of mortgage loans. The primary issuers or guarantors of these mortgage-backed securities are GNMA, FNMA 36 and FHLMC. FNMA and FHLMC obligations are not backed by the full faith and credit of the U.S. Government as GNMA certificates are, but FNMA and FHLMC securities are supported by the instrumentalities' right to borrow from the U.S. Treasury. GNMA, FNMA and FHLMC each guarantees timely distributions of interest to certificate holders. GNMA and FNMA also each guarantees timely distributions of scheduled principal. FHLMC has in the past guaranteed only the ultimate collection of principal of the underlying mortgage loan; however, FHLMC now issues mortgage-backed securities (FHLMC Gold PCs) which also guarantee timely payment of monthly principal reductions. Government and private guarantees do not extend to the securities' value, which is likely to vary inversely with fluctuations in interest rates. PRIVATE PASS-THROUGH SECURITIES: These are mortgage-backed securities issued by a non-governmental entity, such as a trust. These securities include collateralized mortgage obligations ("CMOs") and real estate mortgage investment conduits ("REMICs") that are rated in one of the top two rating categories. While they are generally structured with one or more types of credit enhancement, private pass-through securities typically lack a guarantee by an entity having the credit status of a governmental agency or instrumentality. COLLATERALIZED MORTGAGE OBLIGATIONS ("CMOS"): CMOs are debt obligations or multiclass pass-through certificates issued by agencies or instrumentalities of the U.S. Government or by private originators or investors in mortgage loans. In a CMO, series of bonds or certificates are usually issued in multiple classes. Principal and interest paid on the underlying mortgage assets may be allocated among the several classes of a series of a CMO in a variety of ways. Each class of a CMO, often referred to as a "tranche," is issued with a specific fixed or floating coupon rate and has a stated maturity or final distribution date. Principal payments on the underlying mortgage assets may cause CMOs to be retired substantially earlier then their stated maturities or final distribution dates, resulting in a loss of all or part of any premium paid. REMICS: A REMIC is a CMO that qualifies for special tax treatment under the Internal Revenue Code and invests in certain mortgages principally secured by interests in real property. Investors may purchase beneficial interests in REMICs, which are known as "regular" interests, or "residual" interests. Guaranteed REMIC pass-through certificates ("REMIC Certificates") issued by FNMA or FHLMC represent beneficial ownership interests in a REMIC trust consisting principally of mortgage loans or FNMA, FHLMC or GNMA-guaranteed mortgage pass-through certificates. For FHLMC REMIC Certificates, FHLMC guarantees the timely payment of interest, and also guarantees the payment of principal as payments are required to be made on the underlying mortgage participation certificates. FNMA REMIC Certificates are issued and guaranteed as to timely distribution of principal and interest by FNMA. STRIPPED MORTGAGE-BACKED SECURITIES ("SMBS"): SMBs are usually structured with two classes that receive specified proportions of the monthly interest and principal payments from a pool of mortgage securities. One class may receive all of the interest payments and thus is termed an interest-only class ("IO"), while the other class may receive all of the principal payments and thus is termed the principal-only class ("PO"). The value of IOs tends to increase as rates rise and decrease as rates fall; the opposite is true of POs. SMBs are extremely sensitive to changes in interest rates because of the impact thereon of prepayment of principal on the underlying mortgage 37 securities. The market for SMBs is not as fully developed as other markets; SMBs therefore may be illiquid. RISK FACTORS: Due to the possibility of prepayments of the underlying mortgage instruments, mortgage-backed securities generally do not have a known maturity. In the absence of a known maturity, market participants generally refer to an estimated average life. An average life estimate is a function of an assumption regarding anticipated prepayment patterns, based upon current interest rates, current conditions in the relevant housing markets and other factors. The assumption is necessarily subjective, and thus different market participants can produce different average life estimates with regard to the same security. There can be no assurance that estimated average life will be a security's actual average life. MUNICIPAL FORWARDS -- Municipal forwards are forward commitments for the purchase of tax-exempt bonds with a specified coupon to be delivered by an issuer at a future date, typically exceeding 45 days but normally less than one year after the commitment date. Municipal forwards are normally used as a refunding mechanism for bonds that may only be redeemed on a designated future date. A Fund will enter into municipal forwards when the price and yield of the underlying bonds are believed to be favorable when compared to current prices and yields. As with forward commitments, municipal forwards are subject to market fluctuations due to changes in market interest rates between the commitment date and the settlement date. municipal forwards may be considered to be illiquid investments. To avoid any leveraging concerns, a Fund will maintain liquid, high grade securities in a segregated account at least equal to the purchase price of the municipal forward. MUNICIPAL LEASE OBLIGATIONS -- Municipal lease obligations are securities issued by state and local governments and authorities to finance the acquisition of equipment and facilities. They may take the form of a lease, an installment purchase contract, a conditional sales contract, or a participation interest in any of the above. Depending upon the market for such securities, municipal lease obligations may be illiquid. MUNICIPAL SECURITIES -- Municipal securities consist of (i) debt obligations issued by or on behalf of public authorities to obtain funds to be used for various public facilities, for refunding outstanding obligations, for general operating expenses, and for lending such funds to other public institutions and facilities, and (ii) certain private activity and industrial development bonds issued by or on behalf of public authorities to obtain funds to provide for the construction, equipment, repair or improvement of privately operated facilities. General obligation bonds are backed by the taxing power of the issuing municipality. Revenue bonds are backed by the revenues of a project or facility (tolls from a bridge, for example). Certificates of participation represent an interest in an underlying obligation or commitment, such as an obligation issued in connection with a leasing arrangement. The payment of principal and interest on private activity and industrial development bonds generally is dependent solely on the ability of a facility's user to meet its financial obligations and the pledge, if any, of real and personal property as security for such payment. Municipal securities include both municipal notes and municipal bonds. Municipal notes include general obligation notes, tax anticipation notes, revenue anticipation notes, bond anticipation notes, certificates of indebtedness, demand notes and construction 38 loan notes and participation interests in municipal notes. Municipal bonds include general obligation bonds, revenue or special obligation bonds, private activity and industrial development bonds and participation interests in municipal bonds. OBLIGATIONS OF SUPRANATIONAL ENTITIES -- Supranational entities are entities established through the joint participation of several governments, and include the Asian Development Bank, Inter-American Development Bank, International Bank for Reconstruction and Development (World Bank), African Development Bank, European Economic Community, European Investment Bank and Nordic Investment Bank. REPURCHASE AGREEMENTS -- Repurchase agreements are agreements by which a Fund obtains a security and simultaneously commits to return the security to the seller at an agreed upon price on an agreed upon date within a number of days from the date of purchase. The custodian will hold the security as collateral for the repurchase agreement. A Fund bears a risk of loss in the event the other party defaults on its obligations and the Fund is delayed or prevented from exercising its right to dispose of the collateral or if the Fund realizes a loss on the sale of the collateral. A Fund will enter into repurchase agreements only with financial institutions deemed to present minimal risk of bankruptcy during the term of the agreement based on established guidelines. Repurchase agreements are considered loans under the Investment Company Act of 1940. RESTRAINTS ON INVESTMENTS BY MONEY MARKET FUNDS -- Investments by a money market fund are subject to limitations imposed under regulations adopted by the Securities and Exchange Commission. Under these regulations, money market funds may only acquire obligations that present minimal credit risk and that are "eligible securities," which means they are (i) rated, at the time of investment, by at least two nationally recognized security rating organizations (one if it is the only organization rating such obligation) in the highest rating category or, if unrated, determined to be of comparable quality (a "first tier security"), or (ii) rated according to the foregoing criteria in the second highest rating category or, if unrated, determined to be of comparable quality ("second tier security"). A security is not considered to be unrated if its issuer has outstanding obligations of comparable priority and security that have a short-term rating. In the case of taxable money market funds, investments in second tier securities are subject to the further constraints in that (i) no more than 5% of a Fund's assets may be invested in second tier securities and (ii) any investment in securities of any one such issuer is limited to the greater of 1% of the Fund's total assets or $1 million. A taxable money market fund may also hold more than 5% of its assets in first tier securities of a single issuer for three "business days" (that is, any day other than a Saturday, Sunday or customary business holiday). RESTRICTED SECURITIES -- Restricted securities are securities that may not be sold freely to the public absent registration under the Securities Act of 1933 or an exemption from registration. Rule 144A securities are securities that have not been registered under the Securities Act of 1933 but which may be traded between certain institutional investors including investment companies. The Trust's Board of Trustees is responsible for developing guidelines and procedures for determining the liquidity of restricted securities, and for monitoring the Advisor's implementation of the guidelines and procedures. SECURITIES LENDING -- In order to generate additional income, a Fund may lend securities 39 which it owns pursuant to agreements requiring that the loan be continuously secured by collateral consisting of cash, securities of the U.S. Government or its agencies equal to at least 100% of the market value of the securities lent. A Fund continues to receive interest on the securities lent while simultaneously earning interest on the investment of cash collateral. Collateral is marked to market daily. There may be risks of delay in recovery of the securities or even loss of rights in the collateral should the borrower of the securities fail financially or become insolvent. SECURITIES OF FOREIGN ISSUERS -- There are certain risks connected with investing in foreign securities. These include risks of adverse political and economic developments (including possible governmental seizure or nationalization of assets), the possible imposition of exchange controls or other governmental restrictions, less uniformity in accounting and reporting requirements, the possibility that there will be less information on such securities and their issuers available to the public, the difficulty of obtaining or enforcing court judgments abroad, restrictions on foreign investments in other jurisdictions, difficulties in effecting repatriation of capital invested abroad, and difficulties in transaction settlements and the effect of delay on shareholder equity. Foreign securities may be subject to foreign taxes, and may be less marketable than comparable U.S. securities. The value of a Fund's investments denominated in foreign currencies will depend on the relative strengths of those currencies and the U.S. dollar, and a Fund may be affected favorably or unfavorably by changes in the exchange rates or exchange control regulations between foreign currencies and the U.S. dollar. Changes in foreign currency exchange rates also may affect the value of dividends and interest earned, gains and losses realized on the sale of securities and net investment income and gains, if any, to be distributed to shareholders by a Fund. STANDBY COMMITMENTS AND PUTS -- Securities subject to standby commitments or puts permit the holder thereof to sell the securities at a fixed price prior to maturity. Securities subject to a standby commitment or put may be sold at any time at the current market price. However, unless the standby commitment or put was an integral part of the security as originally issued, it may not be marketable or assignable; therefore, the standby commitment or put would only have value to the Fund owning the security to which it relates. In certain cases, a premium may be paid for a standby commitment or put, which premium will have the effect of reducing the yield otherwise payable on the underlying security. The Fund will limit standby commitment or put transactions to institutions believed to present minimal credit risk. TIME DEPOSITS -- Time deposits are non-negotiable receipts issued by a bank in exchange for the deposit of funds. Like a certificate of deposit, it earns a specified rate of interest over a definite period of time; however, it cannot be traded in the secondary market. Time deposits are considered to be illiquid securities. U.S. GOVERNMENT AGENCIES -- Obligations issued or guaranteed by agencies of the U.S. Government, including, among others, the Federal Farm Credit Bank, the Federal Housing Administration and the Small Business Administration, and obligations issued or guaranteed by instrumentalities of the U.S. Government, including, among others, the Federal Home Loan Mortgage Corporation, the Federal Land Banks and the U.S. Postal Service. Some of these securities are supported by the full faith and credit of the U.S. Treasury (e.g., 40 Government National Mortgage Association), others are supported by the right of the issuer to borrow from the Treasury (e.g., Federal Farm Credit Bank), while still others are supported only by the credit of the instrumentality (e.g., Federal National Mortgage Association). Guarantees of principal by agencies or instrumentalities of the U.S. Government may be a guarantee of payment at the maturity of the obligation so that in the event of a default prior to maturity there might not be a market and thus no means of realizing on the obligation prior to maturity. Guarantees as to the timely payment of principal and interest do not extend to the value or yield of these securities nor to the value of the Fund's shares. U.S. GOVERNMENT SUBSIDIARY CORPORATIONS -- Securities of wholly-owned corporations of the U.S. Government (within the Department of Housing and Urban Development) which are secured by the full faith and credit of the U.S. Government (e.g., GNMA). U.S. TREASURY OBLIGATIONS -- U.S. Treasury obligations consist of bills, notes and bonds issued by the U.S. Treasury and separately traded interest and principal component parts of such obligations that are transferable through the Federal book-entry system known as Separately Traded Registered Interest and Principal Securities ("STRIPS") and Coupon Under Book Entry Safekeeping ("CUBES"). VARIABLE AND FLOATING RATE INSTRUMENTS -- Certain obligations may carry variable or floating rates of interest, and may involve a conditional or unconditional demand feature. Such instruments bear interest at rates which are not fixed, but which vary with changes in specified market rates or indices. The interest rates on these securities may be reset daily, weekly, quarterly or some other reset period, and may have a floor or ceiling on interest rate changes. There is a risk that the current interest rate on such obligations may not accurately reflect existing market interest rates. A demand instrument with a demand notice exceeding seven days may be considered illiquid if there is no secondary market for such security. WHEN-ISSUED AND DELAYED DELIVERY SECURITIES -- When-issued or delayed delivery basis transactions involve the purchase of an instrument with payment and delivery taking place in the future. Delivery of and payment for these securities may occur a month or more after the date of the purchase commitment. The Fund will segregate liquid high grade debt securities or cash in an amount at least equal to these commitments. The interest rate realized on these securities is fixed as of the purchase date and no interest accrues to the Fund before settlement. These securities are subject to market fluctuation due to changes in market interest rates and it is possible that the market value at the time of settlement could be higher or lower than the purchase price if the general level of interest rates has changed. Although a Fund generally purchases securities on a when-issued or forward commitment basis with the intention of actually acquiring securities for its portfolio, a Fund may dispose of a when-issued security or forward commitment prior to settlement if it deems appropriate. ZERO COUPON OBLIGATIONS -- Zero coupon obligations are debt securities that do not bear any interest, but instead are issued at a deep discount from par. The value of a zero coupon obligation increases over time to reflect the interest accreted. Such obligations will not result in the payment of interest until maturity, and will have greater price volatility than similar securities that are issued at par and pay interest periodically. A-1 APPENDIX I. BOND RATINGS *CORPORATE AND MUNICIPAL BONDS The following are descriptions of Standard & Poor's Corporation ("S&P") and Moody's Investors Service, Inc. ("Moody's") corporate and municipal bond ratings. Bonds rated AAA have the highest rating S&P assigns to a debt obligation. Such a rating indicates an extremely strong capacity to pay principal and interest. Bonds rated AA also qualify as high-quality debt obligations. Capacity to pay principal and interest is very strong, and in the majority of instances they differ from AAA issues only in small degree. Debt rated A has a strong capacity to pay interest and repay principal although it is somewhat more susceptible to the adverse effects of changes in circumstances and economic conditions than debt in higher rated categories. Bonds which are rated BBB are considered to be medium-grade obligations (i.e., they are neither highly protected nor poorly secured). Interest payments and principal security appear adequate for the present but certain protective elements may be lacking or may be characteristically unreliable over any great length of time. Such bonds lack outstanding investment characteristics and in fact have speculative characteristics as well. Bonds which are rated Aaa by Moody's are judged to be of the best quality. They carry the smallest degree of investment risk and are generally referred to as "gilt edge." Interest payments are protected by a large, or an exceptionally stable, margin and principal is secure. While the various protective elements are likely to change, such changes as can be visualized are most unlikely to impair the fundamentally strong position of such issues. Bonds rated Aa by Moody's are judged by Moody's to be of high quality by all standards. Together with bonds rated Aaa, they comprise what are generally known as high-grade bonds. They are rated lower than the best bonds because margins of protection may not be as large as in Aaa securities or fluctuation of protective elements may be of greater amplitude or there may be other elements present which make the long-term risks appear somewhat larger than in Aaa securities. Bonds which are rated A possess many favorable investment attributes and are to be considered as upper-medium grade obligations. Factors giving security to principal and interest are considered adequate, but elements may be present which suggest a susceptibility to impairment sometime in the future. Debt rated Baa is regarded as having an adequate capacity to pay interest and repay principal. Whereas it normally exhibits adequate protection parameters, adverse economic conditions or changing circumstances are more likely to lead to a weakened capacity to pay interest and repay principal for debt in this category than in higher rated categories. *MUNICIPAL NOTE RATINGS Moody's highest rating for state and municipal and other short-term notes is MIG-1 and VMIG-1. Short-term municipal securities rated MIG-1 or VMIG-1 are of the best quality. They have strong protection from established cash flows of funds for their servicing or from established and broad-based access to the market for refinancing or both. Short-term municipal securities rated MIG-2 and VMIG-2 are of high quality. Margins of protection are ample although not so large as in the preceding group. A-2 An S&P note rating reflects the liquidity concerns and market access risks unique to notes. Notes due in 3 years or less will likely receive a note rating. Notes maturing beyond 3 years will most likely receive a long-term debt rating. The following criteria will be used in making that assessment. - Amortization schedule (the larger the final maturity relative to other maturities the more likely it will be treated as a note). - Source of Payment (the more dependent the issue is on the market for its refinancing, the more likely it will be treated as a note) Note rating symbols are as follows: SP-1. Very strong or strong capacity to pay principal and interest. Those issues determined to possess overwhelming safety characteristics will be given a plus (+) designation. SP-2. Satisfactory capacity to pay principal and interest. II. COMMERCIAL PAPER AND SHORT-TERM RATINGS The following descriptions of commercial paper ratings have been published by S&P, Moody's, Fitch Investors Service, Inc. ("Fitch"), Duff and Phelps ("Duff") and IBCA Limited ("IBCA"), respectively. Commercial paper rated A by S&P is regarded by S&P as having the greatest capacity for timely payment. Issues rated A are further refined by use of the numbers 1+ and 1. Issues rated A-1+ are those with an "overwhelming degree" of credit protection. Those rated A-1 reflect a "very strong" degree of safety regarding timely payment. Those rated A-2 reflect a safety regarding timely payment but not as high as A-1. Commercial paper issues rated Prime-1 and Prime-2 by Moody's are judged by Moody's to have superior ability and strong ability for repayment, respectively. The rating Fitch-1 (Highest Grade) is the highest commercial rating assigned by Fitch. Paper rated Fitch-1 is regarded as having the strongest degree of assurance for timely payment. The rating Fitch-2 (Very Good Grade) is the second highest commercial paper rating assigned by Fitch which reflects an assurance of timely payment only slightly less in degree than the strongest issues. The rating Duff-1 is the highest commercial paper rating assigned by Duff. Paper rated Duff-1 is regarded as having very high certainty of timely payment with excellent liquidity factors which are supported by ample asset protection. Risk factors are minor. Paper rated Duff-2 is regarded as having good certainty of timely payment, good access to capital markets and sound liquidity factors and company fundamentals. Risk factors are small. The designation A1 by IBCA indicates that the obligation is supported by a very strong capacity for timely repayment. Those obligations rated A1+ are supported by the highest capacity for timely repayment. Obligations rated A2 are supported by a strong capacity for timely repayment, although such capacity may be susceptible to adverse changes in business, economic or financial conditions. (THIS PAGE INTENTIONALLY LEFT BLANK) STI CLASSIC FUNDS ORGANIZATIONAL OVERVIEW * INVESTMENT ADVISORS Trusco Capital Management, Inc. 50 Hurt Plaza Suite 1400 Atlanta, GA 30303 STI Capital Management, N.A. P.O. Box 3808 Orlando, FL 32802 SunTrust Bank, Chattanooga, N.A. 736 Market Street Chattanooga, TN 37402 SunTrust Bank, Atlanta 25 Park Place Atlanta, GA 30303 * DISTRIBUTOR SEI Financial Services Company 680 E. Swedesford Road Wayne, PA 19087 * ADMINISTRATOR SEI Financial Management Corporation 680 E. Swedesford Road Wayne, PA 19087 * TRANSFER AGENT Federated Services Company Federated Investors Tower Pittsburgh, PA 15222-3779 * CUSTODIAN SunTrust Bank, Atlanta c/o STI Trust & Investment Operations, Inc. 303 Peachtree Street N.E. 14th Floor Atlanta, GA 30308 * LEGAL COUNSEL Morgan, Lewis & Bockius LLP 2000 One Logan Square Philadelphia, PA 19103 * INDEPENDENT PUBLIC ACCOUNTANTS Arthur Andersen, LLP 1601 Market Street Philadelphia, PA 19103
100486 / 10-95 DISTRIBUTOR SEI Financial Services Company / / / / / / / / / / PROSPECTUS TRUST SHARES INVESTMENT GRADE BOND FUND INVESTMENT GRADE TAX-EXEMPT BOND FUND U.S. GOVERNMENT SECURITIES FUND LIMITED-TERM FEDERAL MORTGAGE SECURITIES FUND SHORT-TERM BOND FUND SHORT-TERM U.S. TREASURY SECURITIES FUND FLORIDA TAX-EXEMPT BOND FUND GEORGIA TAX-EXEMPT BOND FUND TENNESSEE TAX-EXEMPT BOND FUND PRIME QUALITY MONEY MARKET FUND U.S. GOVERNMENT SECURITIES MONEY MARKET FUND TAX-EXEMPT MONEY MARKET FUND INVESTMENT ADVISORS TRUSCO CAPITAL MANAGEMENT, INC. STI CAPITAL MANAGEMENT, N.A. SUNTRUST BANK, CHATTANOOGA, N.A. SUNTRUST BANK, ATLANTA OCTOBER 1, 1995 STI CLASSIC FUNDS INVESTOR SHARES CAPITAL GROWTH FUND VALUE INCOME STOCK FUND AGGRESSIVE GROWTH FUND BALANCED FUND SUNBELT EQUITY FUND INTERNATIONAL EQUITY INDEX FUND INVESTMENT ADVISORS TO THE FUNDS: STI CAPITAL MANAGEMENT, N.A. TRUSCO CAPITAL MANAGEMENT, INC. The STI Classic Funds (the "Trust") is a mutual fund that offers shares in a number of separate investment portfolios. This Prospectus sets forth concisely the information about the Investor Shares of the above-referenced Funds (each a "Fund" and, collectively, the "Funds"). Investors are advised to read this Prospectus and retain it for future reference. A Statement of Additional Information relating to the Funds dated the same date as this Prospectus has been filed with the Securities and Exchange Commission and is available without charge through the Distributor, SEI Financial Services Company, 680 East Swedesford Road, Wayne, PA 19087-1658 or by calling 1-800-428-6970. The Statement of Additional Information is incorporated into this Prospectus by reference. THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. THE TRUST'S SHARES ARE NOT SPONSORED, ENDORSED, OR GUARANTEED BY, AND DO NOT CONSTITUTE OBLIGATIONS OR DEPOSITS OF, THE ADVISORS OR ANY OF THEIR AFFILIATES OR CORRESPONDENTS INCLUDING SUNTRUST BANKS, INC., ARE NOT GUARANTEED OR INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION, THE FEDERAL RESERVE BOARD OR ANY OTHER GOVERNMENTAL AGENCY, AND INVOLVE INVESTMENT RISKS, INCLUDING THE POSSIBLE LOSS OF THE PRINCIPAL AMOUNT INVESTED. OCTOBER 1, 1995 2 No person has been authorized to give any information or to make any representations not contained in this Prospectus, or in the Trust's Statement of Additional Information in connection with the offering made by this Prospectus and, if given or made, such information or representations must not be relied upon as having been authorized by the Trust or SEI Financial Services Company (the "Distributor"). This Prospectus does not constitute an offering by the Trust or by the Distributor in any jurisdiction in which such offering may not lawfully be made. TABLE OF CONTENTS Expense Summary...................... 3 Financial Highlights................. 4 The Trust............................ 5 Funds and Investment Objectives...... 5 Investment Policies and Strategies... 5 General Investment Policies and Strategies.......................... 10 Investment Risks..................... 11 Investment Limitations............... 12 Performance Information.............. 13 General Performance Information...... 13 Fundlink............................. 13 Purchase of Fund Shares.............. 14 Redemption of Fund Shares............ 17 Exchanges............................ 17 Dividends and Distributions.......... 18 Tax Information...................... 18 STI Classic Funds Information........ 20 Board of Trustees.................... 20 Investment Advisors.................. 20 Portfolio Managers................... 21 Banking Laws......................... 22 Distribution......................... 22 Administration....................... 23 Transfer Agent and Dividend Disbursing Agent.................... 23 Custodian............................ 23 Legal Counsel........................ 24 Independent Public Accountants....... 24 Other Information.................... 24 Voting Rights........................ 24 Reporting............................ 24 Shareholder Inquiries................ 24 Description of Permitted Investments......................... 24 Appendix............................. A-1
3 EXPENSE SUMMARY INVESTOR SHARES Below is a summary of the transaction expenses and annual operating expenses for Investor Shares of each Fund described in this Prospectus. A hypothetical example based on the estimated expenses is also shown. Actual expenses may vary. SHAREHOLDER TRANSACTION EXPENSES ALL FUNDS - ------------------------------------------------------------------------------------------------ Maximum Sales Charge Imposed on Purchases (as a percentage of offering price)........ 3.75% Maximum Sales Charge Imposed on Reinvested Dividends................................. None Deferred Sales Charge................................................................ None Redemption Fees(1)................................................................... None Exchange Fee......................................................................... None - ------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------
(1) There is a $7.00 wire charge for redemptions for all funds processed from retail accounts which require wires to particular banks. ANNUAL OPERATING EXPENSES (as a percentage of average net assets)
CAPITAL AGGRESSIVE SUNBELT GROWTH VALUE INCOME GROWTH BALANCED EQUITY FUND STOCK FUND FUND FUND FUND - ------------------------------------------------------------------------------------------------------------------------------- Advisory Fees (After Voluntary Reductions)(1)... 1.02% .80% .95% .77% .98% All Other Expenses (After Voluntary Reductions)(1)................................. .28% .20% .49% .39% .37% 12b-1 Service & Distribution Expenses (After Voluntary Reductions)(1)....................... .50% .30% .16% .09% .25% - ------------------------------------------------------------------------------------------------------------------------------- Total Operating Expenses (After Voluntary Reductions)(1)................................. 1.80% 1.30% 1.60% 1.25% 1.60% - ------------------------------------------------------------------------------------------------------------------------------- - ------------------------------------------------------------------------------------------------------------------------------- INTERNATIONAL EQUITY INDEX FUND - ------------------------------------------------ Advisory Fees (After Voluntary Reductions)(1)... .64% All Other Expenses (After Voluntary Reductions)(1)................................. .81% 12b-1 Service & Distribution Expenses (After Voluntary Reductions)(1)....................... 0% - ------------------------------------------------ Total Operating Expenses (After Voluntary Reductions)(1)................................. 1.45% - ------------------------------------------------ - ------------------------------------------------
(1) Absent voluntary reductions and reimbursements by the Advisor and Administrator, advisory fees, other expenses, service and distribution expenses, and total operating expenses expressed as a percentage of average net assets, respectively, for the Investor Shares of each Fund would be: Capital Growth Fund -- 1.15%, .28%, .68%, and 2.11%; Value Income Stock Fund -- .80%, .28%, .33% and 1.41%; Aggressive Growth Fund -- 1.15%, .69%, .43%, and 2.27%; Balanced Fund -- .95%, .57%, .28% and 1.80%; Sunbelt Equity Fund -- 1.15%, .40%, .43%, and 1.98%; and International Equity Index Fund -- .90%, 1.16%, .38% and 2.44%. Fee reductions are voluntary and may be terminated at any time. Additional information may be found under "Investment Advisors," "Administration," and "Distribution." A person that purchases shares through an account with a financial institution may be charged separate fees by the financial institution.
CAPITAL AGGRESSIVE SUNBELT INTERNATIONAL GROWTH VALUE INCOME GROWTH BALANCED EQUITY EQUITY INDEX EXAMPLE FUND STOCK FUND FUND FUND FUND FUND - ----------------------------------------------------------------------------------------------------------------------------- An investor would pay the following expenses on a $1,000 investment assuming: (1) 5% annual return and (2) redemption at the end of each time period: One year.................................. $ 55 $ 50 $ 53 $ 50 $ 53 $ 52 Three Years............................... 92 77 86 76 86 82 Five Years................................ 131 106 121 104 121 114 Ten Years................................. 241 188 220 183 220 205 - ----------------------------------------------------------------------------------------------------------------------------- - -----------------------------------------------------------------------------------------------------------------------------
THE EXAMPLE IS BASED UPON THE TOTAL OPERATING EXPENSES OF A FUND AND SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE EXPENSES. ACTUAL EXPENSES MAY BE GREATER OR LESS THAN THOSE SHOWN. The purpose of this table is to assist the investor in understanding the various costs and expenses that may be directly or indirectly borne by investors in the Trust. The information set forth in the foregoing table and example relates only to Investor Shares. The Trust also offers Trust Shares of each Fund which are subject to the same expenses except there are no distribution fees, different transfer agent fees or sales charges and Flex Shares of each Fund which are subject to the same expenses except for different distribution, sales charges, service and transfer agent fees. The rules of the Securities and Exchange Commission require that the maximum sales charge be reflected in the above table. However, certain investors may qualify for reduced sales charges. See "Purchase of Fund Shares." Long-term Investor Class Shareholders may eventually pay more than the economic equivalent of the maximum front-end sales charges otherwise permitted by the National Association of Securities Dealers, Inc.'s Rules of Fair Practice. 4 FINANCIAL HIGHLIGHTS The following information has been audited by Arthur Andersen, LLP, the Trust's independent public accountants, as indicated in their report dated July 20, 1995 on the Trust's financial statements as of May 31, 1995 included in the Trust's Statement of Additional Information under "Financial Information." This table should be read in conjunction with the Trust's financial statements and notes thereto. Additional performance information regarding each Fund is contained in the Trust's Annual Report to Shareholders and is available without charge by calling 1-800-428-6970. For an Investor Share Outstanding Throughout the Period
NET ASSET NET REALIZED VALUE NET AND UNREALIZED DISTRIBUTIONS FROM DISTRIBUTIONS NET ASSET BEGINNING OF INVESTMENT GAINS (LOSSES) NET INVESTMENT FROM REALIZED VALUE END OF PERIOD INCOME (LOSS) ON INVESTMENTS INCOME CAPITAL GAINS PERIOD ------------ ------------- --------------- ------------------ --------------- ------------ - ------------------- CAPITAL GROWTH FUND - ------------------- INVESTOR SHARES 1995........................ $ 11.98 $ 0.09 $ 0.57 $ (0.07 ) $ (0.40 ) $ 12.17 1994........................ 11.93 0.09 0.31 (0.09 ) (0.26 ) 11.98 1993 (1).................... 10.00 0.06 1.93 (0.06 ) -- 11.93 - ------------------------ VALUE INCOME STOCK FUND - ------------------------ INVESTOR SHARES 1995........................ $ 10.52 $ 0.28 $ 1.56 $ (0.27 ) $ (0.51 ) $ 11.58 1994........................ 10.23 0.26 0.67 (0.27 ) (0.37 ) 10.52 1993 (2).................... 9.73 0.09 0.44 (0.03 ) -- 10.23 - ----------------------- AGGRESSIVE GROWTH FUND - ----------------------- INVESTOR SHARES 1995........................ $ 9.84 $ 0.03 $ 1.15 $ (0.03 ) -- $ 10.99 1994 (3).................... 10.00 0.01 (0.17 ) -- -- 9.84 - -------------- BALANCED FUND - -------------- INVESTOR SHARES 1995........................ $ 9.79 $ 0.28 $ 0.51 $ (0.28 ) -- $ 10.30 1994 (4).................... 10.00 0.03 (0.24 ) -- -- 9.79 - ------------------- SUNBELT EQUITY FUND - ------------------- INVESTOR SHARES 1995........................ $ 9.69 $ (0.05 ) $ 0.36 -- $ (0.04 ) $ 9.96 1994 (4).................... 10.00 (0.02 ) (0.29 ) -- -- 9.69 - ----------------------------- INTERNATIONAL EQUITY INDEX FUND - ----------------------------- INVESTOR SHARES 1995 (5).................... $ 10.00 $ 0.05 $ 0.17 $ (0.01 ) $ (0.01 ) $ 10.20 RATIO OF NET RATIO OF INVESTMENT RATIO OF EXPENSES TO EXPENSES TO INCOME (LOSS) AVERAGE NET ASSETS NET ASSETS END AVERAGE NET TO AVERAGE NET (EXCLUDING WAIVERS AND TOTAL RETURN OF PERIOD (000) ASSETS ASSETS REIMBURSEMENTS) ------------- --------------- --------------- --------------- ----------------------- - ------------------- CAPITAL GROWTH FUND - ------------------- INVESTOR SHARES 1995........................ 5.93 % $ 160,875 1.80 % 0.73 % 2.10 % 1994........................ 3.26 % 170,795 1.80 % 0.64 % 2.11 % 1993 (1).................... 20.49 %* 131,858 1.80 %* 0.81 %* 2.06 %* - ------------------------ VALUE INCOME STOCK FUND - ------------------------ INVESTOR SHARES 1995........................ 18.71 % $ 92,256 1.30 % 2.80 % 1.41 % 1994........................ 9.27 % 60,589 1.25 % 2.80 % 1.44 % 1993 (2).................... 19.42 %* 24,779 1.15 %* 4.51 %* 1.63 %* - ----------------------- AGGRESSIVE GROWTH FUND - ----------------------- INVESTOR SHARES 1995........................ 11.96 % $ 7,345 1.60 % 0.43 % 2.27 % 1994 (3).................... (1.60 %)+ 3,004 1.60 %* 0.74 %* 4.60 %* - -------------- BALANCED FUND - -------------- INVESTOR SHARES 1995........................ 8.29 % $ 3,765 1.25 % 3.17 % 1.80 % 1994 (4).................... (2.10 %)+ 2,311 1.25 %* 2.46 %* 4.91 %* - ------------------- SUNBELT EQUITY FUND - ------------------- INVESTOR SHARES 1995........................ 3.20 % $ 22,180 1.60 % (0.57 %) 1.98 % 1994 (4).................... (3.10 %)+ 16,077 1.60 %* (0.63 %)* 2.04 %* - ----------------------------- INTERNATIONAL EQUITY INDEX FUN - ----------------------------- INVESTOR SHARES 1995 (5).................... 2.18 %+ $ 3,960 1.45 %* 0.67 %* 2.44 %* RATIO OF NET INVESTMENT INCOME (LOSS) TO AVERAGE NET ASSETS (EXCLUDING WAIVERS AND PORTFOLIO REIMBURSEMENTS) TURNOVER RATE --------------------- ------------- - ------------------- CAPITAL GROWTH FUND - ------------------- INVESTOR SHARES 1995........................ 0.43 % 127.79 % 1994........................ 0.33 % 123.87 % 1993 (1).................... 0.55 %* 95.02 % - ------------------------ VALUE INCOME STOCK FUND - ------------------------ INVESTOR SHARES 1995........................ 2.69 % 125.71 % 1994........................ 2.61 % 149.28 % 1993 (2).................... 4.04 %* 34.71 % - ----------------------- AGGRESSIVE GROWTH FUND - ----------------------- INVESTOR SHARES 1995........................ (0.24 %) 65.63 % 1994 (3).................... (2.26 %)* 7.99 % - -------------- BALANCED FUND - -------------- INVESTOR SHARES 1995........................ 2.62 % 156.61 % 1994 (4).................... (1.20 %)* 105.65 % - ------------------- SUNBELT EQUITY FUND - ------------------- INVESTOR SHARES 1995........................ (0.95 %) 80.03 % 1994 (4).................... (1.07 %)* 21.42 % - ----------------------------- INTERNATIONAL EQUITY INDEX FUN - ----------------------------- INVESTOR SHARES 1995 (5).................... (0.32 %)* 10.37 %
* Annualized. + Cumulative since inception. (1) The Capital Growth Fund Investor Shares Investor Shares commenced operations on June 9, 1992. (2) The Value Income Stock Fund Investor Shares commenced operation on February 17, 1993. (3) The Aggressive Growth Fund Investor Shares commenced operations on February 1, 1994. (4) The Sunbelt Equity Fund Investor Shares and the Balanced Fund Investor Shares commenced operations on January 4, 1994. (5) The International Equity Index Fund Investor Shares commenced operations on June 6, 1994. 5 THE TRUST STI CLASSIC FUNDS (the "Trust") is a diversified, open-end management investment company that provides a convenient and economical means of investing in several professionally managed portfolios of securities. The Trust currently offers units of beneficial interest ("shares") in a number of separate Funds. Shareholders may purchase shares in each Fund through three separate classes (Trust Shares, Investor Shares and Flex Shares) which provide for variations in distribution and service fees and transfer agent fees, voting rights and dividends. Except for differences between classes, each share of each Fund represents an undivided, proportionate interest in that Fund. This Prospectus relates to the Investor Shares of the Funds described below. FUNDS AND INVESTMENT OBJECTIVES THE CAPITAL GROWTH FUND seeks to provide capital appreciation by investing primarily in a portfolio of common stocks, warrants and securities convertible into common stock which in the Advisor's opinion are undervalued in the marketplace at the time of purchase. THE VALUE INCOME STOCK FUND seeks to provide current income with the secondary goal of achieving capital appreciation by investing primarily in equity securities. THE AGGRESSIVE GROWTH FUND seeks to provide capital appreciation by investing primarily in a diversified portfolio of common stocks, preferred stocks and securities convertible into common stock of small to mid-sized companies with above-average growth of earnings. Current income will not be an important criterion of investment selection and any such income should be considered incidental. THE BALANCED FUND seeks to provide capital appreciation and current income by investing in common and preferred stocks, warrants, securities convertible into common stock and investment grade fixed income securities. THE SUNBELT EQUITY FUND seeks to provide capital appreciation by investing substantially all and under normal market conditions at least 65% of its assets in common stocks, preferred stocks, warrants and securities convertible into common stock of U.S. companies headquartered and/or conducting a substantial portion of their operations in the southern region of the United States. Current income will not be an important criterion of investment selection and any such income should be considered incidental. THE INTERNATIONAL EQUITY INDEX FUND seeks to provide investment results that correspond to the aggregate price and dividend performance of the securities included in the Gross Domestic Product Weighted Morgan Stanley Capital International Europe, Australasia and Far East Index (the "MSCI EAFE-GDP Index" or "EAFE-GDP Index").11"MSCI EAFE-GDP Index" is a registered service mark of Morgan Stanley Capital International which does not sponsor and is in no way affiliated with the International Equity Index Fund. There can be no assurance that a Fund will achieve its investment objective. The investment objectives of each Fund are nonfundamental and may be changed without shareholder approval. INVESTMENT POLICIES AND STRATEGIES *CAPITAL GROWTH FUND The Capital Growth Fund invests primarily in a diversified portfolio of common stocks, 6 warrants, and securities convertible into common stocks which, in the Advisor's opinion, are undervalued in the marketplace at the time of purchase. In selecting securities for the Fund, the Advisor will evaluate factors believed to affect capital appreciation such as the issuer's background, industry position, historical returns on equity and experience and qualifications of the management team. Dividend and interest income is incidental to growth of capital. The Advisor will rotate the Capital Growth Fund's holdings between various market sectors based on economic analysis of the overall business cycle. Under normal conditions, at least 65% of the total assets of the Capital Growth Fund will be invested in common stocks. All of the common stocks in which the Fund invests are traded on registered exchanges or on the over-the-counter market in the United States. Assets of the Capital Growth Fund not invested in the securities described above may be invested in U.S. dollar denominated equity securities of foreign issuers (including sponsored American Depositary Receipts ("ADRs") that are traded on exchanges or listed on NASDAQ); securities issued by money market mutual funds; pay-in-kind securities; and bonds. The bonds that the Capital Growth Fund may purchase may be rated in any rating category or may be unrated, provided that no more than 10% of the Fund's total assets will be invested in bonds rated below BBB by Standard & Poor's Corporation ("S&P") or below Baa by Moody's Investors Service, Inc. ("Moody's") or unrated securities of comparable quality (see "Investment Risks -- High Yield -- Lower Rated Bonds"). In addition, the Fund may invest up to 10% of its assets in restricted securities. The Fund's turnover rate for the fiscal year ended May 31, 1995 was 127.79%. This rate of turnover, if continued, will likely result in higher brokerage commissions and higher levels of realized capital gains than if the turnover rate was lower. *VALUE INCOME STOCK FUND The Value Income Stock Fund seeks to provide current income by structuring its investments in an attempt to maintain the Fund's yield at a level above the average dividend yield of the securities comprising the S&P 500 Stock Index. Achieving such a yield will be the Fund's primary consideration when purchasing securities. A secondary objective of the Fund will be capital appreciation. The Fund will invest at least 80% of its total assets in equity securities. Investments will consist primarily of common stocks, and, under normal market conditions, at least 65% of the Fund's assets will be invested in common stocks issued by corporations which have a history of paying regular dividends, although there can be no assurance that such corporations will continue to pay dividends. Other equity securities in which the Fund may invest are convertible debt securities; preferred stocks and warrants which are convertible into or exchangeable for common stocks; and U.S. dollar denominated equity securities of foreign issuers (including sponsored ADRs that are traded on exchanges or listed on NASDAQ). All of the common stocks in which the Fund invests are traded on registered exchanges such as the New York or American Stock Exchange or on the over-the-counter market in the United States (i.e., NASDAQ). The Fund may also purchase debt securities (corporate debt obligations and U.S. Treasury obligations) which may be rated in any rating category or may be unrated, provided that no more than 10% of the Fund's total assets will be invested 7 in bonds rated below BBB by S&P or below Baa by Moody's or unrated securities of comparable quality. The Fund will invest primarily in stocks of companies operating in all aspects of the U.S. and world economies that have a market capitalization of at least $500 million or more, that the Advisor believes possess fundamentally favorable long-term characteristics. However, stocks of companies with smaller market capitalizations and stocks that are out of favor in the financial community and in which little opportunity for price appreciation is recognized by the financial community may also be purchased if the Advisor believes they are undervalued. The Fund's turnover rate for the fiscal year ended May 31, 1995 was 125.71%. This rate of turnover, if continued, will likely result in higher brokerage commissions and higher levels of realized capital gains than if the turnover rate was lower. *AGGRESSIVE GROWTH FUND The Aggressive Growth Fund invests primarily in a diversified portfolio of common stocks, preferred stocks, and securities convertible into common stocks of small to midsize companies, (i.e., $50 million to $1 billion and $500 million to $5 billion, respectively, as measured by their market capitalization), with above-average growth of earnings. Current income will not be an important criterion of investment selection and any such income should be considered incidental. In selecting securities for the Fund, the Advisor will evaluate factors such as the issuer's background, industry position, historical returns on equity and experience and qualifications of the management team. Under normal conditions, at least 80% of the total assets of the Fund will be invested in equity securities. Most of the common stocks in which the Fund invests are traded on registered exchanges or on the over-the-counter market in the United States. Assets of the Fund not invested in the securities described above may be invested in U.S. dollar denominated equity securities of foreign issuers (including sponsored ADRs that are traded on exchanges or listed on NASDAQ); securities issued by mutual funds; repurchase agreements; and bonds. The bonds that the Fund may purchase, including any variable or floating rate instruments, must be rated B or better by S&P or Moody's, provided that this requirement shall not apply to the Fund's purchase of bonds issued by the government of Canada or by various supranational entities, and provided further that no more than 10% of the Fund's total assets will be invested in bonds rated below BBB by S&P or below Baa by Moody's or unrated securities of comparable quality. The Fund may invest up to 10% of its assets in restricted securities. *SUNBELT EQUITY FUND The Sunbelt Equity Fund seeks to provide capital appreciation by investing substantially all, and under normal market conditions at least 65%, of its assets in common stocks; preferred stocks; warrants; and securities convertible into common stock of U.S. companies headquartered and/or conducting a substantial portion of their operations in (i.e., maintaining at least 50% of their assets in or deriving at least 50% of their revenues and/or sales from) the southern region of the United States. Current income will not be an important criterion of investment selection and any such income should be considered incidental. The Advisor will seek to identify and purchase securities of companies that it believes to be undervalued and that possess a strong balance sheet, a strong earnings record, and adequate market liquidity. 8 Most of the common stocks in which the Fund invests are traded on registered exchanges such as the New York or American Stock Exchange or on the over-the-counter market in the United States (i.e., NASDAQ). The Fund will invest no more than 10% of its assets in convertible securities rated lower than BBB. (See "Investment Risks -- High Yield, Lower Rated Bonds.") The Fund may invest up to 10% of its total assets in restricted securities. The Fund may also purchase futures and options for hedging purposes. Obligations relating to futures contracts will be limited to not more than 20% of the Fund's total assets. The Fund will invest primarily in stocks of U.S. companies headquartered and/or operating in the following U.S. states: Texas, Arkansas, Alabama, Mississippi, Tennessee, Kentucky, Florida, Virginia, Georgia, North Carolina, South Carolina and Louisiana. To the extent that the Fund's investments are not as geographically dispersed across the U.S. as other funds with comparable objectives, Shareholders will be more subject to the impact of economic forces on and the relative economic conditions of these states. *BALANCED FUND The Balanced Fund seeks to provide capital appreciation and current income through investments in a diversified portfolio of common and preferred stocks, warrants, securities convertible into common stocks, and investment grade fixed income securities. Under normal conditions, no more than 70% of the total assets of the Fund will be invested in common stocks and other equity securities, and no more than 60% of the Fund's total assets will be invested in bonds and other fixed income securities. The Fund will maintain at least 25% of its total assets in senior fixed income securities. In selecting equity securities for the Fund, the Advisor will evaluate factors believed to affect capital appreciation such as the issuer's background, industry position, historical returns on equity and experience and qualifications of the management team. The Advisor will rotate the Fund's holdings between various market sectors based on economic analysis of the overall business cycle. All of the common stocks in which the Fund invests are traded on registered exchanges or on the over-the-counter market in the United States. Assets of the Fund not invested in the securities described above may be invested in U.S. dollar denominated equity securities of foreign issuers (including sponsored ADRs that are traded on exchanges or listed on NASDAQ), securities issued by investment companies, and bonds. The Fund will invest in investment grade fixed income securities rated BBB or better by S&P or Baa or better by Moody's or, if unrated, of comparable quality at the time of purchase as determined by the Advisor, including corporate debt obligations; mortgage-backed securities, collateralized mortgage obligations and asset-backed securities; obligations issued or guaranteed as to principal and interest by the U.S. Government or its agencies or instrumentalities; custodial receipts involving U.S. Treasury obligations; securities of the government of Canada and its provincial and local governments; securities issued or guaranteed by foreign governments, their political subdivisions, agencies or instrumentalities; and obligations of supranational entities. No more than 25% of the Fund's assets will be invested in securities rated BBB by S&P or Baa by Moody's or, if unrated, of comparable quality at the time of purchase as determined by the Fund's Advisor. 9 The Fund may purchase mortgage-backed securities issued or guaranteed as to the payment of principal and interest by the U.S. Government or its agencies or instrumentalities or, subject to a limit of 25% of the Fund's assets, mortgage-backed securities issued by private issuers. These mortgage-backed securities may be backed or collateralized by fixed, adjustable or floating rate mortgages. The Fund may also invest in asset backed securities which consist of securities backed by company receivables, truck and auto loans, leases, credit card receivables and home equity loans. In order to reduce interest rate risk, the Fund may purchase floating or variable rate securities. It may also buy securities on a when-issued basis, putable securities, pay-in-kind securities, and zero coupon securities. The Fund may also invest futures and options. Some floating or variable rate securities will be subject to interest rate "caps" or "floors." The Balanced Fund's turnover rate for the fiscal year ended May 31, 1995 was 128% for the equity portion of its portfolio and 193% for the fixed income portion of its portfolio. These rates of turnover if continued will likely result in higher transaction costs and brokerage commissions and higher levels of realized capital gains than if the turnover rate was lower. *INTERNATIONAL EQUITY INDEX FUND The Fund will invest substantially all and, under normal market conditions, at least 65% of its assets in common and preferred stocks; warrants; options; and securities convertible into common stock of companies headquartered or based in the approximately twenty foreign countries included in the Morgan Stanley Capital International EAFE-GDP Index. The Fund will invest only in the 1088 or so companies included in the EAFE-GDP Index. Because it is impractical to invest in every company included in the Index, the Fund will select a representative sample of securities in each country using a statistical-based optimization process. Morgan Stanley & Co. Incorporated maintains the optimization computer programs which will be utilized to select companies within each country. The Fund will be constructed to have aggregate investment characteristics similar to those of the EAFE-GDP Index. The Fund will invest in a statistically selected sample of the securities included in the EAFE-GDP Index, although not all countries nor all companies within a country will be represented in the Fund's portfolio of securities at any time. The Fund expects to invest in approximately 300 stocks so that the results fall within the targeted tracking error. From time to time, adjustments may be made in the Fund's portfolio because of changes in the composition of the EAFE-GDP Index. No attempt will be made to manage the portfolio using traditional economic, financial and market analyses. The Fund expects that there will be a close correlation between the Fund's performance and that of the EAFE-GDP Index. A 1.00 correlation would indicate perfect correlation, which would be achieved when the net asset value of the Fund, including the value of its dividend and capital gains distributions, increases or decreases in exact proportion to changes in the EAFE-GDP Index. The correlation between the Fund and the EAFE-GDP Index is expected to be over 0.95 on an annual basis. The Fund's ability to track the EAFE-GDP Index, however may be affected by, among other things, transaction costs, changes in either the composition of the EAFE-GDP Index or number of shares outstanding for the component companies of the EAFE-GDP Index, and the timing and amount of purchases and redemptions. 10 Securities of foreign issuers purchased by the Fund may be purchased in foreign markets, on United States registered exchanges, the over-the-counter market or in the form of sponsored or unsponsored ADRs traded on registered exchanges or NASDAQ, or sponsored or unsponsored European Depositary Receipts ("EDRs"). The Fund may enter into forward foreign currency contracts as a hedge against possible variations in foreign exchange rates. A forward foreign currency contract is a commitment to purchase or sell a specified currency, at a specified future date, at a specified price. The Fund may enter into forward foreign currency contracts to hedge a specific security transaction or to hedge a portfolio position. These contracts may be bought or sold to protect the Fund, to some degree, against a possible loss resulting from an adverse change in the relationship between foreign currencies and the U.S. dollar. The Fund expects to be fully invested in the investments, described above, but may invest up to 35% of its total assets in U.S. and non-U.S. denominated money market instruments; repurchase agreements; futures contracts, including stock index futures contracts; and options on futures contracts. Obligations relating to futures contracts will be limited to not more than 20% of the Fund's total assets. The Fund is also permitted to acquire floating and variable rate securities; purchase securities on a when-issued basis; and purchase illiquid securities. GENERAL INVESTMENT POLICIES AND STRATEGIES For temporary defensive purposes during periods when its Advisor determines that market conditions warrant, each Fund may invest up to 100% of its assets in money market instruments consisting of securities issued or guaranteed as to principal and interest by the U.S. Government, its agencies or instrumentalities, custodial receipts involving U.S. Treasury obligations, repurchase agreements, certificates of deposit, bankers' acceptances, and time deposits issued by banks or savings and loan associations and commercial paper rated in the highest rating category, and may hold a portion of its assets in cash. A Fund may not be pursuing its investment objective when it is engaged in temporary defensive investing. Each Fund may also invest in money market instruments for liquidity purposes. Each Fund may invest, subject to its investment objective and policies, in zero coupon obligations. Zero coupon obligations are sold at original issue discount and do not make periodic payments. Zero coupon obligations may be subject to greater fluctuation in value due to interest rate changes. Each Fund, except the International Equity Index Fund, may purchase restricted securities, including Rule 144A securities, that its Advisor determines are liquid pursuant to guidelines established by the Trust's Board of Trustees. In the event that a security owned by a Fund is downgraded below the stated rating categories, the Advisor will review and take appropriate action with regard to the security. Each Fund may borrow money for temporary or emergency purposes in an amount not to exceed one-third of the value of its total assets. A Fund may not purchase additional securities while its outstanding borrowings exceed 5% of its assets. A Fund's purchase of shares of other investment companies is limited by the 11 Investment Company Act of 1940 and will ordinarily result in an additional layer of charges and expenses. Each of the Funds may engage in securities lending and will limit such practice to 33 1/3% of its total assets. It is a non-fundamental policy of each Fund to invest no more than 15% of its net assets in illiquid securities. An illiquid security is a security which cannot be disposed of in the usual course of business within seven days at a price approximating its carrying value. For additional information regarding permitted investments, see "Description of Permitted Investments" in this Prospectus and in the Statement of Additional Information. INVESTMENT RISKS FOREIGN SECURITIES AND FOREIGN CURRENCY CONTRACTS Investing in the securities of foreign companies and the utilization of forward foreign currency contracts involve special risks and considerations not typically associated with investing in U.S. companies. These risks and considerations include differences in accounting, auditing and financial reporting standards, generally higher commission rates on foreign portfolio transactions, the possibility of expropriation or confiscatory taxation, adverse changes in investment or exchange control regulations, political instability which could affect U.S. investment in foreign countries and potential restrictions of the flow of international capital and currencies. Foreign companies may also be subject to less government regulation than U.S. companies. Moreover, the dividends payable on the foreign securities may be subject to foreign withholding taxes, thus reducing the net amount of income available for distribution to the Fund's Shareholders. Further, foreign securities often trade with less frequency and volume than domestic securities and, therefore, may exhibit greater price volatility. Changes in foreign exchange rates will affect, favorably or unfavorably, the value of those securities which are denominated or quoted in currencies other than the U.S. dollar. By entering into forward foreign currency contracts, the International Equity Index Fund will seek to protect the value of its investment securities against a decline in the value of a currency. However, these forward foreign currency contracts will not eliminate fluctuations in the underlying prices of the securities. Rather, they simply establish a rate of exchange which one can obtain at some future point in time. Although such contracts tend to minimize the risk of loss due to a decline in the value of the hedged currency, also, they tend to limit any potential gain which might result should the value of such currency increase. EQUITY SECURITIES Investments in equity securities are generally subject to market risks that may cause their prices to fluctuate over time. The values of convertible equity securities are 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 each Fund invests will cause the net asset value of the Fund to fluctuate. MORTGAGE-BACKED SECURITIES Mortgage-backed securities are subject to the risk of prepayment of the underlying mortgages. During periods of declining interest rates, prepayment of mortgages underlying these securities can be expected to accelerate. When the mortgage-backed securities held by 12 the Balanced Fund are prepaid, the Balanced Fund must reinvest the proceeds in securities the yield of which reflects prevailing interest rates, which may be lower than the prepaid security. FIXED INCOME SECURITIES The market value of a Fund's fixed income investments will change in response to interest rate changes and other factors. During periods of falling interest rates, the values of outstanding fixed income securities generally rise. Conversely, during periods of rising interest rates, the values of such securities generally decline. Securities with longer maturities are subject to greater fluctuations in value than securities with shorter maturities. Changes by a nationally recognized statistical rating organization ("NRSRO") to the rating of any fixed income security and in the ability of an issuer to make payments of interest and principal also affect the value of these investments. Changes in the value of a Fund's securities will not affect cash income derived from these securities but will affect the Fund's net asset value. There is a risk that the current interest rate on floating and variable rate instruments may not accurately reflect existing market interest rates. Fixed income securities rated BBB by S&P or Baa by Moody's (investment grade bonds) are deemed by these rating services to have speculative characteristics. HIGH YIELD, LOWER RATED BONDS A Fund's investments in high yield, lower rated bonds ("junk bonds") involve greater risk of default or price declines than investments in investment grade securities (securities rated BBB or higher by S&P or Baa or higher by Moody's) due to changes in the issuer's creditworthiness. The market for high risk, high yield securities may be thinner and less active, causing market price volatility and limited liquidity in the secondary market. This may limit the ability of the Fund to sell such securities at their fair market value either to meet redemption requests or in response to changes in the economy or the financial markets. Market prices for high risk, high yield securities may also be affected by investors' perception of the issuer's credit quality and the outlook for economic growth. Thus, prices for high risk, high yield securities may move independently of interest rates and the overall bond market. In addition, the market for high risk, high yield securities may be adversely affected by legislative and regulatory developments. INVESTMENT LIMITATIONS The following investment limitations constitute fundamental policies of each Fund. Fundamental policies cannot be changed with respect to a Fund without the consent of the holders of a majority of the Fund's outstanding shares. The term "majority of the outstanding shares" means the vote of (i) 67% or more of a Fund's shares present at a meeting, if more than 50% of the outstanding shares of the Fund are present or represented by proxy, or (ii) more than 50% of a Fund's outstanding shares, whichever is less. Each Fund may not: 1. Purchase securities of any issuer (except securities issued or guaranteed by the United States, its agencies or instrumentalities and repurchase agreements involving such securities) if as a result more than 5% of the total assets of a Fund would be invested in the securities of such issuer; provided, however, that a Fund may invest up to 25% of its total assets without regard to this restriction as permitted by applicable law. 13 2. Purchase any securities which would cause more than 25% of the total assets of a Fund to be invested in the securities of one or more issuers conducting their principal business activities in the same industry, provided that this limitation does not apply to investments in obligations issued or guaranteed by the U.S. Government or its agencies and instrumentalities, repurchase agreements involving such securities or tax-exempt securities issued by governments or political subdivisions of governments. For purposes of this limitation, (i) utility companies will be divided according to their services, for example, gas, gas transmission, electric and telephone will each be considered a separate industry; (ii) financial service companies will be classified according to the end users of their services, for example, automobile finance, bank finance and diversified finance will each be considered a separate industry; and (iii) supranational entities will be considered to be a separate industry. The foregoing percentages will apply at the time of the purchase of a security. Additional investment limitations are set forth in the Statement of Additional Information. PERFORMANCE INFORMATION From time to time, the Funds may advertise performance (total return and yield). These figures will be historical and are not intended to indicate future performance. The yield of a Fund refers to the annualized income generated by an investment in that Fund over a specified 30-day period. The yield is calculated by assuming that the income generated by the investment during that period is generated over one year and is shown as a percentage of the investment. The total return of a Fund refers to the average compounded rate of return on a hypothetical investment, including any sales charge imposed, for designated time periods (including but not limited to, the period from which a Fund commenced operations through the specified date), assuming that the entire investment is redeemed at the end of each period and assuming the reinvestment of all dividend and capital gains distributions. GENERAL PERFORMANCE INFORMATION The performance of the Trust's Investor Shares and Flex Shares will normally be lower than for Trust Shares because Investor Shares and Flex Shares are subject to distribution, service, and certain transfer agent fees not charged to Trust Shares. The performance of Flex Shares in comparison to Investor Shares will vary depending upon investment time horizon. Each Fund may periodically compare its performance to other mutual funds tracked by mutual fund rating services, to broad groups of comparable mutual funds or to unmanaged indices which may assume reinvestment of dividends but generally do not reflect deductions for administrative and management costs. FUNDLINK All purchases and redemptions of STI Classic Fund Investor Shares may be completed via FUNDLINK, a telephone activated service that allows Shareholders to transfer money between the STI Classic Funds and a Shareholder's SunTrust bank account(s). To initiate a FUNDLINK transaction, Shareholders are provided a toll-free telephone number (1-800-428-6970) to call the Trust's Transfer Agent. To utilize this service, a Shareholder must contact an Investment Services Representative of a SunTrust Banks, Inc. affiliate bank and complete the appropriate application and authorization agreements. 14 PURCHASE OF FUND SHARES Investor Shares are sold on a continuous basis and may be purchased by contacting the Trust's Transfer Agent, Federated Services Company (the "Transfer Agent,") either by mail, by telephone or by wire. Investor Shares may also be purchased through Investment Services Representatives of SunTrust Banks, Inc. affiliate banks which serve as Shareholder Servicing Agents to the Trust. Furthermore, Investor Shares may be purchased through SunTrust Securities, Inc., as well as, certain correspondent banks of SunTrust Banks, Inc. Shares may be purchased on days on which the New York Stock Exchange is open for business ("business day"). A purchase order for any of the Funds will be effective as of the business day it is received by the Transfer Agent if the Transfer Agent receives the order before 4:00 p.m. Eastern time. The purchase price of shares of a Fund is the net asset value next determined after a purchase order is effective plus any applicable sales charge (the "offering price"). The net asset value per share of a Fund is determined by dividing the total market value of the Fund's investments and other assets, less any liabilities, by the total outstanding shares of the Fund. Net asset value per share is determined daily as of close of business of the New York Stock Exchange (currently 4:00 p.m. Eastern time) on any business day. Pursuant to guidelines established by the Trustees, the Trust may use a pricing service to provide market quotations or valuations for securities owned by each Fund. Purchases will be made in full and fractional shares of the Trust calculated to three decimal places. Purchases by mail are considered received after payment by check is converted into federal funds. Minimum initial and subsequent purchase amounts, respectively, for each Fund are $2,000 and $1,000 ($100 via statement coupon). Employees and their immediate family members (spouses and children under age 21) of SunTrust Banks, Inc. and its affiliates may establish accounts with a minimum initial purchase amount of $1,000. The minimum initial purchase amount for retirement plans is $2,000. These minimums may be waived at the Distributor's discretion. Financial institutions may impose an earlier cut-off time for receipt of purchase orders directed through them to allow for processing and transmittal of these orders to the Transfer Agent for effectiveness the same day. The Trust reserves the right to reject a purchase order when the Distributor determines that it is not in the best interest of the Trust and/or Shareholder(s). Neither the Trust's Transfer Agent nor the Trust will be responsible for any loss, liability, cost or expense for acting upon telephone or wire instructions reasonably believed to be genuine. The Trust maintains procedures, including identification methods and other means, for ascertaining the identity of callers and authenticity of instructions. Shares of the Funds are offered only to residents of states in which the shares are eligible for purchase. Although the methodology and procedures for calculating the net asset value of Investor Shares are identical to those for Trust Shares and Flex Shares, the net asset value per share of the classes may differ because of the distribution, service, and certain transfer agent expenses charged to Investor Shares and Flex Shares. Investors in certain states may be required to purchase shares through institutions registered as brokers/dealers in such states. 15 *SYSTEMATIC INVESTMENT PLAN Shares of each Fund may be purchased systematically through deductions from checking or savings accounts maintained through SunTrust Banks, Inc. affiliate banks. Investors may purchase shares on a fixed schedule (semi-monthly or monthly) with amounts from $100 up to $100,000. The Systematic Investment Plan is subject to account minimum initial purchase and subsequent amounts of $500 and $50 ($5,000 for non-SunTrust employees, $1,000 for employees of SunTrust and their immediate family members) and minimum maintained balance requirements. The purchases will be effective on the business day that the transfer agent receives the transmission. *SALES CHARGE INFORMATION The following schedule applies to the purchase of Investor Shares of a Fund:
SALES CHARGE AS A SALES CHARGE AS A PERCENTAGE OF PERCENTAGE OF NET OFFERING PRICE AMOUNT INVESTED ----------------- ------------------ Less than $100,000... 3.75% 3.90% $100,000 but less than $250,000....... 3.25% 3.36% $250,000 but less than $1,000,000..... 2.50% 2.56% $1,000,000 and higher.............. 1.50% 1.52%
Employees and their immediate family members (spouses and children under age 21) of SunTrust Banks, Inc. and its affiliates, as well as persons investing distributions from qualified employee benefit retirement plans or rollovers from Individual Retirement Accounts ("IRAs") previously established with a SunTrust Banks, Inc. affiliate bank trust department, will be exempt from sales charges in purchasing Investor Shares. In addition, certain trust accounts for which a subsidiary bank of SunTrust Banks, Inc. acts in an administrative, fiduciary, investment advisory, or custodial capacity, will be exempt from sales charges and be placed in Trust Shares. When accounts for which a subsidiary bank of SunTrust Banks, Inc. has acted in a fiduciary, administrative, custodial or investment advisory capacity are closed and Investor Shares purchased, the Investor Shares that are purchased in an amount equal to or lesser than the value of the account distribution will be exempt from sales charges. Any subsequent purchases will be subject to the applicable sales charge. Purchases of STI Classic Funds Investor Shares through a SunTrust Banks, Inc. affiliate bank's asset allocation account will be exempt from sales charges. Dealers will be reallowed the entire sales charge imposed on purchases of Investor Shares and may, therefore, be deemed "underwriters" for purposes of the Securities Act of 1933. *RIGHTS OF ACCUMULATION In calculating the sales charge rates applicable to current purchases of a Fund's Investor Shares by a "single purchaser," the Trust will cumulate current purchases at the offering price with the current market value of previously purchased Investor Shares of any Trust's non-Money Market Funds ("Eligible Funds") which are sold subject to a sales charge. The term "single purchaser" refers to (i) an individual, (ii) an individual and spouse purchasing shares of an Eligible Fund for their own account or for trust or custodial accounts for their minor children, or (iii) a fiduciary purchasing for any one trust, estate or fiduciary account, including employee benefit plans created under Sections 401 or 457 of the Internal Revenue Code, including related plans 16 of the same employer. Furthermore, under this provision, purchases by a "single purchaser" shall include purchases by an individual for his/ her own account in combination with (i) purchases of that individual and spouse for their joint account or for trust and custodial accounts for their minor children and (ii) purchases of that individual's spouse for his/ her own account. To be entitled to a reduced sales charge based upon shares already owned, the investor must ask the Distributor for such reduction at the time of purchase and provide the account number(s) of the investor, the investor and spouse, and their children (under age 21), and give the ages of such children. The Funds may amend or terminate this right of accumulation at any time as to subsequent purchases. *LETTER OF INTENT By submitting a Letter of Intent to the Transfer Agent, a "single purchaser" may purchase shares of a non-Money Market Fund during a 13-month period at the reduced sales charge rates applicable to the aggregate amount of the intended purchases stated in the Letter. The Letter may apply to purchases made up to 90 days before the date of the Letter. The purchase price for these prior trades will not be adjusted. A written Letter of Intent provided to the Transfer Agent, is not legally binding on the signer or a Fund, and provides for the holding in escrow by the transfer agent of 3.75% of the total amount intended to be purchased until such purchase is completed within the 13-month period. A Letter of Intent may be dated to include shares purchased up to 90 days prior to the date the Letter is signed. The 13-month period begins on the date of the earliest purchase. If the intended investment is not completed, the Transfer Agent will surrender an appropriate number of the escrowed shares for redemption in order to realize the difference between the sales charge on the shares purchased at the reduced rate and the sales charge otherwise applicable to the total shares purchased. *COMBINED PURCHASE/QUANTITY DISCOUNT PRIVILEGE The Trust will combine purchases of Investor Shares of Eligible Funds made on the same day by the investor, his/her spouse, and his/her children under age 21 when calculating the sales charge. This combination may also apply to purchases made pursuant to a Letter of Intent. Purchases made by such persons over a 13 month period could thus qualify the entire purchase for a reduced sales charge. *SPECIAL DIVIDEND SERVICES Dividend distributions made by a Fund can be automatically reinvested in any one Fund of the Trust without a sales charge, subject to account minimum initial purchase amounts and minimum maintained balance requirements. *REPURCHASE OF FUND SHARES Investor Shares of a Fund may be purchased at their net asset value if such shares were redeemed from a Fund with a sales charge within the past 60 days. The amount which may be reinvested is limited to an amount up to but not exceeding the redemption proceeds. In order to exercise this privilege a written order for the purchases must be received by the Transfer Agent within 60 days after the redemption. It is the responsibility of the Investor to notify the Transfer Agent at the time of repurchase. 17 REDEMPTION OF FUND SHARES Shareholders may redeem their Investor Shares without charge on any day that net asset value is calculated. Investor Shares may ordinarily be redeemed by mail or telephone request to the Transfer Agent. However, all or part of a shareholder's holdings of Investor Shares may be redeemed in accordance with instructions and limitations pertaining to his or her account. Redemption orders must be received by the Transfer Agent before 4:00 p.m. Eastern time on any business day. Redemption proceeds are remitted within five days following receipt of the order. Requests for redemptions from the Funds may be placed in writing or by telephone directly to an Investment Services Representative of a SunTrust Banks, Inc. affiliate bank, through SunTrust Securities, Inc., and through certain correspondent banks of SunTrust Banks, Inc. (or via FUNDLINK to the Transfer Agent).Redemptions placed via telephone or FUNDLINK (1-800-428-6970) can only be placed for a minimum of $1,000. Redemption proceeds can be wired, distributed by check, or transferred to a Shareholder's account via FUNDLINK. There will be a $7.00 wire charge for redemptions processed from accounts which require wires to particular banks. When Investor Shares are purchased by check or through ACH the proceeds from the redemption of those Shares are not available, and the Shares may not be exchanged, until the Trust or its agents are reasonably certain that the purchase check has cleared, which could take up to 7 business days. A Shareholder may be required to redeem Investor Shares if the balance in a Shareholder's Fund account drops below $2,000 as a result of redemptions and the Shareholder does not increase its balance to at least $2,000 on 60 days' written notice. The minimum account balance for employees of SunTrust Banks, Inc. and its affiliates is $1,000. The Trust intends to pay cash for all shares redeemed, but under abnormal conditions which make payment in cash unwise, payment may be made wholly or partly in liquid portfolio securities with a market value equal to the redemption price. In such cases, an investor may incur brokerage costs in converting such securities to cash. Redemptions of $25,000 or greater must be in writing and a signature guarantee must accompany the written request. *SYSTEMATIC WITHDRAWAL PLAN A systematic withdrawal plan can be established for any Fund account with a $10,000 minimum balance. Under the plan, redemptions can be automatically processed (monthly, quarterly, semi-annually or annually) by check or through an electronic transfer to a Shareholder's SunTrust Banks, Inc. affiliate bank account with a minimum redemption amount of $50. EXCHANGES Some or all of the Investor Shares of the Funds for which payment has been received (i.e., an established account) may be exchanged for Investor Shares of other Funds within the Trust. Shares being exchanged for the first time from a Money Market Fund into a Fund with a sales charge will be subject to the sales charge of that Fund. Likewise, Shares being exchanged for the first time into a Fund with a higher sales 18 charge will be subject to an incremental sales charge. Exchanges made from a Fund with a higher sales charge to a Fund with a lower sales charge or a Money Market Fund are made without a charge. Four exchanges may be made per calendar year. More than four exchanges in a year may be considered an abuse of the exchange privilege. The Fund reserves the right to charge a $10.00 fee for each exchange. A Shareholder with more than four exchanges per year will be notified prior to the imposition of any such fee. Exchanges may be requested through an Investment Services Representative of a SunTrust Banks, Inc. affiliate bank, SunTrust Securities, Inc. and certain correspondent banks of SunTrust Banks, Inc., either by telephone or in writing, (or via FUNDLINK through the Fund's Transfer Agent). The minimum exchange amount is $1,000 subject to account minimum initial purchase amounts and minimum maintained balance requirements. This exchange offer is subject to change or termination by the Trust upon sixty days' notice. DIVIDENDS AND DISTRIBUTIONS Dividends from net investment income (exclusive of capital gains) are declared and paid quarterly by each of the Funds except that dividends are declared and paid annually by the International Equity Index Fund. Each Fund's net realized capital gains (including net short-term capital gains) are distributed at least annually. Net income for dividend purposes consists of (i) interest accrued and original issue discount earned on the Fund's assets, (ii) plus the amortization of market discount and minus the amortization of market premium on such assets, (iii) plus dividend or distribution income on such assets, (iv) less accrued expenses directly attributable to the Fund and the general expenses of the Trust prorated to the Fund on the basis of its relative net assets. Shareholders of record on the record date will be entitled to receive dividends. The net asset value of Investor Shares of the Funds will be reduced by the amount of any dividend or distribution. Dividends and distributions are paid in the form of additional Investor Shares of the same Fund unless the customer has elected prior to the date of distribution to receive payment in cash. Such election, or any revocation thereof, must be made in writing prior to the date of distribution to the Trust's transfer agent and will become effective with respect to dividends paid after its receipt. Dividends and distributions are paid within ten days of the end of the time period to which the dividend relates. Dividends and distributions payable to a Shareholder are paid in cash within ten business days after a Shareholder's complete redemption of its Investor Shares in a Fund. The amount of dividends payable on Investor Shares and Flex Shares will be less than the dividends payable on Trust Shares because of the distribution and certain transfer agent expenses charged to Investor Shares and Flex Shares. The amount of dividends payable on Flex Shares generally will be less than the amount of dividends payable on Investor Shares due to the higher distribution and service expenses of Flex Shares. TAX INFORMATION The following summary of federal income tax consequences is based on current tax laws and regulations, which may be changed by legislative, judicial or administrative action. No attempt has been made to present a detailed explanation of the federal, state, or local income tax treatment of each Fund or its Shareholders. Shareholders are urged to 19 consult their tax advisors regarding specific questions as to federal, state and local income taxes. TAX STATUS OF EACH FUND: Each Fund is treated as a separate entity for federal tax purposes, and is not combined with the Trust's other Funds. Each Fund intends to qualify for the special tax treatment afforded regulated investment companies by the Internal Revenue Code of 1986, as amended, (the "Code") so that it will be relieved of federal income tax on that part of its net investment income and net capital gains (the excess of long-term capital gains over net short-term capital loss) which is distributed to Shareholders. Each Fund intends to make sufficient distributions prior to the end of each calendar year to avoid liability for the federal excise tax applicable to regulated investment companies. TAX STATUS OF DISTRIBUTIONS: Each Fund will distribute substantially all of its net investment income (including, for this purpose, net short-term capital gains) to Shareholders. Dividends from net investment income paid by the Funds will be taxable to Shareholders as ordinary income whether received in cash or in additional shares. Dividends from net investment income will qualify for the dividends received deduction for corporate Shareholders only to the extent such distributions are derived from dividends paid by domestic corporations. Any net capital gains will be distributed annually and will be taxed to Shareholders as long-term capital gains, regardless of how long the Shareholder has held shares and regardless of whether distributions are received in cash or in additional shares. For certain individual Shareholders, net long-term capital gains may be taxed at a lower rate than ordinary income. The Funds will make annual reports to Shareholders of the federal income tax status of all distributions. Dividends declared by a Fund in October, November or December of any year and payable to Shareholders of record on a date in that month will be deemed to have been paid by the Fund and received by the Shareholder on December 31 of that year, if paid by the Fund at any time during the following January. Income derived by a Fund from obligations of foreign issuers may be subject to foreign withholding taxes. The International Equity Index Fund expects to elect to treat Shareholders as having paid their proportionate share of such foreign taxes. The other Funds will not be able to make this election. Income received on direct U.S. obligations is exempt from tax at the state level when received directly by a Fund and may be exempt, depending on the state, when received by the Shareholder as income dividends from a fund, provided certain state-specific conditions are satisfied. Not all states permit such income dividends to be tax exempt and some require that a certain minimum percentage of an investment company's income be derived from state tax-exempt interest. The Funds will inform Shareholders annually of the percentage of income and distributions derived from direct U.S. obligations. Shareholders should consult their tax advisors to determine whether any portion of the income dividends received from a Fund is considered tax-exempt in their particular state. A sale, exchange or redemption of Fund shares is a taxable event to the Shareholder. 20 STI CLASSIC FUNDS INFORMATION THE TRUST The Trust was organized as a Massachusetts Business Trust under a Declaration of Trust dated January 15, 1992. The Declaration of Trust permits the Trust to offer separate portfolios of shares and different classes of each Fund. All consideration received by the Trust for shares of any Fund and all assets of such Fund belong to that Fund and would be subject to liabilities related thereto. The Trust pays its expenses, including fees of its service providers, audit and legal expenses, expenses of preparing prospectuses, proxy solicitation material and reports to Shareholders, costs of custodial services and registering the shares under federal and state securities laws, pricing, insurance expenses, litigation and other extraordinary expenses, brokerage costs, interest charges, taxes and organization expenses. BOARD OF TRUSTEES The management and affairs of the Trust are supervised by the Trustees under the laws governing business trusts in the Commonwealth of Massachusetts. The Trustees have approved contracts under which, as described below, certain companies provide essential management services to the Trust. INVESTMENT ADVISORS The Advisors are indirect wholly-owned subsidiaries of SunTrust Banks, Inc. ("SunTrust"), a southeastern regional bank holding company with assets of $44.2 billion as of June 30, 1995. SunTrust ranks among the twenty largest U.S. banking companies. Its three principal subsidiaries--SunTrust Banks of Florida, Inc., SunTrust Banks of Georgia, Inc. and SunTrust Banks of Tennessee, Inc.-- provide a wide range of personal and corporate banking, trust, and investment services through more than 600 locations in the three-state area. Total discretionary assets under management with SunTrust Banks, Inc. equalled approximately $42 billion as of December 31, 1994. STI Capital Management, N.A. ("STI Capital") (formerly SunBank Capital Management, N.A.) serves as the Advisor to the Capital Growth, Value Income, Aggressive Growth and Balanced Funds and joint advisor to the International Equity Index Fund. As of June 30, 1995, STI Capital had discretionary management authority with respect to assets of approximately $11.1 billion. The principal business address of STI Capital is P.O. Box 3808, Orlando, FL 32802. Trusco Capital Management, Inc. ("Trusco") serves as the Advisor to the Sunbelt Equity Fund and as joint advisor to the International Equity Index Fund. As of June 30, 1995, Trusco had approximately $11.5 billion in assets under management. The principal business address of Trusco is 50 Hurt Plaza, Suite 1400, Atlanta, GA 30303. The Trust and the above Advisors have entered into advisory agreements (the "Advisory Agreements"). Under the Advisory Agreements, the Advisors make the investment decisions for the assets of the Fund(s) they advise and continuously review, supervise and administer their respective Fund's investment program. The Advisors discharge their responsibilities subject to the supervision of, and policies established by, the Trustees of the Trust. STI CLASSIC FUNDS ARE NOT DEPOSITS, ARE NOT INSURED OR GUARANTEED BY THE FDIC OR ANY OTHER GOVERNMENT AGENCY, AND ARE NOT ENDORSED OR GUARANTEED BY AND DO NOT CONSTITUTE OBLIGATIONS OF SUNTRUST BANKS, 21 INC. OR ANY OF ITS AFFILIATES. INVESTMENTS IN THE FUNDS INVOLVE RISK, INCLUDING THE POSSIBLE LOSS OF PRINCIPAL. RETURNS AND PRINCIPAL VALUES WILL FLUCTUATE AND SHARES AT REDEMPTION MAY BE WORTH MORE OR LESS THAN THEIR ORIGINAL COST. THERE IS NO GUARANTEE THAT ANY STI CLASSIC FUND WILL ACHIEVE ITS INVESTMENT OBJECTIVE. With respect to all Funds, the Advisors may execute brokerage or other agency transactions through affiliates of the Advisors. For the services provided and expenses incurred pursuant to the Advisory Agreements, STI Capital is entitled to receive advisory fees computed daily and paid monthly at the annual rate of 1.15%, .95%, 1.15% and .80% of the average daily net assets of the Capital Growth, Balanced, Aggressive Growth and Value Income Stock Funds, respectively. Trusco is entitled to receive an advisory fee computed daily and paid monthly at the annual rate of 1.15% of the average daily net assets of the Sunbelt Equity Fund. Trusco and STI Capital jointly are entitled to receive an advisory fee computed daily and paid monthly at the annual rate of .90% of the average daily net assets of the International Equity Index Fund. Although the advisory fee for each Fund is higher than advisory fees paid by other mutual funds, the Trust believes that the fee is comparable to the advisory fee paid by many other mutual funds with similar investment objectives and policies. From time to time, an Advisor may waive (either voluntarily or pursuant to applicable state limitations) advisory fees payable by a Fund. Currently, the Advisors and the Distributor have agreed to voluntary reductions in their respective fees as well as reductions in service and distribution fees in amounts necessary to maintain the total operating expenses at the amounts set forth in the Expense Summary. Voluntary reductions of fees may be terminated at anytime. For the fiscal year ended May 31, 1995, STI Capital received advisory fees computed daily and paid monthly at the annual rate of 1.02%, .77%, .95%, and .80% of the average daily net assets of the Capital Growth, Balanced, Aggressive Growth and Value Income Stock, respectively. Trusco received an advisory fee computed daily and paid monthly at the annual rate of .98% of the average daily net assets of Sunbelt Equity Fund. Trusco and STI Capital jointly received an advisory fee computed daily and paid monthly at the annual rate of .64% of the average daily net assets of the International Equity Index Fund. PORTFOLIO MANAGERS Mr. Anthony Gray has been responsible for the day-to-day management of the Capital Growth Fund since its inception. Mr. Gray has served as Chief Executive Officer and Chief Investment Officer of STI Capital since 1979. Mr. Gray has also been responsible for the day-to-day management of the equity portion of the Balanced Fund since its inception. Mr. Mills Riddick, CFA, has been responsible for the day-to-day management of the Value Income Stock Fund since April, 1995. Mr. Riddick has been a value portfolio manager at STI Capital Management since 1989. Mr. Thomas Edgar has been responsible for the day-to-day management of the Aggressive Growth Fund since its inception. Mr. Edgar has served as Senior Vice President of STI Capital since 1990 and served as Senior Vice President of First Union Bank from 1988 to 1990. Mr. L. Earl Denney, CFA, has been responsible for the day-to-day management of the fixed income portion of the Balanced Fund since its inception. Mr. Denney has served as Executive Vice President of STI Capital since 1983. 22 Mr. James Foster has been responsible for the day-to-day management of the Sunbelt Equity Fund since its inception. Mr. Foster has served as a Vice President of Trusco since 1989. BANKING LAWS Banking laws and regulations, including the Glass-Steagall Act as presently interpreted by the Board of Governors of the Federal Reserve System, presently (a) prohibit a bank holding company registered under the Federal Bank Holding Company Act of 1956 or its affiliates from sponsoring, organizing, controlling, or distributing the shares of a registered, open-end investment company continuously engaged in the issuance of its shares, and generally prohibit banks from underwriting securities, but (b) do not prohibit such a bank holding company or affiliate or banks generally from acting as an investment advisor, transfer agent, or custodian to such an investment company or from purchasing shares of such a company as agent for and upon the order of a customer. The Advisors believe that each may perform the services for STI Classic Funds contemplated by their agreements described in this Prospectus without violation of applicable banking laws or regulations. However, future changes in legal requirements relating to the permissible activities of banks and their affiliates, as well as future interpretations of present requirements, could prevent the Advisors from continuing to perform services for STI Classic Funds. If the Advisors were prohibited from providing services to STI Classic Funds, the Board of Trustees would consider selecting other qualified firms. Any new investment advisory agreements would be subject to Shareholder approval. If current restrictions preventing a bank or its affiliates from legally sponsoring, organizing, controlling, or distributing shares of an investment company were relaxed, the Advisors, or their affiliates, would consider the possibility of offering to perform additional services for STI Classic Funds. It is not possible, of course, to predict whether or in what form such legislation might be enacted or the terms upon which the Advisors, or such affiliates, might offer to provide such services. In addition, state securities laws on this issue may differ from the interpretations of federal law expressed herein and banks and financial institutions may be required to register as dealers pursuant to state law. DISTRIBUTION SEI Financial Services Company (the "Distributor"), a wholly-owned subsidiary of SEI Corporation ("SEI"), and the Trust, are parties to a Distribution Agreement ("Distribution Agreement") dated May 29, 1992. The Investor Shares of each Fund have a distribution plan ("Investor Plan"). The Distribution Agreement and the Investor Plan provide that the Investor Shares of the Funds may pay a distribution services fee to the Distributor of up to .68% of the daily net assets of the Capital Growth Fund, .33% of the average daily net assets of the Value Income Stock Fund, .43% of the average daily net assets of the Aggressive Growth and Sunbelt Equity Funds, .28% of the average daily net assets of the Balanced Fund and .38% of the average daily net assets of the International Equity Index Fund. The Distributor will waive all or a portion of the distribution fee in order to limit the net expenses of the Investor Shares to the amounts set forth under "Expense Summary." The Distributor may apply this fee toward: (a) compensation for its services in connection with distribution assistance or provision of shareholder services; or (b) payments to financial institutions and intermediaries such as banks (including 23 SunTrust Banks, Inc.'s affiliate banks), savings and loan associations, insurance companies, and investment counselors, broker-dealers, and the Distributor's affiliates and subsidiaries as compensation for services, reimbursement of expenses incurred in connection with distribution assistance, or provision of Shareholder services. The Investor Plan is characterized as a compensation plan since the distribution fee will be paid to the Distributor without regard to the distribution or shareholder service expenses incurred by the Distributor or the amount of payments made to financial institutions and intermediaries. SunTrust Banks, Inc.'s affiliate banks and certain correspondent banks may serve as shareholder servicing agents to the Trust. A prospective investor may visit any one of the Investment Services offices of the SunTrust Banks, Inc.'s affiliate banks, as listed on the last pages of the Prospectus, SunTrust Securities, Inc. or certain correspondent banks of SunTrust Banks, Inc. to receive copies of the Prospectuses for the Investor Shares of the Trust and application forms. Trust Shares of each Fund are offered without a sales charge or a distribution fee primarily to institutional investors, including affiliates and correspondents for the investment of funds in which they act in a fiduciary, agency, investment advisory or custodial capacity. It is possible that a financial institution may offer different classes of shares to its customers and thus receive different compensation with respect to different classes of shares. Each Fund may execute brokerage or other agency transactions through the Distributor, for which the Distributor receives compensation. ADMINISTRATION SEI Financial Management Corporation (the "Administrator"), a wholly-owned subsidiary of SEI, and the Trust are parties to an Administration Agreement (the "Administration Agreement"). Under the terms of the Administration Agreement, the Administrator provides the Trust with certain administrative services, other than investment advisory services, including regulatory reporting, all necessary office space, equipment, personnel, and facilities. The Administrator is entitled to a fee, which is calculated daily and paid monthly, at an annual rate as follows:
AVERAGE AGGREGATE NET ASSETS FEE - -------------------------------------------- --------- $1 - $1 billion .10% over $1 billion to $5 billion .07% over $5 billion to $8 billion .05% over $8 billion to $10 billion .045% over $10 billion .04%
From time to time, the Administrator may waive (either voluntarily or pursuant to applicable state limitations) all or a portion of the administration fee payable with respect to the Trust. TRANSFER AGENT AND DIVIDEND DISBURSING AGENT Federated Services Company, Pittsburgh, PA is the Transfer Agent for the shares of the Trust and dividend disbursing agent for the Trust. CUSTODIAN SunTrust Bank, Atlanta, c/o STI Trust & Investment Operations, Inc., 303 Peachtree Street N.E., 14th Floor, Atlanta, GA 30308 serves as Custodian of the assets of each Fund of the Trust with the exception of the International Equity Index Fund. The Bank of California, 475 Sansome Street, Suite 1200, San Francisco, CA 94111, serves as Custodian for 24 the International Equity Index Fund. The Custodians hold cash, securities and other assets of the Trust as required by the Investment Company Act of 1940. LEGAL COUNSEL Morgan, Lewis & Bockius LLP, Philadelphia, PA, serves as legal counsel to the Trust. INDEPENDENT PUBLIC ACCOUNTANTS The independent public accountants to the Trust are Arthur Andersen, LLP, Philadelphia, PA. OTHER INFORMATION VOTING RIGHTS Each share held entitles the Shareholder of record to one vote. Each Fund or class of a Fund will vote separately on matters relating solely to that Fund or class. As a Massachusetts business trust, the Trust is not required to hold annual meetings of Shareholders but approval will be sought for certain changes in the operation of the Trust and for the election of Trustees under certain circumstances. In addition, a Trustee may be removed by the remaining Trustees or by Shareholders at a special meeting called upon written request of Shareholders owning at least 10% of the outstanding shares of the Trust. In the event that such a meeting is requested the Trust will provide appropriate assistance and information to the Shareholders requesting the meeting. REPORTING The Trust issues unaudited financial information semi-annually and audited financial statements annually. The Trust furnishes proxy statements and other reports to Shareholders of record. SHAREHOLDER INQUIRIES Shareholders may contact the Transfer Agent in order to obtain information on account statements, procedures and other related information by calling 1-800-428-6970. DESCRIPTION OF PERMITTED INVESTMENTS The following is a description of the permitted investments for the Funds. Further discussion is contained in the Statement of Additional Information. AMERICAN DEPOSITARY RECEIPTS ("ADRs") -- ADRs are securities, typically issued by a U.S. financial institution (a "depositary"), that evidence ownership interests in a security or a pool of securities issued by a foreign issuer and deposited with the depositary. ADRs may be available through "sponsored" or "unsponsored" facilities. A sponsored facility is established jointly by the issuer of the security underlying the receipt and a depositary, whereas an unsponsored facility may be established by a depositary without participation by the issuer of the underlying security. Holders of unsponsored depositary receipts generally bear all the costs of the unsponsored facility. The depositary of an unsponsored facility frequently is under no obligation to distribute shareholder communications received from the issuer of the deposited security or to pass through, to the holders of the receipts, voting rights with respect to the deposited securities. ASSET-BACKED SECURITIES -- Asset-backed securities are securities secured by non-mortgage assets such as company receivables, truck and auto loans, leases and credit card receivables. Such securities are generally issued as pass-through certificates, which represent undivided fractional ownership interests in 25 the underlying pools of assets. Such securities also may be debt instruments, which are also known as collateralized obligations and are generally issued as the debt of a special purpose entity, such as a trust, organized solely for the purpose of owning such assets and issuing such debt. Asset-backed securities are not issued or guaranteed by the U.S. Government or its agencies or instrumentalities; however, the payment of principal and interest on such obligations may be guaranteed up to certain amounts and for a certain period by a letter of credit issued by a financial institution (such as a bank or insurance company) unaffiliated with the issuers of such securities. The purchase of asset-backed securities raises risk considerations peculiar to the financing of the instruments underlying such securities. For example, there is a risk that another party could acquire an interest in the obligations superior to that of the holders of the asset-backed securities. There also is the possibility that recoveries on repossessed collateral may not, in some cases, be available to support payments on those securities. Asset-backed securities entail prepayment risk, which may vary depending on the type of asset, but is generally less than the prepayment risk associated with mortgage-backed securities. In addition, credit card receivables are unsecured obligations of the card holder. The market for asset-backed securities is at a relatively early stage of development. Accordingly, there may be a limited secondary market for such securities. BANKERS' ACCEPTANCES -- Bankers' acceptances are bills of exchange or time drafts drawn on and accepted by a commercial bank. Bankers' acceptances are used by corporations to finance the shipment and storage of goods. Maturities are generally six months or less. CERTIFICATES OF DEPOSIT -- Certificates of deposit are interest bearing instruments with a specific maturity. They are issued by banks and savings and loan institutions in exchange for the deposit of funds and normally can be traded in the secondary market prior to maturity. Certificates of deposit with penalties for early withdrawal will be considered illiquid. COMMERCIAL PAPER -- Commercial paper is a term used to describe unsecured short-term promissory notes issued by banks, municipalities, corporations and other entities. Maturities on these issues vary from a few to 270 days. CONVERTIBLE SECURITIES -- Convertible securities are corporate securities that are exchangeable for a set number of another security at a prestated price. Convertible securities typically have characteristics similar to both fixed income and equity securities. Because of the conversion feature, the market value of a convertible security tends to move with the market value of the underlying stock. The value of a convertible security is also affected by prevailing interest rates, the credit quality of the issuer, and any call provisions. CORPORATE DEBT OBLIGATIONS -- Corporate debt obligations are debt instruments issued by corporations with maturities exceeding 270 days. Such instruments may include putable corporate bonds and zero coupon bonds. CUSTODIAL RECEIPTS -- Custodial receipts are interests in separately traded interest and principal component parts of U. S. Treasury obligations that are issued by banks or brokerage firms and are created by depositing U. S. Treasury obligations into a special account at custodian bank. The custodian holds the interest and principal payments for the benefit of the registered owners of the certificates or receipts. The custodian arranges for the issuance of the certificates or receipts evidencing 26 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. See "Zero Coupon Obligations." DERIVATIVES -- Derivatives are securities whose value is derived from an underlying contract, index or security, or any combination thereof. This includes: futures, swap agreements, and some mortgage-back securities (CMOs, REMICs, IOs and POs). See elsewhere in this "Description of Permitted Investments" for discussions of these various instruments, and see "Investment Policies and Strategies" for more information about any investment policies and limitations applicable to their use. EUROPEAN DEPOSITARY RECEIPTS ("EDRs") -- EDRs are securities, typically issued by a non-U.S. financial institution, that evidence ownership interests in a security or a pool of securities issued by either a U.S. or foreign issuer. EDRs may be available for investment through "sponsored" or "unsponsored" facilities. See "ADRs." FORWARD FOREIGN CURRENCY CONTRACTS -- A forward foreign currency contract involves an obligation to purchase or sell a specific currency amount at a future date, agreed upon by the parties, at a price set at the time of the contract. A Fund may also enter into a contract to sell, for a fixed amount of U.S. dollars or other appropriate currency, the amount of foreign currency approximating the value of some or all of the Fund's securities denominated in such foreign currency. At the maturity of a forward contract, the Fund may either sell a portfolio security and make delivery of the foreign currency, or it may retain the security and terminate its contractual obligation to deliver the foreign currency by purchasing an "offsetting" contract with the same currency trader, obligating it to purchase, on the same maturity date, the same amount of the foreign currency. The Fund may realize a gain or loss from currency transactions. FUTURES CONTRACTS AND OPTIONS ON FUTURES CONTRACTS -- Futures contracts provide for the future sale by one party and purchase by another party of a specified amount of a specific security at a specified future time and at a specified price. An option on a futures contract gives the purchaser the right, in exchange for a premium, to assume a position in a futures contract at a specified exercise price during the term of the option. A Fund may use futures contracts and related options for bona fide hedging purposes, to offset changes in the value of securities held or expected to be acquired, to minimize fluctuations in foreign currencies, or to gain exposure to a particular market or instrument. A Fund will minimize the risk that it will be unable to close out a futures contract by only entering into futures contracts which are traded on national futures exchanges. Stock index futures are futures contracts for various stock indices that are traded on registered securities exchanges. A stock index futures contract obligates the seller to deliver (and the purchaser to take) an amount of cash equal to a specific dollar amount times the difference between the value of a specific stock index at the close of the last trading day of the contract and the price at which the agreement is made. There are risks associated with these activities, including the following: (1) the success of a hedging strategy may depend on an ability to predict movements in the prices of individual securities, fluctuations in markets and movements in interest rates, (2) there may be an imperfect or no correlation between the 27 changes in market value of the securities held by the Fund and the prices of futures and options on futures, (3) there may not be a liquid secondary market for a futures contract or option, (4) trading restrictions or limitations may be imposed by an exchange, and (5) government regulations may restrict trading in futures contracts and futures options. ILLIQUID SECURITIES -- Illiquid securities are securities that cannot be disposed of within seven business days at approximately the price at which they are being carried on the Fund's books. An illiquid security includes a demand instrument with a demand notice period exceeding seven days, where there is no secondary market for such security, and repurchase agreements with durations (or maturities) over seven days in length. MEDIUM TERM NOTES -- Medium term notes are periodically or continuously offered corporate or agency debt that differs from traditionally underwritten corporate bonds only in the process by which they are issued. MORTGAGE-BACKED SECURITIES -- Mortgage-backed securities are instruments that entitle the holder to a share of all interest and principal payments from mortgages underlying the security. The mortgages backing these securities include conventional thirty-year fixed rate mortgages, graduated payment mortgages, and adjustable rate mortgages. During periods of declining interest rates, prepayment of mortgages underlying mortgage-backed securities can be expected to accelerate. Prepayment of mortgages which underlie securities purchased at a premium often results in capital losses, while prepayment of mortgages purchased at a discount often results in capital gains. Because of these unpredictable prepayment characteristics, it is often not possible to predict accurately the average life or realized yield of a particular issue. GOVERNMENT PASS-THROUGH SECURITIES: These are securities that are issued or guaranteed by a U.S. Government agency representing an interest in a pool of mortgage loans. The primary issuers or guarantors of these mortgage-backed securities are GNMA, FNMA and FHLMC. FNMA and FHLMC obligations are not backed by the full faith and credit of the U.S. Government as GNMA certificates are, but FNMA and FHLMC securities are supported by the instrumentalities' right to borrow from the U.S. Treasury. GNMA, FNMA and FHLMC each guarantees timely distributions of interest to certificate holders. GNMA and FNMA also each guarantees timely distributions of scheduled principal. FHLMC has in the past guaranteed only the ultimate collection of principal of the underlying mortgage loan; however, FHLMC now issues mortgage-backed securities (FHLMC Gold PCs) which also guarantee timely payment of monthly principal reductions. Government and private guarantees do not extend to the securities' value, which is likely to vary inversely with fluctuations in interest rates. PRIVATE PASS-THROUGH SECURITIES: These are mortgage-backed securities issued by a non-governmental entity, such as a trust. These securities include collateralized mortgage obligations ("CMOs") and real estate mortgage investment conduits ("REMICs") that are rated in one of the top two rating categories. While they are generally structured with one or more types of credit enhancement, private pass-through securities typically lack a guarantee by an entity having the credit status of a governmental agency or instrumentality. COLLATERALIZED MORTGAGE OBLIGATIONS ("CMOS"): CMOs are debt obligations or multiclass pass-through certificates issued by agencies or instrumentalities of the U.S. Government or by private originators or investors in mortgage loans. In a CMO, series of bonds or certificates are usually issued in multiple classes. Principal 28 and interest paid on the underlying mortgage assets may be allocated among the several classes of a series of a CMO in a variety of ways. Each class of a CMO, often referred to as a "tranche," is issued with a specific fixed or floating coupon rate and has a stated maturity or final distribution date. Principal payments on the underlying mortgage assets may cause CMOs to be retired substantially earlier then their stated maturities or final distribution dates, resulting in a loss of all or part of any premium paid. REMICS: A REMIC is a CMO that qualifies for special tax treatment under the Internal Revenue Code and invests in certain mortgages principally secured by interests in real property. Investors may purchase beneficial interests in REMICs, which are known as "regular" interests, or "residual" interests. Guaranteed REMIC pass-through certificates ("REMIC Certificates") issued by FNMA or FHLMC represent beneficial ownership interests in a REMIC trust consisting principally of mortgage loans or FNMA, FHLMC or GNMA-guaranteed mortgage pass-through certificates. For FHLMC REMIC Certificates, FHLMC guarantees the timely payment of interest, and also guarantees the payment of principal as payments are required to be made on the underlying mortgage participation certificates. FNMA REMIC Certificates are issued and guaranteed as to timely distribution of principal and interest by FNMA. STRIPPED MORTGAGE-BACKED SECURITIES ("SMBS"): SMBs are usually structured with two classes that receive specified proportions of the monthly interest and principal payments from a pool of mortgage securities. One class may receive all of the interest payments and is thus termed an interest-only class ("IO"), while the other class may receive all of the principal payments and is thus termed the principal-only class ("PO"). The value of IOs tends to increase as rates rise and decrease as rates fall; the opposite is true of POs. SMBs are extremely sensitive to changes in interest rates because of the impact thereon of prepayment of principal on the underlying mortgage securities. The market for SMBs is not as fully developed as other markets; SMBs therefore may be illiquid. OBLIGATIONS OF SUPRANATIONAL ENTITIES -- Supranational entities are entities established through the joint participation of several governments, and include the Asian Development Bank, the Inter-American Development Bank, International Bank for Reconstruction and Development (World Bank), African Development Bank, European Economic Community, European Investment Bank and the Nordic Investment Bank. OPTIONS ON CURRENCIES -- The International Equity Index Fund may purchase and write put and call options on foreign currencies (traded on U.S. and foreign exchanges or over-the-counter markets) to manage the portfolio's exposure to changes in dollar exchange rates. Call options on foreign currency written by the Fund will be "covered," which means that the Fund will own an equal amount of the underlying foreign currency. With respect to put options on foreign currency written by the Fund, the Fund will establish a segregated account with its custodian bank consisting of cash, U.S. Government securities or other high grade liquid debt securities in an amount equal to the amount the Fund would be required to pay upon exercise of the put. PAY-IN-KIND SECURITIES -- Pay-in-kind securities are bonds or preferred stock that pay interest or dividends in the form of additional bonds or preferred stock. REPURCHASE AGREEMENTS -- Repurchase agreements are agreements by which a Fund obtains a security and simultaneously commits to return the security to the seller at an agreed 29 upon price on an agreed upon date within a number of days from the date of purchase. The custodian will hold the security as collateral for the repurchase agreement. A Fund bears a risk of loss in the event the other party defaults on its obligations and the Fund is delayed or prevented from exercising its right to dispose of the collateral or if the Fund realizes a loss on the sale of the collateral. A Fund will enter into repurchase agreements only with financial institutions deemed to present minimal risk of bankruptcy during the term of the agreement based on established guidelines. Repurchase agreements are considered loans under the Investment Company Act of 1940. RESTRICTED SECURITIES -- Restricted securities are securities that may not be sold freely to the public absent registration under the Securities Act of 1933 or an exemption from registration. Rule 144A securities are securities that have not been registered under the Securities Act of 1933, but which may be traded between certain institutional investors, including investment companies. The Trust's Board of Trustees is responsible for developing guidelines and procedures for determining the liquidity of restricted securities and monitoring the Advisors' implementation of the guidelines and procedures. SECURITIES LENDING -- In order to generate additional income, a Fund may lend securities which it owns pursuant to agreements requiring that the loan be continuously secured by collateral consisting of cash, securities of the U.S. Government or its agencies equal to at least 100% of the market value of the securities lent. A Fund continues to receive interest on the securities lent while simultaneously earning interest on the investment of cash collateral. Collateral is marked to market daily. There may be risks of delay in recovery of the securities or even loss of rights in the collateral should the borrower of the securities fail financially or become insolvent. STANDBY COMMITMENTS AND PUTS -- Securities subject to standby commitments or puts permit the holder thereof to sell the securities at a fixed price prior to maturity. Securities subject to a standby commitment or put may be sold at any time at the current market price. However, unless the standby commitment or put was an integral part of the security as originally issued, it may not be marketable or assignable; therefore, the standby commitment or put would only have value to the Fund owning the security to which it relates. In certain cases, a premium may be paid for a standby commitment or put, which premium will have the effect of reducing the yield otherwise payable on the underlying security. The Fund will limit standby commitment or put transactions to institutions believed to present minimal credit risk. SWAPS, CAPS, FLOORS and COLLARS -- Interest rate swaps, mortgage swaps, currency swaps and other types of swap agreements such as caps, floors and collars are designed to permit the purchaser to preserve a return or spread on a particular investment or portion of its portfolio, and to protect against any increase in the price of securities the Fund anticipates purchasing at a later date. In a typical interest rate swap, one party agrees to make regular payments equal to a floating interest rate times a "notional principal amount," in return for payments equal to a fixed rate times the same amount, for a specific period of time. If a swap agreement provides for payment in different currencies, the parties might agree to exchange the notional principal amount as well. Swaps may also depend on other prices or rates, such as the value of an index or mortgage prepayment rates. 30 In a typical cap or floor agreement, one party agrees to make payments only under specified circumstances, usually in return for payment of a fee by the other party. For example, the buyer of an interest rate cap obtains the right to receive payments to the extent that a specific interest rate exceeds an agreed-upon level, while the seller of an interest rate floor is obligated to make payments to the extent that a specified interest rate falls below an agreed-upon level. An interest rate collar combines elements of buying a cap and selling a floor. Swap agreements are sophisticated hedging instruments that typically involve a small investment of cash relative to the magnitude of risk assumed. As a result, swaps can be highly volatile and have a considerable impact on the Fund's performance. Swap agreements are subject to risks related to the counterparty's ability to perform, and may decline in value if the counterparty's creditworthiness deteriorates. The Fund may also suffer losses if it is unable to terminate outstanding swap agreements or reduce its exposure through offsetting transactions. Any obligation the Fund may have under these types of arrangements will be covered by setting aside liquid high grade securities in a segregated account. The Fund will enter into swaps only with counterparties believed to be creditworthy. TIME DEPOSITS -- Time deposits are non-negotiable receipts issued by a bank in exchange for the deposit of funds. Like a certificate of deposit, it earns a specified rate of interest over a definite period of time; however, it cannot be traded in the secondary market. Time deposits are considered to be illiquid securities. U.S. GOVERNMENT AGENCIES -- Obligations issued or guaranteed by agencies of the U.S. Government, including, among others, the Federal Farm Credit Bank, the Federal Housing Administration and the Small Business Administration, and obligations issued or guaranteed by instrumentalities of the U.S. Government, including, among others, the Federal Home Loan Mortgage Corporation, the Federal Land Banks and the U.S. Postal Service. Some of these securities are supported by the full faith and credit of the U.S. Treasury (e.g., Government National Mortgage Association), others are supported by the right of the issuer to borrow from the Treasury (e.g., Federal Farm Credit Bank), while still others are supported only by the credit of the instrumentality (e.g., Federal National Mortgage Association). Guarantees of principal by agencies or instrumentalities of the U.S. Government may be a guarantee of payment at the maturity of the obligation so that in the event of a default prior to maturity there might not be a market and thus no means of realizing on the obligation prior to maturity. Guarantees as to the timely payment of principal and interest do not extend to the value or yield of these securities nor to the value of the Fund's shares. U.S. TREASURY OBLIGATIONS -- U.S. Treasury obligations consist of bills, notes and bonds issued by the U.S. Treasury and separately traded interest and principal component parts of such obligations that are transferable through the Federal book-entry system known as Separately Traded Registered Interest and Principal Securities ("STRIPS"). VARIABLE AND FLOATING RATE INSTRUMENTS -- Certain obligations may carry variable or floating rates of interest, and may involve a conditional or unconditional demand feature. Such instruments bear interest at rates which are not fixed, but which vary with changes in specified market rates or indices. The interest rates on these securities may be reset daily, weekly, quarterly or some other reset period, and may have a floor or ceiling on interest rate changes. There is a risk that the current interest 31 rate on such obligations may not accurately reflect existing market interest rates. A demand instrument with a demand notice exceeding seven days may be considered illiquid if there is no secondary market for such security. WARRANTS -- Warrants are instruments giving holders the right, but not the obligation, to buy shares of a company at a given price during a specified period. WHEN-ISSUED AND DELAYED DELIVERY SECURITIES -- When-issued or delayed delivery basis transactions involve the purchase of an instrument with payment and delivery taking place in the future. Delivery of and payment for these securities may occur a month or more after the date of the purchase commitment. The Fund will segregate liquid high grade debt securities or cash in an amount at least equal to these commitments. The interest rate realized on these securities is fixed as of the purchase date and no interest accrues to the Fund before settlement. These securities are subject to market fluctuation due to changes in market interest rates and it is possible that the market value at the time of settlement could be higher or lower than the purchase price if the general level of interest rates has changed. Although a Fund generally purchases securities on a when-issued or forward commitment basis with the intention of actually acquiring securities for its portfolio, a Fund may dispose of a when- issued security or forward commitment prior to settlement if it deems appropriate. ZERO COUPON OBLIGATIONS -- Zero coupon obligations are debt securities that do not bear any interest, but instead are issued at a deep discount from par. The value of a zero coupon obligation increases over time to reflect the interest accreted. Such obligations will not result in the payment of interest until maturity, and will have greater price volatility than similar securities that are issued at par and pay interest periodically. A-1 APPENDIX I. BOND RATINGS *CORPORATE BONDS The following are descriptions of Standard & Poor's Corporation ("S&P")and Moody's Investors Service, Inc. ("Moody's") corporate bond ratings. Bonds rated AAA have the highest rating S&P assigns to a debt obligation. Such a rating indicates an extremely strong capacity to pay principal and interest. Bonds rated AA also qualify as high-quality debt obligations. Capacity to pay principal and interest is very strong, and in the majority of instances they differ from AAA issues only in small degree. Debt rated A has a strong capacity to pay interest and repay principal although it is somewhat more susceptible to the adverse effects of changes in circumstances and economic conditions than debt in higher rated categories. Bonds which are rated BBB are considered to be medium-grade obligations (i.e., they are neither highly protected nor poorly secured). Interest payments and principal security appear adequate for the present but certain protective elements may be lacking or may be characteristically unreliable over any great length of time. Such bonds lack outstanding investment characteristics and in fact have speculative characteristics as well. Debt rated BB, B, CCC, CC and C is regarded as having predominately speculative characteristics with respect to capacity to pay interest and repay principal. BB indicates the least degree of speculation and C the highest degree of speculation. While such debt will likely have some quality and protective characteristics, these are outweighed by large uncertainties or major risk exposure to adverse conditions. Bonds which are rated Aaa by Moody's are judged to be of the best quality. They carry the smallest degree of investment risk and are generally referred to as "gilt edge." Interest payments are protected by a large, or an exceptionally stable, margin and principal is secure. While the various protective elements are likely to change, such changes as can be visualized are most unlikely to impair the fundamentally strong position of such issues. Bonds rated Aa by Moody's are judged by Moody's to be of high quality by all standards. Together with bonds rated Aaa, they comprise what are generally known as high-grade bonds. They are rated lower than the best bonds because margins of protection may not be as large as in Aaa securities or fluctuation of protective elements may be of greater amplitude or there may be other elements present which make the long-term risks appear somewhat larger than in Aaa securities. Bonds which are rated A possess many favorable investment attributes and are to be considered as upper-medium grade obligations. Factors giving security to principal and interest are considered adequate, but elements may be present which suggest a susceptibility to impairment sometime in the future. Debt rated Baa is regarded as having an adequate capacity to pay interest and repay principal. Whereas it normally exhibits adequate protection parameters, adverse economic conditions or changing circumstances are more likely to lead to a weakened capacity to pay interest and repay principal for debt in this category than in higher rated categories. Bonds which are rated Ba are judged to have speculative elements; their future cannot be considered as well-assured. Often the protection of interest and principal payments may be very moderate and thereby not well safeguarded during both good and bad times A-2 over the future. Uncertainty of position characterizes bonds in this class. Bonds which are rated B generally lack characteristics of the desirable investment. Assurance of interest and principal payments or of maintenance of other terms of the contract over any long period of time may be small. Bonds which are rated Caa are of poor standing. Such issues may be in default or there may be present elements of danger with respect to principal and interest. Bonds which are rated Ca represent obligations which are speculative in a high degree. Such issues are often in default or have other marked shortcomings. Bonds which are rated C are the lowest rated class of bonds and issues so rated can be regarded as having extremely poor prospects of ever attaining any real investment standing. II. COMMERCIAL PAPER AND SHORT-TERM RATINGS The following descriptions of commercial paper ratings have been published by S&P, Moody's, Fitch Investors Service, Inc. ("Fitch"), Duff and Phelps ("Duff") and IBCA Limited ("IBCA"), respectively. Commercial paper rated A by S&P is regarded by S&P as having the greatest capacity for timely payment. Issues rated A are further refined by use of the numbers 1+ and 1. Issues rated A-1+ are those with an "overwhelming degree" of credit protection. Those rated A-1 reflect a "very strong" degree of safety regarding timely payment. Those rated A-2 reflect a safety regarding timely payment but not as high as A-1. Commercial paper issues rated Prime-1 and Prime-2 by Moody's are judged by Moody's to have superior ability and strong ability for repayment, respectively. The rating Fitch-1 (Highest Grade) is the highest commercial rating assigned by Fitch. Paper rated Fitch-1 is regarded as having the strongest degree of assurance for timely payment. The rating Fitch-2 (Very Good Grade) is the second highest commercial paper rating assigned by Fitch which reflects an assurance of timely payment only slightly less in degree than the strongest issues. The rating Duff-1 is the highest commercial paper rating assigned by Duff. Paper rated Duff-1 is regarded as having very high certainty of timely payment with excellent liquidity factors which are supported by ample asset protection. Risk factors are minor. Paper rated Duff-2 is regarded as having good certainty of timely payment, good access to capital markets and sound liquidity factors and company fundamentals. Risk factors are small. The designation A1 by IBCA indicates that the obligation is supported by a very strong capacity for timely repayment. Those obligations rated A1+ are supported by the highest capacity for timely repayment. Obligations rated A2 are supported by a strong capacity for timely repayment, although such capacity may be susceptible to adverse changes in business, economic or financial conditions. (THIS PAGE INTENTIONALLY LEFT BLANK) (THIS PAGE INTENTIONALLY LEFT BLANK) TRUST AND INVESTMENT SERVICES OFFICES OF SUNTRUST BANKS, INC. AFFILIATE BANKS: FLORIDA: (STATEWIDE TOLL FREE) 1-800-526-1177 SUNTRUST BANK, CENTRAL FLORIDA, N.A. 200 S. Orange Avenue Tower 10 Orlando, FL 32801 (407) 237-4380 1-800-432-4760, ext. 4380 SUNTRUST BANK, SOUTH FLORIDA, N.A. 501 E. Las Olas Boulevard Ft. Lauderdale, FL 33301 (305) 765-7422 Boca Raton Office 800 S. Federal Highway Boca Raton, FL 33435 (407) 243-6707 Coral Ridge Office 2626 E. Oakland Park Blvd. Ft. Lauderdale, FL 33306 (305) 765-2155 Delray Beach Office 302 E. Atlantic Avenue Delray Beach, FL 33483 (407) 243-6750 Hollywood Office 2001 Hollywood Blvd. Hollywood, FL 33021 (305) 765-7062 Palm Beach Office 303 Royal Poinciana Plaza Palm Beach, FL 33480 (407) 835-2855 PGA Office 2570 PGA Blvd. Palm Beach Gardens, FL 33410 (407) 835-2802 SUNTRUST BANK, MIAMI, N.A. 777 Brickell Avenue Miami, FL 33131 (305) 579-7450 SUNTRUST BANK, TAMPA BAY 315 E. Madison Street Tampa, FL 33602 (813) 224-2517 SUNTRUST BANK, TREASURE COAST, N.A. 700 Virginia Avenue Ft. Pierce, FL 34982 (407) 467-6459 Osceola Office 111 E. Osceola Street Stuart, FL 34994 (407) 223-6012 SUNTRUST BANK, EAST CENTRAL FLORIDA Belnova Office 1590 S. Nova Road Daytona Beach, FL 32114 (904) 258-2660 Bill France Office 299 Bill France Blvd. Daytona Beach, FL 32114 (904) 258-2654 Deland Office 302 E. New York Avenue Deland, FL 32724 (904) 822-5891 SUNTRUST BANK, NORTH FLORIDA, N.A. 200 W. Forsyth Street Jacksonville, FL 32202 (904) 632-2534 SUNTRUST BANK, SOUTHWEST FLORIDA 12730 New Brittany Blvd. Ft. Myers, FL 33907 (813) 277-2531 Pelican Bay Office 801 Laurel Oak Drive Naples, FL 33963 (813) 598-0515 SUNTRUST BANK, GULF COAST South Gate Office 3400 S. Tamiami Trail Sarasota, FL 34230 (813) 951-3218 Port Charlotte Office 18501 Murdock Circle Port Charlotte, FL 33949 (813) 625-9286 North Beneva Office 3577 Fruitville Road Sarasota, FL 34237 (813) 951-3040 South Beneva Office 8181 S. Tamiami Trail Sarasota, FL 34231 (813) 951-3053 Venice Office 200 Nokomis Avenue South Venice, FL 34285 (813) 486-4417 SUNTRUST BANK, MID-FLORIDA, N.A. 210 Security Square Winter Haven, FL 33880 (813) 297-6855 Okeechobee Office 815 S. Parrott Avenue Okeechobee, FL 34974 (813) 763-6417 SUNTRUST BANK, NATURE COAST One East Jefferson Street Brooksville, FL 34601 (904) 754-5799 Crystal River Office 1502 SE Highway 19 Crystal River, FL 32629 (904) 795-8214 Seven Hills Office 1170 Mariner Spring Hill, FL 34609 (904) 754-5779 SUNTRUST BANK, NORTH CENTRAL FLORIDA 203 E. Silver Springs Blvd. Ocala, FL 34470 (904) 368-6477 SUNTRUST BANK, TALLAHASSEE, N.A. 3522 Thomasville Road Tallahassee, FL 32312 (904) 298-5030 SUNTRUST BANK, WEST FLORIDA 511 W. 23rd Street Panama City, FL 32405 (904) 872-6087 GEORGIA: SUNTRUST BANK, ATLANTA 55 Park Place First Floor Atlanta, GA 30303 (404) 588-7315 1-800-241-0901 Ext. 7315 SUNTRUST BANK, NORTHEAST GEORGIA, N.A. 101 N. Lumpkin Street Athens, GA 30601 (706) 354-5346 Gainesville Branch 104 Green Street Gainesville, GA 30503 (770) 503-8674 SUNTRUST BANK, NORTHWEST GEORGIA, N.A. 100 East Second Avenue Rome, GA 30161 (706) 236-4325 SUNTRUST BANK, AUGUSTA, N.A. 2815 Wrightsboro Road Augusta, GA 30909 (706) 821-2015 SUNTRUST BANK, MIDDLE GEORGIA, N.A. 606 Cherry Street Macon, GA 31208 (912) 755-5175 SUNTRUST BANK, WEST GEORGIA, N.A. 1246 First Avenue Columbus, GA 31901 (706) 649-3631 SUNTRUST BANK, SAVANNAH, N.A. 33 Ball Street Savannah, GA 31401 (912) 944-1165 SUNTRUST BANK, SOUTH GEORGIA, N.A. 410 W. Broad Avenue Albany, GA 31701 (912) 430-5468 Coffee County Branch 201 S. Peterson Avenue Douglas, GA 31533 (912) 384-1820 SUNTRUST BANK, SOUTHEAST GEORGIA, N.A. 510 Gloucester Street Brunswick, GA 31520 (912) 262-5322 Sea Island Road Branch 701 Sea Island Road St. Simons Island, GA 31522 (912) 638-3620 (912) 262-2227 TENNESSEE: SUNTRUST BANK, NASHVILLE, N.A. 424 Church Street 4th Floor Nashville, TN 37230 (615) 748-4477 1-800-932-2652 SUNTRUST BANK, CHATTANOOGA, N.A. 736 Market Street Chattanooga, TN 37402 (615) 757-3085 TN WATS 1-800-572-7306, Ext. 3085 Bordering States WATS 1-800-874-1083, Ext. 3085 SUNTRUST BANK, EAST TENNESSEE, N.A. 700 East Hill Avenue Knoxville, TN 37997 (615) 544-2181 1-800-225-0913, Ext. 2181 SUNTRUST BANK, NORTHEAST TENNESSEE 207 Mockingbird Lane Johnson City, TN 37604 (615) 461-1005 SUNTRUST BANK, SOUTH CENTRAL TENNESSEE, N.A. 25 Public Square Lawrenceburg, TN 38464 (615) 762-3511 ALABAMA: SUNTRUST BANK, ALABAMA, N.A. 201 South Court Street Florence, AL 35630 (205) 767-8463 STI CLASSIC FUNDS ORGANIZATIONAL OVERVIEW * INVESTMENT ADVISORS Trusco Capital Management, Inc. 50 Hurt Plaza Suite 1400 Atlanta, GA 30303 STI Capital Management, N.A. P.O. Box 3808 Orlando, FL 32802 * DISTRIBUTOR SEI Financial Services Company 680 E. Swedesford Road Wayne, PA 19087 * ADMINISTRATOR SEI Financial Management 680 E. Swedesford Road Corporation Wayne, PA 19087 * TRANSFER AGENT Federated Services Company Federated Investors Tower Pittsburgh, PA 15222-3779 * CUSTODIAN SunTrust Bank, Atlanta c/o STI Trust & Investment Operations, Inc. 303 Peachtree Street N.E. 14th Floor Atlanta, GA 30308 The Bank of California 475 Sansome Street (International Equity Index Fund Suite 1200 only) San Francisco, CA 94111 * LEGAL COUNSEL Morgan, Lewis & Bockius LLP 2000 One Logan Square Philadelphia, PA 19103 * INDEPENDENT PUBLIC ACCOUNTANTS Arthur Andersen, LLP 1601 Market Street Philadelphia, PA 19103
100092/10-95 DISTRIBUTOR SEI Financial Services Company ............................................................................... PROSPECTUS INVESTOR SHARES CAPITAL GROWTH FUND VALUE INCOME STOCK FUND AGGRESSIVE GROWTH FUND BALANCED FUND SUNBELT EQUITY FUND INTERNATIONAL EQUITY INDEX FUND INVESTMENT ADVISORS STI CAPITAL MANAGEMENT, N.A. TRUSCO CAPITAL MANAGEMENT, INC. OCTOBER 1, 1995 ABCD STI CLASSIC FUNDS INVESTOR SHARES INVESTMENT GRADE BOND FUND INVESTMENT GRADE TAX-EXEMPT BOND FUND U.S. GOVERNMENT SECURITIES FUND LIMITED-TERM FEDERAL MORTGAGE SECURITIES FUND SHORT-TERM BOND FUND SHORT-TERM U.S. TREASURY SECURITIES FUND FLORIDA TAX-EXEMPT BOND FUND GEORGIA TAX-EXEMPT BOND FUND TENNESSEE TAX-EXEMPT BOND FUND PRIME QUALITY MONEY MARKET FUND U.S. GOVERNMENT SECURITIES MONEY MARKET FUND TAX-EXEMPT MONEY MARKET FUND INVESTMENT ADVISORS TO THE FUNDS: TRUSCO CAPITAL MANAGEMENT, INC. STI CAPITAL MANAGEMENT, N.A. SUNTRUST BANK, CHATTANOOGA, N.A. SUNTRUST BANK, ATLANTA The STI Classic Funds (the "Trust") is a mutual fund that offers shares in a number of separate investment portfolios. This Prospectus sets forth concisely the information about the Investor Shares of the above-referenced Funds (each a "Fund" and, collectively, the "Funds"). Investors are advised to read this Prospectus and retain it for future reference. A Statement of Additional Information relating to the Funds dated the same date as this Prospectus has been filed with the Securities and Exchange Commission and is available without charge through the Distributor, SEI Financial Services Company, 680 East Swedesford Road, Wayne, PA 19087-1658 or by calling 1-800-428-6970. The Statement of Additional Information is incorporated into this Prospectus by reference. THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. AN INVESTMENT IN A MONEY MARKET FUND IS NEITHER INSURED NOR GUARANTEED BY THE U.S. GOVERNMENT. THERE CAN BE NO ASSURANCE THAT A MONEY MARKET FUND WILL BE ABLE TO MAINTAIN A STABLE NET ASSET VALUE OF $1.00 PER SHARE. THE TRUST'S SHARES ARE NOT SPONSORED, ENDORSED, OR GUARANTEED BY, AND DO NOT CONSTITUTE OBLIGATIONS OR DEPOSITS OF, THE ADVISORS OR ANY OF THEIR AFFILIATES OR CORRESPONDENTS INCLUDING SUNTRUST BANKS, INC., ARE NOT GUARANTEED OR INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION, THE FEDERAL RESERVE BOARD OR ANY OTHER GOVERNMENTAL AGENCY, AND INVOLVE INVESTMENT RISKS, INCLUDING THE POSSIBLE LOSS OF THE PRINCIPAL AMOUNT INVESTED. OCTOBER 1, 1995 2 No person has been authorized to give any information or to make any representations not contained in this Prospectus, or in the Trust's Statement of Additional Information in connection with the offering made by this Prospectus and, if given or made, such information or representations must not be relied upon as having been authorized by the Trust or SEI Financial Services Company (the "Distributor"). This Prospectus does not constitute an offering by the Trust or by the Distributor in any jurisdiction in which such offering may not lawfully be made. Throughout this Prospectus, the Investment Grade Bond Fund, Investment Grade Tax-Exempt Bond Fund, Short-Term U.S. Treasury Securities Fund, Short-Term Bond Fund, U.S. Government Securities Fund and Limited-Term Federal Mortgage Securities Fund, which invest primarily in bonds and other fixed income instruments, may be referred to as the "Bond Funds;" and the Florida Tax-Exempt Bond Fund, Georgia Tax-Exempt Bond Fund and Tennessee Tax-Exempt Bond Fund, which invest primarily in tax-exempt bonds and other fixed income instruments, may be referred to as the "State Tax-Exempt Bond Funds" and the Prime Quality Money Market Fund, U.S. Government Securities Money Market Fund and Tax-Exempt Money Market Fund may be referred to as the "Money Market Funds." TABLE OF CONTENTS Expense Summary...................... 3 Financial Highlights................. 6 The Trust............................ 8 Funds and Investment Objectives...... 8 Investment Policies and Strategies... 9 General Investment Policies and Strategies......................... 18 Investment Risks..................... 18 Investment Limitations............... 20 Performance Information.............. 21 General Performance Information...... 22 Fundlink............................. 22 Purchase of Fund Shares.............. 22 Redemption of Fund Shares............ 26 Exchanges............................ 27 Dividends and Distributions.......... 28 Tax Information...................... 29 STI Classic Funds Information........ 31 Board of Trustees.................... 31 Investment Advisors.................. 31 Portfolio Managers................... 33 Banking Laws......................... 34 Distribution......................... 34 Administration....................... 35 Transfer Agent and Dividend Disbursing Agent................... 35 Custodian............................ 36 Legal Counsel........................ 36 Independent Public Accountants....... 36 Other Information.................... 36 Voting Rights........................ 36 Reporting............................ 36 Shareholder Inquiries................ 36 Description of Permitted Investments........................ 36 Appendix............................. A-1
3 EXPENSE SUMMARY INVESTOR SHARES Below is a summary of the transaction expenses and annual operating expenses for Investor Shares of each Fund described in this Prospectus. A hypothetical example based on the estimated expenses is also shown. Actual expenses may vary. SHAREHOLDER TRANSACTION EXPENSES - ---------------------------------------------------------------------------------------------
U.S. GOVERNMENT SECURITIES, INVESTMENT GRADE BOND, INVESTMENT GRADE LIMITED-TERM SHORT-TERM TAX-EXEMPT BOND FEDERAL U.S. AND STATE MORTGAGE TREASURY TAX-EXEMPT BOND SECURITIES SHORT-TERM SECURITIES FUNDS FUND BOND FUND FUND - --------------------------------------------------------------------------------------------- Maximum Sales Charge Imposed on Purchases (as a percentage of offering price).................. 3.75% 2.50% 2.00% 1.00% Maximum Sales Charge Imposed on Reinvested Dividends............. None None None None Deferred Sales Charge............. None None None None Redemption Fees(1)................ None None None None Exchange Fee...................... None None None None - --------------------------------------------------------------------------------------------- - ---------------------------------------------------------------------------------------------
(1) There is a $7.00 wire charge for redemptions for all funds processed from retail accounts which require wires to particular banks. 4 ANNUAL OPERATING EXPENSES (as a percentage of average net assets)
INVESTMENT GRADE LIMITED-TERM INVESTMENT GRADE TAX- EXEMPT BOND U.S. GOVERNMENT FEDERAL MORTGAGE SHORT-TERM BOND BOND FUND FUND SECURITIES FUND SECURITIES FUND FUND - ------------------------------------------------------------------------------------------------------------------------------- Advisory Fees (After Voluntary Reductions)(1).............. .62 % .61 % 0 % .33 % .42 % All Other Expenses (After Voluntary Reductions)(1).... .37 % .29 % 1.15 % .57 % .36 % 12b-1 Service & Distribution Expenses (After Voluntary Reductions)(1).............. .16 % .25 % 0 % 0 % .07 % - ------------------------------------------------------------------------------------------------------------------------------- Total Operating Expenses (After Voluntary Reductions)(1).............. 1.15 % 1.15 % 1.15 % .90 % .85 % - ------------------------------------------------------------------------------------------------------------------------------- - ------------------------------------------------------------------------------------------------------------------------------- SHORT-TERM U.S. TREASURY SECURITIES FUND - ------------------------------ Advisory Fees (After Voluntary Reductions)(1).............. .19 % All Other Expenses (After Voluntary Reductions)(1).... .52 % 12b-1 Service & Distribution Expenses (After Voluntary Reductions)(1).............. .09 % - ------------------------------ Total Operating Expenses (After Voluntary Reductions)(1).............. .80 % - ------------------------------ - ------------------------------
(1) Absent voluntary reductions and reimbursements by the Advisor and Administrator, advisory fees, other expenses, service and distribution expenses, and total operating expenses expressed as a percentage of average net assets, respectively, for the Investor Shares of each Fund would be: Investment Grade Bond Fund -- .74%, .37%, .43% and 1.54%; Investment Grade Tax Exempt Bond Fund -- .74%, .29%, .43% and 1.46%; US Government Securities Fund -- .74%, 5.72%, .38% and 6.84%; Limited-Term Federal Mortgage Securities Fund -- .65%, 6.86%, .23% and 7.74%; Short-Term Bond Fund -- .65%, .68%, .23% and 1.56%; and Short-Term US Treasury Securities Fund -- .65%, .52%, .18% and 1.35%. Fee reductions are voluntary and may be terminated at any time. Additional information may be found under "Investment Advisors," "Administration" and "Distribution." A person that purchases shares through an account with a financial institution may be charged separate fees by the financial institution.
LIMITED-TERM INVESTMENT INVESTMENT GRADE FEDERAL GRADE BOND TAX- EXEMPT BOND U.S. GOVERNMENT MORTGAGE SHORT-TERM BOND EXAMPLE FUND FUND SECURITIES FUND SECURITIES FUND FUND - ------------------------------------------------------------------------------------------------------------------------- An investor would pay the following expenses on a $1,000 investment assuming: (1) 5% annual return and (2) redemption at the end of each time period: One year.................. $ 49 $ 49 $ 49 $ 34 $ 29 Three Years............... 73 73 73 53 47 Five Years................ 98 98 98 74 66 Ten Years................. 172 172 172 133 123 - ------------------------------------------------------------------------------------------------------------------------- - ------------------------------------------------------------------------------------------------------------------------- SHORT-TERM U.S. TREASURY SECURITIES EXAMPLE FUND - ------------------------------ An investor would pay the following expenses on a $1,000 investment assuming: (1) 5% annual return and (2) redemption at the end of each time period: One year.................. $ 18 Three Years............... 35 Five Years................ 54 Ten Years................. 108 - ------------------------------ - ------------------------------
THE EXAMPLE IS BASED UPON THE TOTAL OPERATING EXPENSES OF A FUND AND SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE EXPENSES. ACTUAL EXPENSES MAY BE GREATER OR LESS THAN THOSE SHOWN. The purpose of this table is to assist the investor in understanding the various costs and expenses that may be directly or indirectly borne by investors in the Trust. The information set forth in the foregoing table and example relates only to Investor Shares. The Trust also offers Trust Shares of each Fund which are subject to the same expenses except there are no distribution fees, different transfer agent fees or sales charges and Flex Shares of each Fund which are subject to the same expenses except for different distribution, sales charges, service and transfer agent fees. The rules of the Securities and Exchange Commission require that the maximum sales charge be reflected in the above table. However, certain investors may qualify for reduced sales charges. See "Purchase of Fund Shares." Long-term Investor Class Shareholders may eventually pay more than the economic equivalent of the maximum front-end sales charges otherwise permitted by the National Association of Securities Dealers, Inc.'s Rules of Fair Practice. 5 ANNUAL OPERATING EXPENSES (as a percentage of average net assets)
TENNESSEE PRIME QUALITY U.S. GOVERNMENT FLORIDA TAX- EXEMPT GEORGIA TAX- EXEMPT TAX-EXEMPT BOND MONEY MARKET SECURITIES MONEY BOND FUND BOND FUND FUND FUND MARKET FUND - -------------------------------------------------------------------------------------------------------------------------------- Advisory Fees (After Voluntary Reductions)(1).......... .08 % .27 % 0 % .50 % .50 % All Other Expenses (After Voluntary Reductions)(1).......... .74 % .53 % .70 % .12 % .21 % 12b-1 Service & Distribution Expenses (After Voluntary Reductions)(1).......... .03 % .05 % .15 % .13 % .04 % - -------------------------------------------------------------------------------------------------------------------------------- Total Operating Expenses (After Voluntary Reductions)(1).......... .85 % .85 % .85 % .75 % .75 % - -------------------------------------------------------------------------------------------------------------------------------- - -------------------------------------------------------------------------------------------------------------------------------- TAX-EXEMPT MONEY MARKET FUND - -------------------------- Advisory Fees (After Voluntary Reductions)(1).......... .46 % All Other Expenses (After Voluntary Reductions)(1).......... .20 % 12b-1 Service & Distribution Expenses (After Voluntary Reductions)(1).......... .06 % - -------------------------- Total Operating Expenses (After Voluntary Reductions)(1).......... .72 % - -------------------------- - --------------------------
(1) Absent voluntary reductions and reimbursements by the Advisor and Administrator, advisory fees, other expenses, and total operating expenses expressed as a percentage of average net assets, respectively, for the Trust Shares of each Fund would be: Florida Tax-Exempt Bond Fund -- .65%, .70%, .18% and 1.53%; Georgia Tax Exempt Bond Fund -- .65%, .60%, .18% and 1.43%; Tennessee Tax-Exempt Bond Fund --.65%, 1.27%, .18% and 2.10%; Prime Qualifty Money Market Fund -- .65%, .40%, .20% and 1.01%; US Government Securities Money Market Fund -- .65%, .21%, .17% and 1.03%, and Tax-Exempt Money Market Fund -- .55%, .20%, .15% and .90%. Total operating expenses for the Tax-Exempt Money Market Fund have been restated to reflect current expenses. Fee reductions are voluntary and may be terminated at anytime. Additional information may be found under "Investment Advisors," "Administration," and "Distribution." A person that purchases shares through an account with a financial institution may be charged separate fees by the financial institution.
U.S. GOVERNMENT TENNESSEE PRIME QUALITY SECURITIES FLORIDA TAX- GEORGIA TAX- TAX-EXEMPT BOND MONEY MARKET MONEY MARKET EXAMPLE EXEMPT BOND FUND EXEMPT BOND FUND FUND FUND FUND - ----------------------------------------------------------------------------------------------------------------------------- An investor would pay the following expenses on a $1,000 investment assuming: (1) 5% annual return and (2) redemption at the end of each time period: One year.............. $ 46 $ 46 $ 46 $ 8 $ 8 Three Years........... 64 64 64 24 24 Five Years............ 83 83 83 42 42 Ten Years............. 138 138 138 93 93 - ----------------------------------------------------------------------------------------------------------------------------- - ----------------------------------------------------------------------------------------------------------------------------- TAX-EXEMPT MONEY MARKET EXAMPLE FUND - -------------------------- An investor would pay the following expenses on a $1,000 investment assuming: (1) 5% annual return and (2) redemption at the end of each time period: One year.............. $ 7 Three Years........... 23 Five Years............ 40 Ten Years............. 89 - -------------------------- - --------------------------
THE EXAMPLE IS BASED UPON THE TOTAL OPERATING EXPENSES OF A FUND AND SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE EXPENSES. ACTUAL EXPENSES MAY BE GREATER OR LESS THAN THOSE SHOWN. The purpose of this table is to assist the investor in understanding the various costs and expenses that may be directly or indirectly borne by investors in the Trust. The information set forth in the foregoing table and example relates only to Investor Shares. The Trust also offers Trust Shares of each Fund of the non-money market funds which are subject to the same expenses except there are no distribution fees, different transfer agent fees or sales charges and Flex Shares of each Fund which are subject to the same expenses except for different distribution, sales charge, service and transfer agent fees. The rules of the Securities and Exchange Commission require that the maximum sales charge be reflected in the above table. However, certain investors may qualify for reduced sales charges. See "Purchase of Fund Shares." Long-term Investor Class Shareholders may eventually pay more than the economic equivalent of the maximum front-end sales charges otherwise permitted by the National Association of Securities Dealers, Inc.'s Rules of Fair Practice. 6 FINANCIAL HIGHLIGHTS The following information has been audited by Arthur Andersen, LLP, the Trust's independent public accountants, as indicated in their report dated July 20, 1995 on the Trust's financial statements as of May 31, 1995 included in the Trust's Statement of Additional Information under "Financial Information." This table should be read in conjunction with the Trust's financial statements and notes thereto. Additional performance information regarding each Fund is contained in the Trust's Annual Report to Shareholders and is available without charge by calling 1-800-428-6970. For an Investor Share Outstanding Throughout the Period
NET REALIZED AND NET ASSET UNREALIZED DISTRIBUTIONS VALUE NET GAINS FROM NET DISTRIBUTIONS BEGINNING INVESTMENT (LOSSES) ON INVESTMENT FROM REALIZED OF PERIOD INCOME INVESTMENTS INCOME CAPITAL GAINS --------- ---------- ------------ -------------- ------------- - ----------------------------- INVESTMENT GRADE BOND FUND - ----------------------------- INVESTOR SHARES 1995........................ $ 9.89 $0.57 $ 0.38 $ (0.58) -- 1994........................ 10.44 0.46 (0.35) (0.46) $ (0.20) 1993 (1).................... 10.00 0.44 0.44 (0.44) -- - ------------------------------------------ INVESTMENT GRADE TAX-EXEMPT BOND FUND - ------------------------------------------ INVESTOR SHARES 1995........................ $10.69 $0.42 $ 0.61 $ (0.42) -- 1994........................ 10.79 0.33 0.25 (0.33) $ (0.35) 1993 (2).................... 10.00 0.35 0.82 (0.35) (0.03) - --------------------------------- U.S. GOVERNMENT SECURITIES FUND - --------------------------------- INVESTOR SHARES 1995 (3).................... $10.00 $0.56 $ 0.26 $ (0.56) -- - ------------------------------------------------ LIMITED-TERM FEDERAL MORTGAGE SECURITIES FUND - ------------------------------------------------ INVESTOR SHARES 1995 (4).................... $ 9.98 $0.58 $ 0.13 $ (0.58) -- - ---------------------- SHORT-TERM BOND FUND - ---------------------- INVESTOR SHARES 1995........................ $ 9.81 $0.51 $ 0.19 $ (0.50) -- 1994........................ 10.03 0.40 (0.21) (0.40) $ (0.01) 1993 (5).................... 10.06 0.06 (0.03) (0.06) -- - ----------------------------------------- SHORT-TERM U.S. TREASURY SECURITIES FUND - ----------------------------------------- INVESTOR SHARES 1995........................ $ 9.83 $0.46 $ 0.11 $ (0.46) -- 1994........................ 9.99 0.32 (0.12) (0.31) $ (0.05) 1993 (6).................... 10.01 0.06 (0.02) (0.06) -- - ------------------------------- FLORIDA TAX-EXEMPT BOND FUND - ------------------------------- INVESTOR SHARES 1995........................ $ 9.75 $0.42 $ 0.43 $ (0.42) -- 1994 (7).................... 10.00 0.13 (0.25) (0.13) -- RATIO OF NET RATIO OF INVESTMENT EXPENSES TO INCOME (LOSS) RATIO OF NET AVERAGE NET TO AVERAGE NET RATIO OF INVESTMENT ASSETS ASSETS NET ASSET NET ASSETS EXPENSES INCOME TO (EXCLUDING (EXCLUDING VALUE END TOTAL END OF TO AVERAGE AVERAGE NET WAIVERS AND WAIVERS AND OF PERIOD RETURN PERIOD (000) NET ASSETS ASSETS REIMBURSEMENTS) REIMBURSEMENTS) --------- -------- ------------ ---------- ------------ --------------- --------------- - ----------------------------- INVESTMENT GRADE BOND FUND - ----------------------------- INVESTOR SHARES 1995........................ $ 10.26 10.04% $ 33,772 1.15% 5.79% 1.49% 5.45% 1994........................ 9.89 0.86% 35,775 1.14% 4.39% 1.41% 4.12% 1993 (1).................... 10.44 9.21%* 24,375 1.14%* 4.75%* 1.46%* 4.43%* - ------------------------------ INVESTMENT GRADE TAX-EXEMPT BO - ------------------------------ INVESTOR SHARES 1995........................ $ 11.30 9.91% $ 41,693 1.15% 3.88% 1.43% 3.60% 1994........................ 10.69 5.37% 46,182 1.14% 2.96% 1.51% 2.59% 1993 (2).................... 10.79 11.88%* 15,844 1.12%* 3.61%* 1.83%* 2.90%* - ------------------------------ U.S. GOVERNMENT SECURITIES FUN - ------------------------------ INVESTOR SHARES 1995 (3).................... $ 10.26 $ 8.61+ $ 589 $ 1.15%* 6.08%* 6.84%* 0.39%* - ------------------------------ LIMITED-TERM FEDERAL MORTGAGE - ------------------------------ INVESTOR SHARES 1995 (4).................... $ 10.11 7.45%+ $ 623 0.90%* 6.27%* 7.74%* (0.57%)* - ---------------------- SHORT-TERM BOND FUND - ---------------------- INVESTOR SHARES 1995........................ $ 10.01 7.44% $ 2,609 0.85% 5.24% 1.56% 4.53% 1994........................ 9.81 1.81% 2,381 0.85% 3.94% 2.52% 2.27% 1993 (5).................... 10.03 1.65%* 716 0.85%* 3.85%* 7.22%* (2.52%)* - ------------------------------ SHORT-TERM U.S. TREASURY SECUR - ------------------------------ INVESTOR SHARES 1995........................ $ 9.94 6.03% $ 7,144 0.80% 4.74% 1.33% 4.21% 1994........................ 9.83 2.01% 4,841 0.78% 3.11% 1.41% 2.48% 1993 (6).................... 9.99 1.84%* 2,423 0.80%* 3.16%* 3.42%* 0.54%* - ------------------------------ FLORIDA TAX-EXEMPT BOND FUND - ------------------------------ INVESTOR SHARES 1995........................ $ 10.18 9.04% $ 3,320 0.85% 4.36% 1.50% 3.71% 1994 (7).................... 9.75 (1.22%)+ 2,280 0.85%* 3.67%* 3.20%* 1.32%* PORTFOLIO TURNOVER RATE -------- - ----------------------------- INVESTMENT GRADE BOND FUND - ----------------------------- INVESTOR SHARES 1995........................ 237.66% 1994........................ 259.19% 1993 (1).................... 299.32% - ------------------------------ INVESTMENT GRADE TAX-EXEMPT BO - ------------------------------ INVESTOR SHARES 1995........................ 591.91% 1994........................ 432.46% 1993 (2).................... 344.87% - ------------------------------ U.S. GOVERNMENT SECURITIES FUN - ------------------------------ INVESTOR SHARES 1995 (3).................... 30.39% - ------------------------------ LIMITED-TERM FEDERAL MORTGAGE - ------------------------------ INVESTOR SHARES 1995 (4).................... 67.63% - ---------------------- SHORT-TERM BOND FUND - ---------------------- INVESTOR SHARES 1995........................ 200.49% 1994........................ 74.85% 1993 (5).................... 63.89% - ------------------------------ SHORT-TERM U.S. TREASURY SECUR - ------------------------------ INVESTOR SHARES 1995........................ 87.98% 1994........................ 116.57% 1993 (6).................... 36.44% - ------------------------------ FLORIDA TAX-EXEMPT BOND FUND - ------------------------------ INVESTOR SHARES 1995........................ 105.01% 1994 (7).................... 53.24%
7
NET REALIZED AND NET ASSET UNREALIZED DISTRIBUTIONS VALUE NET GAINS FROM NET DISTRIBUTIONS BEGINNING INVESTMENT (LOSSES) ON INVESTMENT FROM REALIZED OF PERIOD INCOME INVESTMENTS INCOME CAPITAL GAINS --------- ---------- ------------ -------------- ------------- - -------------------------------- GEORGIA TAX-EXEMPT BOND FUND - -------------------------------- INVESTOR SHARES 1995......... $ 9.44 $0.40 $ 0.21 $ (0.40) -- 1994 (8)..... 10.00 0.13 (0.56) (0.13) -- - ---------------------------------- TENNESSEE TAX-EXEMPT BOND FUND - ---------------------------------- INVESTOR SHARES 1995......... $ 9.23 $0.44 $ 0.29 $ (0.43) -- 1994 (8)..... 10.00 0.13 (0.77) (0.13) -- - ---------------------------------- PRIME QUALITY MONEY MARKET FUND - ---------------------------------- INVESTOR SHARES 1995......... $ 1.00 $0.05 -- $ (0.05) -- 1994......... 1.00 0.03 -- (0.03) -- 1993 (9)..... 1.00 0.03 -- (0.03) -- - ------------------------------------------------- U.S. GOVERNMENT SECURITIES MONEY MARKET FUND - ------------------------------------------------- INVESTOR SHARES 1995......... $ 1.00 $0.04 -- $ (0.04) -- 1994......... 1.00 0.03 -- (0.03) -- 1993 (9)..... 1.00 0.03 -- (0.03) -- - -------------------------------- TAX-EXEMPT MONEY MARKET FUND - -------------------------------- INVESTOR SHARES 1995......... $ 1.00 $0.03 -- $ (0.03) -- 1994......... 1.00 0.02 -- (0.02) -- 1993 (9)..... 1.00 0.02 -- (0.02) -- RATIO OF NET RATIO OF INVESTMENT EXPENSES TO INCOME (LOSS) RATIO OF NET AVERAGE NET TO AVERAGE NET RATIO OF INVESTMENT ASSETS ASSETS NET ASSET NET ASSETS EXPENSES INCOME TO (EXCLUDING (EXCLUDING PORTFOLIO VALUE END TOTAL END OF TO AVERAGE AVERAGE NET WAIVERS AND WAIVERS AND TURNOVER OF PERIOD RETURN PERIOD (000) NET ASSETS ASSETS REIMBURSEMENTS) REIMBURSEMENTS) RATE --------- -------- ------------ ---------- ------------ --------------- --------------- -------- - --------------- GEORGIA TAX-EXE - --------------- INVESTOR SHARE 1995......... $ 9.65 6.70% $ 3,268 0.85% 4.31% 1.43% 3.73% 24.50% 1994 (8)..... 9.44 (4.29%)+ 3,300 0.85%* 3.93%* 2.36%* 2.42%* 25.90% - --------------- TENNESSEE TAX-E - --------------- INVESTOR SHARE 1995......... $ 9.53 8.24% $ 1,170 0.85% 4.70%* 2.10% 3.45% 27.73% 1994 (8)..... 9.23 (6.39%)+ 1,127 0.85%* 3.74%* 6.60%* (2.01%)* 13.05% - --------------- PRIME QUALITY M - --------------- INVESTOR SHARE 1995......... $ 1.00 4.62% $157,616 0.75% 4.55% 1.01% 4.29% -- 1994......... 1.00 2.71% 129,415 0.75% 2.67% 0.99% 2.43% -- 1993 (9)..... 1.00 2.75%* 61,378 0.75%* 2.68%* 1.02%* 2.41%* -- - --------------- U.S. GOVERNMENT - --------------- INVESTOR SHARE 1995......... $ 1.00 4.51% $ 46,639 0.75% 4.51% 1.00% 4.24% -- 1994......... 1.00 2.63% 32,395 0.75% 2.54% 0.97% 2.32% -- 1993 (9)..... 1.00 2.65%* 16,688 0.75%* 2.57%* 1.11%* 2.21%* -- - --------------- TAX-EXEMPT MONE - --------------- INVESTOR SHARE 1995......... $ 1.00 3.00% $ 87,647 0.55% 3.00% 0.87% 2.68% -- 1994......... 1.00 1.96% 61,675 0.54% 1.93% 0.88% 1.59% -- 1993 (9)..... 1.00 2.00%* 35,209 0.53%* 1.95%* 0.95%* 1.53%* --
* Annualized. + Cumulative since inception. (1) The Investment Grade Bond Fund Investor Shares commenced operations on June 11, 1992. (2) The Investment Grade Tax-Exempt Bond Fund Investor Shares commenced operations on June 9, 1992. (3) The U.S. Government Securities Fund Investor Shares commenced operations on June 9, 1994. (4) The Limited-Term Federal Mortgage Securities Fund Investor Shares commenced operations on July 17, 1994. (5) The Short-Term Bond Fund Investor Shares commenced operations on March 22, 1993. (6) The Short-Term U.S. Treasury Securities Fund Investor Shares commenced operations on March 18, 1993. (7) The Florida Tax-Exempt Bond Fund Investor Shares commenced operations on January 18, 1994. (8) The Georgia Tax-Exempt Bond Fund Investor Shares and the Tennessee Tax-Exempt Bond Fund Investor Shares commenced operations on January 19, 1994. (9) The Prime Quality Money Market Fund Trust Shares and Investor Shares, U.S. Government Securities Money Market Fund Trust Shares and Investor Shares, and Tax-Exempt Money Market Fund Trust Shares and Investor Shares commenced opertions on June 8, 1992. 8 THE TRUST STI CLASSIC FUNDS (the "Trust") is a diversified, open-end management investment company that provides a convenient and economical means of investing in several professionally managed portfolios of securities. The Trust currently offers units of beneficial interest ("shares") in a number of separate Funds. Shareholders may purchase shares in each Fund through three separate classes (Trust Shares, Investor Shares and Flex Shares), which provide for variations in distribution and service fees and transfer agent fees, voting rights and dividends. Except for differences between classes, each share of each Fund represents an undivided, proportionate interest in that Fund. This Prospectus relates to the Investor Shares of the Funds described below. FUNDS AND INVESTMENT OBJECTIVES BOND FUNDS: THE INVESTMENT GRADE BOND FUND seeks to provide as high a level of total return through current income and capital appreciation as is consistent with the preservation of capital primarily through investment in investment grade fixed income securities. THE INVESTMENT GRADE TAX-EXEMPT BOND FUND seeks to provide as high a level of total return through federally tax-exempt current income and capital appreciation as is consistent with the preservation of capital primarily through investment in investment grade tax-exempt obligations. THE U.S. GOVERNMENT SECURITIES FUND seeks to provide as high a level of current income as is consistent with the preservation of capital by investing primarily in obligations issued or guaranteed by the U.S. Government or its agencies or instrumentalities. THE LIMITED-TERM FEDERAL MORTGAGE SECURITIES FUND seeks to provide as high a level of current income as is consistent with the preservation of capital by investing primarily in mortgage-related securities issued or guaranteed by U.S. Government agencies and instrumentalities. THE SHORT-TERM BOND FUND seeks to provide as high a level of current income, relative to funds with like investment objectives, as is consistent with the preservation of capital primarily through investment in short- to intermediate-term investment grade fixed income securities. THE SHORT-TERM U.S. TREASURY SECURITIES FUND seeks to provide as high a level of current income, relative to funds with like investment objectives, as is consistent with the preservation of capital through investment exclusively in short-term U.S. Treasury securities. STATE TAX-EXEMPT BOND FUNDS: THE FLORIDA TAX-EXEMPT BOND FUND seeks to provide current income exempt from federal income tax for Florida residents without undue investment risk. THE GEORGIA TAX-EXEMPT BOND FUND seeks to provide current income exempt from federal and state income tax for Georgia residents without undue investment risk. THE TENNESSEE TAX-EXEMPT BOND FUND seeks to provide current income exempt from federal and state income tax for Tennessee residents without undue investment risk. MONEY MARKET FUNDS: THE PRIME QUALITY MONEY MARKET FUND seeks to provide as high a level of current income as is consistent with preservation of 9 capital and liquidity by investing exclusively in high quality money market instruments. THE U.S. GOVERNMENT SECURITIES MONEY MARKET FUND seeks to provide as high a level of current income as is consistent with preservation of capital and liquidity by investing exclusively in bills, notes and bonds issued by the U.S. Treasury and separately traded interest and principal component parts of such obligations that are transferable through the Federal Reserve Book-Entry System ("U.S. Treasury obligations"), U.S. Government Subsidiary Corporation securities that are backed by the full faith and credit of the U.S. Government and repurchase agreements ("Repos") with approved dealers collateralized by U.S. Treasury obligations, and U.S. Government Subsidiary Corporation securities. THE TAX-EXEMPT MONEY MARKET FUND seeks to provide as high a level of current interest income exempt from federal income tax as is consistent with preservation of capital and liquidity. The Fund invests primarily in high quality short-term municipal obligations. Each Money Market Fund's ability to generate high current income will be limited by the fact that it is only permitted to invest in high quality securities. It is a fundamental policy of each Money Market Fund to use its best efforts to maintain a constant net asset value of $1.00 per share. There can be no assurance that a Money Market Fund will achieve its investment objective or that the Money Market Funds will be able to maintain a net asset value of $1.00 per share on a continuous basis. In addition, each Money Market Fund intends to comply with federal regulations applicable to money market funds using the amortized cost method for calculating net asset value which require each Fund to invest only in U.S. dollar denominated obligations, to maintain an average maturity on a dollar-weighted basis of 90 days or less and to acquire eligible securities that present minimal credit risk and have a maturity of 397 days or less. These requirements will also limit a Money Market Fund's ability to generate high current income. For a further discussion of these rules, see "Description of Permitted Investments." There can be no assurance that a Fund will achieve its investment objective. The investment objectives of the Investment Grade Bond Fund, U.S. Government Securities Fund, Limited-Term Federal Mortgage Securities Fund, Short-Term Bond Fund and Short-Term U.S. Treasury Securities Fund are nonfundamental and may be changed without a shareholder vote. INVESTMENT POLICIES AND STRATEGIES *INVESTMENT GRADE BOND FUND The Investment Grade Bond Fund will invest exclusively in investment grade obligations rated BBB or better by Standard & Poor's Corporation ("S&P") or Baa or better by Moody's Investors Service, Inc. ("Moody's") or, if unrated, of comparable quality at the time of purchase as determined by the Advisor, including corporate debt obligations; mortgage-backed securities, collateralized mortgage obligations ("CMOs") and asset-backed securities; obligations issued or guaranteed as to principal and interest by the U.S. Government or its agencies or instrumentalities; custodial receipts involving U.S. Treasury obligations; securities of the government of Canada and its provincial and local governments; securities issued or guaranteed by foreign governments, their political subdivisions, agencies or instrumentalities; obligations of supranational entities and sponsored American Depositary Receipts ("ADRs") that are traded on exchanges or 10 listed on NASDAQ. Under normal circumstances, at least 65% of the Fund's total assets will be invested in corporate and government bonds and debentures. No more than 25% of the Fund's assets will be invested in securities rated BBB by S&P or Baa by Moody's or, if unrated, of comparable quality at the time of purchase as determined by the Advisor. The Fund may purchase mortgage-backed securities issued or guaranteed as to the payment of principal and interest by the U.S. Government or its agencies or instrumentalities or, subject to a limit of 25% of the Fund's assets, mortgage-backed securities issued by private issuers. These mortgage-backed securities may be backed or collateralized by fixed, adjustable or floating rate mortgages. The Fund may also invest in asset-backed securities which consist of securities backed by company receivables, truck and auto loans, leases, credit card receivables and home equity loans. In order to reduce interest rate risk, and subject to a general limit of 25% of the Fund's assets, the Fund may purchase floating or variable rate securities. It may also buy securities on a when-issued basis, medium term notes, putable securities and zero coupon securities. The Fund may also invest up to 10% of its assets in restricted securities that the Advisor determines are liquid under guidelines adopted by the Trust's Board of Trustees. The Fund may also engage in futures and options transactions and may engage in securities lending. Some floating or variable rate securities will be subject to interest rate "caps" or "floors." Under normal market conditions, it is anticipated that the Fund's average weighted maturity will range from 4 to 10 years. In the case of mortgage related securities and asset-backed securities, maturity will be determined based on the expected average life of the security. The Fund may shorten its average weighted maturity to as little as 90 days if deemed appropriate for temporary defensive purposes. By so limiting the maturity of its investments, the Fund expects that its net asset value will experience less price movement in response to changes in interest rates than the net asset values of mutual funds investing in similar credit quality securities with longer maturities. The Fund's portfolio turnover rate was 237.66% for the fiscal year ended May 31, 1995. This rate of turnover, if continued, will likely result in higher transaction costs and higher levels of realized capital gains than if the turnover rate was lower. *INVESTMENT GRADE TAX-EXEMPT BOND FUND The Investment Grade Tax-Exempt Bond Fund intends to be fully invested in municipal securities the interest on which is exempt from federal income taxes in the opinion of bond counsel to the issuer. The issuers of these securities can be located in all fifty states, the District of Columbia, Puerto Rico and other U.S. territories and possessions. It is a fundamental policy of the Investment Grade Tax-Exempt Bond Fund to invest at least 80% of its total assets in securities the income from which is exempt from federal income tax and not treated as a preference item for purposes of the alternative minimum tax. At least 65% of the Fund's assets will be invested in municipal bonds and debentures, and at least 75% of its total assets invested in municipal bonds will be in securities rated A or better by S&P or Moody's. Municipal securities must be rated BBB or better by S&P or Baa or better by Moody's in the case of bonds; SP-1, SP-2 or MIG-1, MIG-2 in the case of notes; A-1, A-2, P-1, P-2 in the case of tax-exempt commercial paper; and VMIG-1 or VMIG-2 in the case of 11 variable rate demand obligations. The Fund will only acquire unrated securities if, at the time of purchase, the Advisor determines that such unrated obligations are of comparable quality to rated obligations that may be acquired by the Fund. The Fund may invest in floating or variable rate securities and commitments to purchase the above securities on a when-issued or delayed delivery basis, and may purchase municipal forwards, medium term notes, putable securities, and zero coupon securities. The Advisor has discretion to invest up to 20% of the Fund's total assets in taxable debt securities rated at least BBB or better by S&P or Baa or better by Moody's or, if unrated, of comparable quality at the time of purchase as determined by the Advisor, repurchase agreements, and securities subject to the alternative minimum tax. The Fund may also invest up to 10% of its assets in restricted securities that the Advisor determines are liquid under guidelines adopted by the Trust's Board of Trustees and may engage in futures and options transactions. Under normal market conditions, it is anticipated that the Fund's average weighted maturity will range from 4 to 10 years. The Fund may shorten its average weighted maturity to as little as 90 days if deemed appropriate for temporary defensive purposes. By so limiting the maturity of its investments, the Fund's net asset value is expected to experience less price movement in response to changes in interest rates than the net asset values of mutual funds investing in similar credit quality securities with longer maturities. The Fund's portfolio turnover rate was 591.91% for the fiscal year ended May 31, 1995. This rate of turnover, if continued, will likely result in higher transaction costs and higher levels of realized capital gains than if the turnover rate was lower. *U.S. GOVERNMENT SECURITIES FUND Under normal market conditions, the Fund will invest at least 65% of its assets in obligations issued or guaranteed by the U.S. Government or its agencies or instrumentalities, including mortgage-backed securities issued or guaranteed by U.S. Government agencies such as the Government National Mortgage Association ("GNMA"), the Federal National Mortgage Association ("FNMA") or the Federal Home Loan Mortgage Corporation ("FHLMC"). Mortgage-backed securities consisting of CMOs and real estate mortgage investment conduits ("REMICs") purchased by the Fund will be issued or guaranteed as to payment of principal and interest by the U.S. Government or its agencies or instrumentalities or, if issued by private issuers, rated in one of the two highest rating categories by an NRSRO. The principal governmental issuers or guarantors of mortgage-backed securities are GNMA, FNMA and FHLMC. Obligations of GNMA are backed by the full faith and credit of the U.S. Government while obligations of FNMA and FHLMC are supported by the respective agency only. The Fund may purchase mortgage-backed securities that are backed or collateralized by fixed, adjustable or floating rate mortgages. Mortgage-backed securities that are not issued or guaranteed by the U.S. Government or its agencies or instrumentalities, including securities nominally issued by a governmental entity (such as the Resolution Trust Corporation), are not obligations of a governmental entity and thus may bear a risk of nonpayment. The timely payment of principal and interest normally is supported, at least partially, by various forms of insurance or 12 guarantees. There can be no assurance, however, that such credit enhancement will support full payment of the principal and interest on such obligations. The average maturity of the Fund's investment portfolio will typically range from 7 to 14 years. With respect to the remaining 35% of its assets, the Fund may invest in corporate or government bonds that carry a rating of Baa or better by Moody's or BBB or better by S&P or better, or that are deemed by the Advisor to be of comparable quality; commercial paper rated at the time of purchase within the two highest ratings categories of an NRSRO; bankers' acceptances; certificates of deposit and time deposits; and U.S. Treasury obligations which includes custodial receipts and repurchase agreements involving securities that constitute permissible investments for the Fund. The Fund intends to invest in privately issued, mortgage-backed securities only if they are rated in one of the two highest rating categories. The Fund may purchase securities on a forward commitment or when-issued basis, which means that delivery and payment for such securities generally takes place after the customary securities settlement period. The Fund may purchase floating or variable rate securities, and may engage in dollar roll transactions. *LIMITED-TERM FEDERAL MORTGAGE SECURITIES FUND Under normal market conditions, the Limited-Term Federal Mortgage Securities Fund will invest at least 65% of its assets in mortgage-related securities issued or guaranteed by U.S. Government agencies such as GNMA, FNMA or the FHLMC. Obligations of GNMA are backed by the full faith and credit of the U.S. Government while obligations of FNMA and FHLMC are supported by the respective agency only. The Fund may purchase mortgage-backed securities that are backed or collateralized by fixed, adjustable or floating rate mortgages. The Fund's holdings of mortgage-backed securities will typically have an average life of from one to five years. Mortgage-backed securities consisting of CMOs and REMICs purchased by the Fund will be either issued or guaranteed as to payment of principal and interest by the U.S. Government or its agencies or instrumentalities or, if issued by private issuers, rated in one of the two highest rating categories by an NRSRO. Mortgage-backed securities that are not issued or guaranteed by the U.S. Government or its agencies or instrumentalities, including securities nominally issued by a governmental entity (such as the Resolution Trust Corporation), are not obligations of the U.S. Government and thus bear a risk of nonpayment. The timely payment of principal and interest normally is supported, at least partially, by various forms of insurance or guarantees. There can be no assurance, however, that such credit enhancement will support full payment of the principal and interest on such obligations. With respect to the remaining 35% of its assets, the Fund may invest in corporate or government bonds that carry a rating of Baa or better by Moody's or BBB or better by S&P, or that are deemed by the Advisor to be of comparable quality; asset backed securities; commercial paper rated at the time of purchase in the two highest ratings categories of an NRSRO rating bankers' acceptances; certificates of deposit and time deposits; U.S. Treasury obligations and custodial receipts; and repurchase agreements involving securities that constitute permissible investments for the Fund. The Fund may purchase securities on a forward commitment or when-issued basis, which 13 means that delivery and payment for such securities generally takes place after the customary securities settlement period. The Fund may purchase floating or variable rate securities, and may engage in dollar roll transactions. The Fund may also purchase stripped mortgage-backed securities, but will limit such purchase to 5% of its net assets. *SHORT-TERM BOND FUND Under normal circumstances, the Short-Term Bond Fund will invest solely in investment grade obligations rated BBB or better by S&P or Baa or better by Moody's or, if unrated, of comparable quality at the time of purchase as determined by the Advisor consisting of debt obligations of U.S. and foreign corporations, mortgage-backed securities; CMOs; asset-backed securities; obligations (including mortgage-backed securities) issued or guaranteed as to principal and interest by the U.S. Government or its agencies or instrumentalities; and custodial receipts involving U.S. Treasury obligations (including STRIPS and CUBES). Under normal circumstances, at least 65% of the Fund's total assets will be invested in corporate and government bonds and debentures. No more than 25% of the Fund's assets will be invested in securities rated BBB by S&P or Baa by Moody's or, if unrated, of comparable quality at the time of purchase by the Advisor. The Fund may purchase, without limitation, mortgage-backed securities issued or guaranteed as to the payment of principal and interest by the U.S. Government or its agencies or instrumentalities and, subject to a limit of 25% of the Fund's assets, mortgage-backed securities issued by private issuers. These mortgage-backed securities may be backed or collateralized by fixed, adjustable or floating rate mortgages. The Fund may also invest in asset-backed securities, which consist of securities backed by company receivables; truck and auto loans; leases; credit card receivables; and home equity loans. The Fund will purchase mortgage-backed and asset-backed securities only if they are rated at least AA by S&P or Aa by Moody's or, if unrated, determined to be of comparable quality at the time of purchase by the Advisor. The Fund may purchase securities on a when-issued basis and may acquire floating or variable rate securities, medium term notes, putable securities, and zero coupon securities. The Fund may also purchase securities issued by foreign governments and supranational agencies. The Fund may also invest in municipal securities when the Advisor feels it is consistent with the Fund's investment objective. The Fund will not invest in municipal securities unless the Advisor believes that the yield will be higher than the yield for comparable taxable investments in which the Fund is permitted to invest. The following quality criteria apply to the Fund's investments in municipal securities. The Fund's investments in municipal notes will be limited to those obligations (i) where both principal and interest are backed by the full faith and credit of the United States, (ii) which are rated MIG-2 or V-MIG-2 at the time of investment by Moody's, (iii) which are rated SP-2 at the time of investment by S&P, or (iv) which, if not rated, are of equivalent quality to MIG-2, V-MIG-2, or SP-2 in the Advisor's judgment. The Fund's investment in municipal bonds will be limited to bonds rated BBB or better by S&P or Baa or better by Moody's, or, if unrated, deemed by the Advisor to be of comparable quality. For the Fund's investments in other types of tax-exempt municipal investments, such as participation interests in municipal lease/purchase agreements, the quality of the underlying credit or of the bank providing a credit support arrangement must, in 14 the Advisor's opinion, be equivalent to the municipal note or bond ratings stated above. The Fund is also authorized to invest up to 10% of its assets in restricted securities, including Rule 144A securities, that the Advisor determines are liquid under guidelines adopted by the Trust's Board of Trustees. The Fund may also enter into bond futures contracts and options on bond futures contracts and engage in securities lending. The Fund intends to maintain a dollar-weighted average maturity of 3 years or less, and the maximum remaining maturity for any security held by the Fund is 7 years. Under normal market conditions it is anticipated that the Fund's dollar-weighted average maturity will range from 2 to 3 years. In the case of mortgage related securities and asset-backed securities, maturity will be determined based on the expected average life of the security. The Fund may shorten its average weighted maturity to as little as 90 days if deemed appropriate for temporary defensive purposes. By so limiting the maturity of its investments, the Fund expects that its net asset value will experience less price movement in response to changes in interest rates than the net asset values of mutual funds investing in similar credit quality securities with longer maturities. The Fund's turnover rate was 200.49% for the fiscal year ended May 31, 1995. This rate of turnover, if continued, will likely result in higher transaction costs and higher levels of realized capital gains than if the turnover rate was lower. *SHORT-TERM U.S. TREASURY SECURITIES FUND The Short-Term U.S. Treasury Securities Fund will invest exclusively in obligations issued by the U.S. Treasury with maximum remaining maturities of 3 years or less. U.S. Treasury securities are considered to be among the safest investments available. The Fund will not invest in repurchase agreements. The Fund may borrow money for temporary or emergency purposes in an amount not exceeding one-third of its total assets, but has no present intention to do so. Under normal market conditions, it is anticipated that the Fund's average maturity will range from one to two years. Furthermore, for temporary defensive purposes during periods when the Advisor determines that market conditions warrant, the Short-Term U.S. Treasury Securities Fund may reduce its average weighted maturity to less than one year. *FLORIDA TAX-EXEMPT BOND FUND The Florida Tax-Exempt Bond Fund intends to be fully invested in municipal securities the interest on which is exempt from federal income taxes based on opinions from bond counsel to the issuers. The issuers of these securities can be located in Florida, the District of Columbia, Puerto Rico and other U.S. territories and possessions. It is a fundamental policy of the Fund to invest at least 80% of its total assets in securities the income from which is exempt from federal income tax and not treated as a preference item for purposes of the alternative minimum tax. At least 65% of the Fund's assets will be invested in Florida municipal bonds and debentures, and at least 75% of its total assets invested in municipal bonds will be in securities rated A or better by S&P or Moody's. Municipal securities must be rated BBB or better by S&P or Baa or better by Moody's in the case of bonds; SP-1, SP-2 or MIG-1, MIG-2 in the case of notes; A-1, A-2, or P-1, P-2 in the case of tax-exempt commercial paper; and VMIG-1 or VMIG-2 in the case of variable rate demand obligations. No more than 25% of the Fund's assets will be invested in bonds rated BBB by S&P or Baa by Moody's. The Fund will only acquire unrated securities if, 15 at the time of purchase, the Advisor determines that such unrated obligations are of comparable quality to rated obligations that may be acquired by the Fund. The Fund may invest in floating or variable rate securities, commitments to purchase the above securities on a when-issued or delayed delivery basis, and may purchase municipal forwards, putable securities, medium term notes, and zero coupon securities. The Advisor has discretion to invest up to 20% of the Fund's total assets in taxable debt securities rated at least BBB or better by S&P or Baa or better by Moody's or, if unrated, of comparable quality at the time of purchase as determined by the Advisor, repurchase agreements, and securities subject to the alternative minimum tax. The Fund may also invest in futures and options, but has no present intention to do so for other than hedging purposes. Under normal market conditions, it is anticipated that the Fund's average weighted maturity will range from 6 to 25 years. The Fund may shorten its average weighted maturity to as little as 90 days if deemed appropriate for temporary defensive purposes. The Fund's portfolio turnover rate was 105.01% for the fiscal year ended May 31, 1995. This rate of turnover, if continued, will likely result in higher transaction costs and higher levels of realized capital gains than if the turnover rate was lower. *GEORGIA TAX-EXEMPT BOND FUND The Georgia Tax-Exempt Bond Fund intends to be fully invested in municipal securities the interest on which is exempt from federal income taxes and substantially exempt from State of Georgia income taxes based on opinions from bond counsel to the issuers. The issuers of these securities can be located in Georgia, the District of Columbia, Puerto Rico and other U.S. territories and possessions. It is a fundamental policy of the Fund to invest at least 80% of its total assets in securities the income from which is exempt from federal income tax and not treated as a preference item for purposes of alternative minimum tax. At least 65% of the Fund's assets will be invested in Georgia municipal bonds and debentures, and at least 75% of its total assets invested in municipal bonds will be in securities rated A or better by S&P or Moody's. Municipal securities must be rated BBB or better by S&P or Baa or better by Moody's in the case of bonds; SP-1, SP-2 or MIG-1, MIG-2 in the case of notes; A-1, A-2, or P-1, P-2 in the case of tax-exempt commercial paper; and VMIG-1 or VMIG-2 in the case of variable rate demand obligations. No more than 25% of the Fund's assets will be invested in bonds rated BBB by S&P or Baa by Moody's. The Fund will only acquire unrated securities if, at the time of purchase, the Advisor determines that such unrated obligations are of comparable quality to rated obligations that may be acquired by the Fund. The Fund may invest in floating or variable rate securities, commitments to purchase the above securities on a when-issued or delayed delivery basis, and may purchase municipal forwards, putable securities, medium term notes and zero coupon securities. The Advisor has discretion to invest up to 20% of the Fund's total assets in taxable debt securities rated at least BBB or better by S&P or Baa or better by Moody's or, if unrated, of comparable quality at the time of purchase as determined by the Advisor, repurchase agreements, and securities subject to the alternative minimum tax. The Fund may also invest in futures and options, but has no present intention to do so for other than hedging purposes. Under normal market conditions, it is anticipated that the Fund's average weighted 16 maturity will range from 6 to 25 years. The Fund may shorten its average weighted maturity to as little as 90 days if deemed appropriate for temporary defensive purposes. *TENNESSEE TAX-EXEMPT BOND FUND The Tennessee Tax-Exempt Bond Fund intends to be fully invested in municipal securities the interest on which is exempt from federal income taxes and substantially exempt from State of Tennessee income taxes based on opinions from bond counsel to the issuers. The issuers of these securities can be located in Tennessee, the District of Columbia, Puerto Rico and other U.S. territories and possessions. It is a fundamental policy of the Fund to invest at least 80% of its total assets in securities the income from which is exempt from federal income tax and not treated as a preference item for purposes of the alternative minimum tax. At least 65% of the Fund's assets will be invested in Tennessee municipal bonds and debentures, and at least 75% of its total assets invested in municipal bonds will be in securities rated A or better by S&P or Moody's. Municipal securities must be rated BBB or better by S&P or Baa or better by Moody's in the case of bonds; SP-1, SP-2 or MIG-1, MIG-2 in the case of notes; A-1, A-2, or P-1, P-2 in the case of tax-exempt commercial paper; and VMIG-1 or VMIG-2 in the case of variable rate demand obligations. No more than 25% of the Fund's assets will be invested in bonds rated BBB by S&P or Baa by Moody's. The Fund will only acquire unrated securities if, at the time of purchase, the Advisor determines that such unrated obligations are of comparable quality to rated obligations that may be acquired by the Fund. The Fund may invest in floating or variable rate securities, commitments to purchase the above securities on a when-issued or delayed delivery basis, and may purchase municipal forwards, putable securities, medium term notes and zero coupon securities. The Advisor has discretion to invest up to 20% of the Fund's total assets in taxable debt securities rated at least BBB or better by S&P or Baa or better by Moody's or, if unrated, of comparable quality at the time of purchase as determined by the Advisor, repurchase agreements, and securities subject to the alternative minimum tax. The Fund may also invest in futures and options, but has no present intention to do so for other than hedging purposes. Under normal market conditions, it is anticipated that the Fund's average weighted maturity will range from 6 to 25 years. The Fund may shorten its average weighted maturity to as little as 90 days if deemed appropriate for temporary defensive purposes. *PRIME QUALITY MONEY MARKET FUND The Prime Quality Money Market Fund will invest in money market instruments denominated in U.S. dollars consisting of (i) U.S. Treasury obligations; (ii) custodial receipts representing interests in component parts of U.S. Treasury obligations; (iii) obligations issued or guaranteed as to principal and interest by agencies and instrumentalities of the U.S. Government; (iv) commercial paper issued by domestic and foreign issuers rated in the highest short-term rating category by one or more nationally recognized statistical rating organizations ("NRSROs") as described in the "Appendix" or, if not rated, determined by the Advisor to be of comparable quality; (v) high quality obligations (including certificates of deposit, time deposits, bankers' acceptances, Eurodollar and Yankee bank obligations) of U.S. commercial banks (including foreign branches of such banks), and U.S. and London branches of foreign banks or savings and loan and thrift institutions that are 17 members of the Federal Reserve System, the Federal Deposit Insurance Corporation, or the Federal Savings and Loan Insurance Corporation; (vi) high quality short-term corporate obligations issued by companies with commercial paper meeting the ratings indicated in (iv), above, or, if not rated, determined by the Advisor to be of comparable quality; (vii) repurchase agreements involving such obligations; (viii) high quality obligations of supranational entities satisfying the credit ratings described in (iv), above, or, if not rated, determined by the Advisor to be of comparable quality; (ix) medium term notes and (x) investments in guaranteed investment contracts ("GICs") issued by U.S. insurance companies that are determined by the Advisor to be of comparable quality to the securities with the ratings described above (subject to a limit of 10% of the Fund's assets). The Fund may not invest more than 25% of its total assets in obligations issued by foreign branches of U.S. banks and London branches of foreign banks. The Fund may purchase securities subject to standby commitments. As a Money Market Fund, the Fund is subject to limitations on the percentage of its assets that may be invested in any one issuer and on the percentage that may be invested in securities carrying the second highest rating assigned by the requisite NRSROs. *U.S. GOVERNMENT SECURITIES MONEY MARKET FUND The U.S. Government Securities Money Market Fund will invest exclusively in U.S. Treasury obligations, U.S. Government Subsidiary Corporation securities which are backed by the full faith and credit of the U.S. Government (e.g., the Government National Mortgage Association) and repurchase agreements with dealers selected pursuant to guidelines adopted by the Trust's Board of Trustees and collateralized by U.S. Treasury securities and U.S. Government Subsidiary Corporation securities. *TAX-EXEMPT MONEY MARKET FUND The Tax-Exempt Money Market Fund intends to be fully invested in securities the interest on which is exempt from federal income taxes in the opinion of bond counsel to the issuer. It is a fundamental policy of the Tax-Exempt Money Market Fund to invest at least 80% of its total assets in securities the income from which is exempt from federal income taxes and not treated as a preference item for purposes of the alternative minimum tax. The Fund may invest in high quality U.S. dollar denominated municipal securities of issuers located in all fifty states, the District of Columbia, Puerto Rico and other U.S. territories rated in one of the two highest short-term rating categories by S&P or Moody's or, if not rated, determined by the Advisor to be of comparable quality. The Fund will primarily purchase municipal bonds with a remaining maturity of 397 days or less, and will also acquire municipal notes and tax-exempt commercial paper with similar maturities. The Fund may agree to purchase short-term securities on a when-issued basis and may invest in securities subject to standby commitments. Securities purchased on a when-issued basis are subject to settlement within 45 days of the purchase date. The Advisor has discretion to invest up to 20% of the Fund's assets in U.S. dollar denominated obligations consisting of taxable money market instruments, obligations issued or guaranteed by the U.S. Government or its agencies and instrumentalities, repurchase agreements, and securities subject to the alternative minimum tax. 18 GENERAL INVESTMENT POLICIES AND STRATEGIES For temporary defensive purposes during periods when its Advisor determines that market conditions warrant, each Fund, except the U.S. Government Securities Money Market Fund and Short-Term U.S. Treasury Securities Fund, may invest up to 100% of its assets in money market instruments consisting of securities issued or guaranteed as to principal and interest by the U.S. Government, its agencies or instrumentalities, custodial receipts involving U.S. Treasury obligations, repurchase agreements, certificates of deposit, bankers' acceptances, and time deposits issued by banks or savings and loan associations and commercial paper rated in the highest rating category, and may hold a portion of its assets in cash. A Fund may not be pursuing its investment objective when it is engaged in temporary defensive investing. The municipal bonds that the Investment Grade Tax-Exempt Bond Fund and State Tax-Exempt Bond Funds may purchase include general obligation bonds, revenue or special obligation bonds, and private activity and industrial development bonds. General obligation bonds are backed by the taxing power of the issuing municipality while revenue or special obligation bonds are backed by a specific project or facility. The State Tax-Exempt Bond Funds may also purchase certificates of participation which represent an interest in an underlying obligation or commitment such as an obligation issued in connection with a leasing arrangement. The payment of principal and interest on private activity and industrial development bonds generally is dependent solely on the ability of the facility's user to meet its obligation and the pledge, if any, of real or personal property as security for such payment. The Advisor to a State Tax-Exempt Bond Fund or the Investment Grade Tax-Exempt Bond Fund may buy or sell portfolio securities with the intention of generating capital gains. Such gains will increase the Fund's total return and will be taxable upon distribution to Shareholders. See "Tax Information." In the event that a security owned by a Fund is downgraded below the stated rating categories, the Advisor will review and take appropriate action with regard to the security. A Fund's purchase of shares of other investment companies is limited by the Investment Company Act of 1940 and will ordinarily result in an additional layer of charges and expenses. Each of the Funds may engage in securities lending and will limit such practice to 33 1/3% of its total assets. No Fund may purchase additional securities while its outstanding borrowings exceed 5% of its assets. It is a non-fundamental policy of each Fund to invest no more than 15% of its net assets in illiquid securities (10% of the net assets of each Money Market Fund). An illiquid security is a security which cannot be disposed of in the usual course of business within seven days at a price approximating its carrying value. For additional information regarding permitted investments, see "Description of Permitted Investments" in this Prospectus and in the Statement of Additional Information. INVESTMENT RISKS ZERO COUPON OBLIGATIONS Each Fund, except the Tax-Exempt Money Market Fund, may invest, subject to its investment objective and policies, in zero coupon obligations. Zero coupon obligations are sold at original issue discount and do not 19 make periodic payments. Zero coupon obligations may be subject to greater fluctuations in value due to interest rate changes than interest bearing obligations. A Fund will be required to include the imputed interest in zero coupon obligations in its current income. Because each Fund distributes all of its net investment income to Shareholders, a Fund may have to sell portfolio securities to distribute the income attributable to these obligations and securities at a time when the Advisor would not have chosen to sell such obligations or securities and which may result in a taxable gain or loss. FOREIGN SECURITIES Investing in the securities of foreign companies involves special risks and considerations not typically associated with investing in U.S. companies. These risks and considerations include differences in accounting, auditing and financial reporting standards, generally higher commission rates on foreign portfolio transactions, the possibility of expropriation or confiscatory taxation, adverse changes in investment or exchange control regulations, political instability which could affect U.S. investment in foreign countries and potential restrictions of the flow of international capital and currencies. Foreign companies may also be subject to less government regulation than U.S. companies. Moreover, the dividends payable on the foreign securities may be subject to foreign withholding taxes, thus reducing the net amount of income available for distribution to the Fund's Shareholders. Further, foreign securities often trade with less frequency and volume than domestic securities and, therefore, may exhibit greater price volatility. Changes in foreign exchange rates will affect, favorably or unfavorably, the value of those securities which are denominated or quoted in currencies other than the U.S. dollar. MORTGAGE-BACKED SECURITIES Mortgage-backed securities are subject to the risk of prepayment of the underlying mortgages. During periods of declining interest rates, prepayment of mortgages underlying these securities can be expected to accelerate. When the mortgage-backed securities held by a Fund are prepaid, the Fund must reinvest the proceeds in securities the yield of which reflects prevailing interest rates, which may be lower than the prepaid security. FIXED INCOME SECURITIES The market value of a Fund's fixed income investments will change in response to interest rate changes and other factors. During periods of falling interest rates, the values of outstanding fixed income securities generally rise. Conversely, during periods of rising interest rates, the values of such securities generally decline. Securities with longer maturities are subject to greater fluctuations in value than securities with shorter maturities. Changes by an NRSRO to the rating of any fixed income security and in the ability of an issuer to make payments of interest and principal also affect the value of these investments. Changes in the value of a Fund's securities will not affect cash income derived from these securities but will affect the Fund's net asset value. Fixed income securities rated BBB by S&P or Baa by Moody's (investment grade bonds) are deemed by these rating services to have speculative characteristics. Guarantees of a Fund's securities by the U.S. Government or its agencies or instrumentalities guarantee only the payment of principal and interest on the guaranteed securities, and do not guarantee the securities' yield or value or the yield or value of a Fund's shares. 20 There is a risk that the current interest rate on floating and variable rate instruments may not accurately reflect existing market interest rates. MUNICIPAL SECURITIES Since each State Tax-Exempt Bond Fund invests in municipal securities issued by governmental entities of each of their specific states, the performance of each State Tax-Exempt Bond Fund may be especially affected by factors pertaining to such state's economy and other factors specifically affecting the ability of issuers in that state to meet their obligations. As a result, the value of each State Tax-Exempt Bond Fund's shares may fluctuate more widely than the value of shares of a portfolio investing in securities relating to a number of different states. The ability of state, county, or local governments to meet their obligations will depend primarily on the availability of tax and other revenues to those governments and on their fiscal conditions generally. Municipal securities may be affected from time to time by economic, political, geographic and demographic conditions. In addition, constitutional amendments, legislative measures, executive orders, administrative regulations and voter initiatives may limit a government's power to raise revenues or increase taxes and thus could adversely affect the ability to meet financial obligations. INVESTMENT LIMITATIONS The following investment limitations constitute fundamental policies of each Fund. Fundamental policies cannot be changed with respect to a Fund without the consent of the holders of a majority of the Fund's outstanding shares. The term "majority of the outstanding shares" means the vote of (i) 67% or more of a Fund's shares present at a meeting, if more than 50% of the outstanding shares of the Fund are present or represented by proxy, or (ii) more than 50% of a Fund's outstanding shares, whichever is less. Each Fund may not: 1. Purchase securities of any issuer (except securities issued or guaranteed by the United States, its agencies or instrumentalities and repurchase agreements involving such securities) if as a result more than 5% of the total assets of a Fund would be invested in the securities of such issuer; provided, however, that a Fund may invest up to 25% of its total assets without regard to this restriction as permitted by applicable law. 2. Purchase any securities which would cause more than 25% of the total assets of a Fund to be invested in the securities of one or more issuers conducting their principal business activities in the same industry, provided that this limitation does not apply to investments in obligations issued or guaranteed by the U.S. Government or its agencies and instrumentalities, repurchase agreements involving such securities or tax-exempt securities issued by governments or political subdivisions of governments and, with respect to only the Money Market Funds, obligations issued by domestic branches of U.S. banks or U.S. branches of foreign banks subject to the same regulations as U.S. banks. For purposes of this limitation, (i) utility companies will be 21 divided according to their services, for example, gas, gas transmission, electric and telephone will each be considered a separate industry; (ii) financial service companies will be classified according to the end users of their services, for example, automobile finance, bank finance and diversified finance will each be considered a separate industry; and (iii) supranational entities will be considered to be a separate industry. It is a non-fundamental policy of the Tax-Exempt Money Market Fund and Investment Grade Tax-Exempt Bond Fund that they will not invest more than 25% of their net assets in securities of one or more issuers conducting their principal activities in the same state. In addition, the Tax-Exempt Money Market Fund, Investment Grade Tax-Exempt Bond Fund and State Tax-Exempt Bond Funds will not invest more than 25% of their total assets in securities the interest on which is derived from revenues of similar type projects. The foregoing percentages will apply at the time of the purchase of a security. Additional investment limitations are set forth in the Statement of Additional Information. PERFORMANCE INFORMATION *MONEY MARKET FUNDS From time to time each Money Market Fund may advertise its "current yield" and "effective compound yield." Both yield figures are based on historical earnings and are not intended to indicate future performance. The "current yield" of each Fund refers to the income generated by an investment in a Fund over a seven-day period (which period will be stated in the advertisement). This income is then "annualized." That is, the amount of income generated by the investment during that week is assumed to be generated each week over a 52-week period and is shown as a percentage of the investment. The "effective yield" is calculated similarly but, when annualized, the income earned by an investment in a Fund is assumed to be reinvested. The "effective yield" will be slightly higher than the "current yield" because of the compounding effect of this assumed reinvestment. The Tax-Exempt Money Market Fund may also advertise a "tax-equivalent yield," which is calculated by determining the rate of return that would have been achieved on a fully taxable investment to produce the after tax equivalent of the Fund's yield, assuming certain tax brackets for the Shareholder. *BOND AND STATE TAX-EXEMPT BOND FUNDS From time to time, the Bond and State Tax-Exempt Bond Funds may advertise yield and total return. These figures will be based on historical earnings and are not intended to indicate future performance. The yield of a Fund refers to the annualized income generated by an investment in that Fund over a specified 30-day period. The yield is calculated by assuming that the income generated by the investment during that period is generated over one year and is shown as a percentage of the investment. The Investment Grade Tax-Exempt and State Tax-Exempt Bond Funds may also advertise a "tax-equivalent yield," which is calculated by determining the rate of return that would have been achieved on a fully taxable investment to produce the after tax equivalent of the Fund's yield, assuming certain tax brackets for the Shareholder. The total return of a Fund refers to the average compounded rate of return to a hypothetical investment, including any sales charge imposed, for designated time periods (including but not limited to, the period from which a Fund 22 commenced operations through the specified date), assuming that the entire investment is redeemed at the end of each period and assuming the reinvestment of all dividend and capital gains distributions. GENERAL PERFORMANCE INFORMATION The performance of the Trust's Investor Shares and Flex Shares will normally be lower than for Trust Shares of the Trust because Investor Shares and Flex Shares are subject to distribution, service, and certain transfer agent fees not charged to Trust Shares. The performance of Flex Shares in comparison to Investor Shares will vary depending upon the investment time horizon. Each Fund may periodically compare its performance to other mutual funds tracked by mutual fund rating services, to broad groups of comparable mutual funds or to unmanaged indices which may assume reinvestment of dividends but generally do not reflect deductions for administrative and management costs. FUNDLINK All purchases and redemptions of STI Classic Fund Investor Shares may be completed via FUNDLINK, a telephone activated service that allows Shareholders to transfer money between the STI Classic Funds and a Shareholder's SunTrust bank account(s). To initiate a FUNDLINK transaction, Shareholders are provided a toll-free telephone number (1-800-428-6970) to call the Trust's Transfer Agent. To utilize this service, a Shareholder must contact an Investment Services Representative of a SunTrust Banks, Inc. affiliate bank and complete the appropriate application and authorization agreements. PURCHASE OF FUND SHARES Investor Shares are sold on a continuous basis and may be purchased by contacting the Trust's Transfer Agent, Federated Services Company (the "Transfer Agent"), either by mail, by telephone or by wire. Investor Shares may also be purchased through Investment Services Representatives of SunTrust Banks, Inc., affiliate banks which serve as Shareholder Servicing Agents to the Trust. Furthermore, Investor Shares may be purchased through SunTrust Securities, Inc., as well as, certain correspondent banks of SunTrust Banks, Inc. Shares may be purchased on days on which the New York Stock Exchange is open for business ("business day"). However, money market mutual fund shares cannot be purchased or redeemed for same day settlement on days the Federal Reserve is closed. MONEY MARKET FUNDS Purchase orders for Money Market Funds will be effective as of the business day received by the Transfer Agent and eligible to receive dividends declared the same day if the Transfer Agent receives the order before 11:00 a.m. Eastern time for the Tax-Exempt Money Market Fund or before 1:00 p.m. Eastern time for the Prime Quality Money Market Fund and U.S. Government Securities Money Market Fund and the Custodian receives federal funds before 4:00 p.m. Eastern time on such day. Otherwise, purchase orders for the Money Market Funds will be effective the next business day provided the Custodian receives readily available funds before 4:00 p.m. Eastern time on the next such business day. The purchase price is the net asset value per share next computed after the order is received and accepted by the Trust. The net asset value per share of each Fund is determined by dividing the total value of its 23 investments and other assets, less any liabilities, by its total outstanding shares. The net asset value per share is calculated as of close of business of the New York Stock Exchange (currently 4:00 p.m. Eastern time) each business day based on the amortized cost method described in the Statement of Additional Information and is expected to remain constant at $1.00 per share. Minimum initial and subsequent purchase amounts for all Investor Shares of Money Market Funds are $5,000 and $1,000, respectively. Subsequent purchases via statement coupon are permitted in amounts of $100 or more. These minimums may be waived at the Distributor's discretion. BOND AND STATE TAX-EXEMPT BOND FUNDS A purchase order for any of the Bond or State Tax-Exempt Bond Funds will be effective as of the business day it is received by the Transfer Agent if the Transfer Agent receives the order before 4:00 p.m. Eastern time. The purchase price of shares of a Fund is the net asset value next determined after a purchase order is effective plus any applicable sales charge (the "offering price"). The net asset value per share of a Fund is determined by dividing the total market value of the Fund's investments and other assets, less any liabilities, by the total outstanding shares of the Fund. Net asset value per share is determined daily as of 4:00 p.m. Eastern time on any business day. Pursuant to guidelines established by the Trustees, the Trust may use a pricing service to provide market quotations or valuations for securities owned by each Fund. Purchases will be made in full and fractional shares of a Fund calculated to three decimal places. Purchases by mail are considered received after payment by check is converted into federal funds. Minimum initial and subsequent purchase amounts, respectively, for each Bond and State Tax-Exempt Bond Fund are $2,000 and $1,000 ($100 via statement coupon). Employees and their immediate family members (spouses and children under age 21) of SunTrust Banks, Inc. and its affiliates may establish accounts with a minimum initial purchase amount of $1,000. The minimum initial purchase amount for retirement plans is $2,000. These minimums may be waived at the Distributor's discretion. Financial institutions may impose an earlier cut-off time for receipt of purchase orders directed through them to allow for processing and transmittal of these orders to the Transfer Agent for effectiveness the same day. The Trust reserves the right to reject a purchase order when the Distributor determines that it is not in the best interest of the Trust and/or Shareholder(s). Neither the Trust's Transfer Agent nor the Trust will be responsible for any loss, liability, cost or expense for acting upon telephone or wire instructions reasonably believed to be geniune. The Trust maintains procedures, including identification methods and other means, for ascertaining the identity of callers and authenticity of instructions. Shares of the Funds are offered only to residents of states in which the shares are eligible for purchase. Investors in certain states may be required to purchase shares through institutions registered as brokers/dealers in such states. Although the methodology and procedures for calculating the net asset value of Investor Shares and Flex Shares are identical to those for Trust Shares, the net asset value per share of the classes may differ because of the distribution, service, and certain transfer agent expenses charged to Investor Shares and Flex Shares. 24 *SYSTEMATIC INVESTMENT PLAN Shares of each Fund may be purchased systematically through deductions from checking or savings accounts maintained through SunTrust Banks, Inc. affiliate banks. Investors may purchase shares on a fixed schedule (semi-monthly or monthly) with amounts from $100 up to $100,000. The Systematic Investment Plan is subject to account minimum initial purchase and subsequent purchase amounts of $500 and $50 and minimum maintained balance requirements. The purchases will be effective on the business day that the transfer agent receives the transmission. *SALES CHARGE INFORMATION The following schedules apply to the purchase of Investor Shares of a Fund:
SALES CHARGE AS A SALES CHARGE AS A PERCENTAGE OF PERCENTAGE OF NET OFFERING PRICE AMOUNT INVESTED ----------------- ----------------- U.S. GOVERNMENT SECURITIES, INVESTMENT GRADE TAX-EXEMPT BOND, INVESTMENT GRADE BOND, and STATE TAX-EXEMPT BOND FUNDS Less than $100,000....................................................... 3.75% 3.90% $100,000 but less than $250,000.......................................... 3.25% 3.36% $250,000 but less than $1,000,000........................................ 2.50% 2.56% $1,000,000 and higher.................................................... 1.00% 1.01% LIMITED-TERM FEDERAL MORTGAGE SECURITIES FUND Less than $100,000....................................................... 2.50% 2.56% $100,000 but less than $250,000.......................................... 1.75% 1.78% $250,000 but less than $1,000,000........................................ 1.25% 1.27% $1,000,000 and higher.................................................... None None SHORT-TERM BOND FUND Less than $100,000....................................................... 2.00 % 2.04 % $100,000 but less than $250,000.......................................... 1.50 % 1.52 % $250,000 but less than $1,000,000........................................ 1.00 % 1.01 % $1,000,000 and higher.................................................... None None SHORT-TERM U.S. TREASURY SECURITIES FUND Less than $100,000....................................................... 1.00 % 1.01 % $100,000 but less than $250,000.......................................... 0.75 % 0.76 % $250,000 but less than $500,000.......................................... 0.50 % 0.50 % $500,000 and higher...................................................... None None
25 Employees and their immediate family members (spouses and children under age 21) of SunTrust Banks, Inc. and its affiliates, as well as persons investing distributions from qualified employee benefit retirement plans or rollovers from Individual Retirement Accounts ("IRAs") previously established with a SunTrust Banks, Inc. affiliate bank trust department, will be exempt from sales charges in purchasing Investor Shares. In addition, certain trust accounts for which a subsidiary bank of SunTrust Banks, Inc. acts in an administrative, fiduciary, investment advisory, or custodial capacity, will be exempt from sales charges and be placed in Trust Shares. When accounts for which a subsidiary bank of SunTrust Banks, Inc. has acted in a fiduciary, administrative, custodial or investment advisory capacity are closed and Investor Shares purchased, the Investor Shares that are purchased in an amount equal to or lesser than the value of the account distribution will be exempt from sales charges. Any subsequent purchases will be subject to the applicable sales charge. Purchases of STI Classic Fund Investor Shares through a SunTrust Banks, Inc. affiliate bank asset allocation account will be exempt from sales charges. Dealers will be reallowed the entire sales charge imposed on purchases of Investor Shares and may, therefore, be deemed "underwriters" for purposes of the Securities Act of 1933. *RIGHTS OF ACCUMULATION In calculating the sales charge rates applicable to current purchases of a Fund's Investor Shares by a "single purchaser," the Trust will cumulate current purchases at the offering price with the current market value of previously purchased Investor Shares of any Trust's non-Money Market Funds ("Eligible Funds") which are sold subject to a sales charge. The term "single purchaser" refers to (i) an individual, (ii) an individual and spouse purchasing shares of an Eligible Fund for their own account or for trust or custodial accounts for their minor children, or (iii) a fiduciary purchasing for any one trust, estate or fiduciary account, including employee benefit plans created under Sections 401 or 457 of the Internal Revenue Code, including related plans of the same employer. Furthermore, under this provision, purchases by a "single purchaser" shall include purchases by an individual for his/her own account in combination with (i) purchases of that individual and spouse for their joint account or for trust and custodial accounts for their minor children and (ii) purchases of that individual's spouse for his/her own account. To be entitled to a reduced sales charge based upon shares already owned, the investor must ask the Distributor for such reduction at the time of purchase and provide the account number(s) of the investor, the investor and spouse, and their children (under age 21), and give the ages of such children. The Funds may amend or terminate this right of accumulation at any time as to subsequent purchases. *LETTER OF INTENT By submitting a Letter of Intent to the Transfer Agent, a "single purchaser" may purchase shares of a non-Money Market Fund during a 13-month period at the reduced sales charge rates applicable to the aggregate amount of the intended purchases stated in the Letter. The Letter may apply to purchases made up to 90 days before the date of the Letter. The purchase price for these prior trades will not be adjusted. A written Letter of Intent provided to the Transfer Agent, is not legally binding on the 26 signer or a Fund, and provides for the holding in escrow by the Transfer Agent of 3.75% of the total amount intended to be purchased until such purchase is completed within the 13-month period. A Letter of Intent may be dated to include shares purchased up to 90 days prior to the date the Letter is signed. The 13-month period begins on the date of the earliest purchase. If the intended investment is not completed, the Transfer Agent will surrender an appropriate number of the escrowed shares for redemption in order to realize the difference between the sales charge on the shares purchased at the reduced rate and the sales charge otherwise applicable to the total shares purchased. *COMBINED PURCHASE/QUANTITY DISCOUNT PRIVILEGE The Trust will combine purchases of Investor Shares of Eligible Funds made on the same day by the investor, his/her spouse, and his/her children under age 21 when calculating the sales charge. This combination may also apply to purchases made pursuant to a Letter of Intent. Purchases made by such persons over a 13 month period could thus qualify the entire purchase for a reduced sales charge. *SPECIAL DIVIDEND SERVICES Dividend distributions made by a Fund can be automatically reinvested in any one Fund without a sales charge, subject to account minimum initial purchase amounts and minimum maintained balance requirements. *REPURCHASE OF FUND SHARES Investor Shares of a Fund may be purchased at their net asset value if such shares were redeemed from a Fund with a sales charge within the past 60 days. The amount which may be reinvested is limited to an amount up to but not exceeding the redemption proceeds. In order to exercise this privilege a written order for the purchases must be received by the Transfer Agent within 60 days after the redemption. It is the responsibility of the Investor to notify the Transfer Agent at the time of repurchase. REDEMPTION OF FUND SHARES Shareholders may redeem their Investor Shares without charge on any day that net asset value is calculated. Investor Shares may ordinarily be redeemed by mail or telephone request to the Transfer Agent. With respect to the Money Market Funds, redemption orders must be received by the Transfer Agent on a business day before 1:00 p.m. Eastern time for the Prime Quality and U.S. Government Securities Money Market Funds and before 11:00 a.m. Eastern time for the Tax-Exempt Money Market Fund. Redemption orders received after the times noted above will normally be executed the following day. The Trust reserves the right to wire redemption proceeds within five business days after receiving the redemption orders if, in the judgment of the Advisor, an earlier payment could adversely impact a Fund. With respect to the Bond and State Tax-Exempt Bond Funds, redemption orders must be received by the Transfer Agent before 4:00 p.m. Eastern time on any business day. Redemption proceeds are normally remitted within five business days following receipt of the order. Requests for redemptions from the Funds may be placed in writing or by telephone directly to an Investment Services Representative of a SunTrust Banks, Inc. affiliate bank, through SunTrust Securities, Inc. and through certain correspondent banks of SunTrust Banks, Inc. 27 (or via FUNDLINK to the Transfer Agent). Redemptions placed via telephone or FUNDLINK (1-800-428-6970) can only be placed for a minimum of $1,000. Redemption proceeds can be wired, distributed by check, or transferred to a Shareholder's account via FUNDLINK. There will be a $7.00 wire charge for redemptions processed from accounts which require wires to particular banks. When Investor Shares are purchased by check or through ACH the proceeds from the redemption of those Shares are not available, and the Shares may not be exchanged, until the Trust or its agents are reasonably certain that the purchase check has cleared, which could take up to 7 business days. A Shareholder may be required to redeem Investor Shares if the balance in a Shareholder's Fund account drops below $2,000 for the Bond and State Tax-Exempt Bond Funds ($5,000 for the Money Market Funds) as a result of redemptions, and, the Shareholder does not increase its balance to at least $2,000 for the Bond and State Tax-Exempt Bond Funds ($5,000 for the Money Market Funds) on 60 days' written notice. The minimum account balance for employees of SunTrust is $1,000 for the Bond and State Tax-Exempt Bond Funds. The Trust intends to pay cash for all shares redeemed, but under abnormal conditions which make payment in cash unwise, payment may be made wholly or partly in liquid portfolio securities with a market value equal to the redemption price. In such cases, an investor may incur brokerage costs in converting such securities to cash. Redemptions of $25,000 or greater for Bond and State Tax-Exempt Bond Funds must be in writing and a signature guarantee must accompany the written request. *SYSTEMATIC WITHDRAWAL PLAN A systematic withdrawal plan can be established for any Fund account with a $10,000 minimum balance. Under the plan, redemptions can be automatically processed (monthly, quarterly, semi-annually or annually) by check or through an electronic transfer to a Shareholder's SunTrust Banks, Inc. affiliate bank account with a minimum redemption amount of $50. EXCHANGES Some or all of the Investor Shares of the Funds for which payment has been received (i.e., an established account) may be exchanged for Investor Shares of other Funds within the Trust. Shares being exchanged for the first time from a Money Market Fund into a Fund with a sales charge will be subject to the sales charge of that Fund. Likewise, Shares being exchanged for the first time into a Fund with a higher sales charge will be subject to an incremental sales charge. Exchanges made from a Fund with a higher sales charge to a Fund with a lower sales charge or a Money Market Fund are made without a charge. Four exchanges may be made per calendar year. More than four exchanges in a year may be considered an abuse of the exchange privilege. The Fund reserves the right to charge a $10.00 fee for each exchange. A Shareholder with more than four exchanges per year will be notified prior to the imposition of any such fee. Exchanges may be requested through an Investment Services Representative of a SunTrust Banks, Inc. affiliate bank, SunTrust Securities, Inc. and certain correspondent banks of SunTrust Banks, Inc. either by telephone or in writing (or via FUNDLINK through the Fund's Transfer Agent). The minimum exchange amount is $1,000 subject to account minimum initial purchase amounts and minimum maintained balance requirements. This exchange offer is subject to 28 change or termination by the Trust at any time upon sixty days' notice. DIVIDENDS AND DISTRIBUTIONS MONEY MARKET FUNDS Dividends from net investment income (exclusive of capital gains) of each of the Money Market Funds are declared on each business day to Shareholders at the close of business on the day of declaration. Net income for dividend purposes consists of (i) interest accrued and original issue discount earned on the Fund's assets, (ii) plus the amortization of market discount (except in the case of the Tax-Exempt Money Market Fund) and minus the amortization of market premium on such assets, (iii) less accrued expenses directly attributable to the Fund and the general expenses of the Trust prorated to the Fund on the basis of its relative net assets. Investor Shares begin earning dividends on the business day the purchase order is effective and continue earning dividends through and including the business day before the redemption order is effective. Dividends are paid within ten business days after the end of each month in the form of additional Investor Shares of the same Fund unless the Shareholder has elected prior to the date of distribution to receive payment in cash. Such election, or any revocation thereof, must be made in writing at least 15 days prior to the date of distribution to the Fund's transfer agent and will become effective with respect to dividends paid after its receipt. Dividends are paid within ten business days after a Shareholder's complete redemption of his Investor Shares in a Fund. BOND AND STATE TAX-EXEMPT BOND FUNDS Dividends from net investment income (exclusive of capital gains) are declared on each business day and paid monthly by each of the Bond and State Tax-Exempt Bond Funds. Each Fund's net realized capital gains (including net short-term capital gains) are distributed at least annually. Net income for dividend purposes consists of (i) interest accrued and original issue discount earned on the Fund's assets, (ii) plus the amortization of market discount (except in the case of the Investment Grade Tax-Exempt Bond and State Tax-Exempt Bond Funds) and minus the amortization of market premium on such assets, (iii) plus dividend or distribution income on such assets, (iv) less accrued expenses directly attributable to the Fund and the general expenses of the Trust prorated to the Fund on the basis of its relative net assets. Investor Shares invested in the Bond and State Tax-Exempt Bond Funds are eligible to begin earning dividends that are declared on the business day after the purchase order is effective and continue to be eligible for dividends through and including the day the redemption order is effective. The net asset value of Investor Shares of the Funds will be reduced by the amount of any dividend or distribution. Dividends and distributions are paid in the form of additional Investor Shares of the same Fund unless the customer has elected prior to the date of distribution to receive payment in cash. Such election, or any revocation thereof, must be made in writing prior to the date of distribution to the Trust's transfer agent and will become effective with respect to dividends paid after its receipt. Dividends and distributions are paid within ten days of the end of the time period to which the dividend relates. Dividends and distributions payable to a Shareholder are paid in cash within ten business days after a Shareholder's complete redemption of its Investor Shares in a Fund. The amount of dividends payable on Investor Shares and Flex Shares will be less than the 29 dividends payable on Trust Shares because of the distribution and certain transfer agent expenses charged to Investor Shares and Flex Shares. The amount of dividends payable on Flex Shares generally will be less than the amount of dividends payable on Investor Shares due to the higher distribution and service expenses of Flex Shares. TAX INFORMATION The following summary of federal income tax consequences is based on current tax laws and regulations, which may be changed by legislative, judicial or administrative action. No attempt has been made to present a detailed explanation of the federal, state, or local income tax treatment of each Fund or its Shareholders. In particular, no attempt has been made herein to provide information on the tax laws of Florida, Georgia or Tennessee. Accordingly, Shareholders are urged to consult their tax advisors regarding specific questions as to federal, state and local income taxes. TAX STATUS OF EACH FUND Each Fund is treated as a separate entity for federal tax purposes, and is not combined with the Trust's other Funds. Each Fund intends to qualify for the special tax treatment afforded regulated investment companies by the Internal Revenue Code of 1986, as amended, (the "Code") so that it will be relieved of federal income tax on that part of its net investment income and net capital gains (the excess of long-term capital gains over net short-term capital loss) which is distributed to Shareholders. Each Fund intends to make sufficient distributions prior to the end of each calendar year to avoid liability for the federal excise tax applicable to regulated investment companies. TAX STATUS OF DISTRIBUTIONS: MONEY MARKET FUNDS The Prime Quality Money Market Fund and the U.S. Government Securities Money Market Fund will each distribute all of their net investment income (including, for this purpose, net short-term capital gains) to Shareholders. Dividends from net investment income will be taxable to Shareholders as ordinary income whether received in cash or in additional shares. The Tax-Exempt Money Market Fund will distribute all of its net investment income (including net short-term capital gains) to Share- holders. If, at the close of each quarter of its taxable year, at least 50% of the value of the Fund's assets consists of obligations the interest on which is excludable from gross income, the Fund may pay exempt-interest dividends to its Shareholders. Those dividends constitute the portion of the aggregate dividends as designated by the Fund, equal to the excess of the excludable interest over certain amounts disallowed as deductions. Exempt-interest dividends are excludable from a Shareholder's gross income for regular federal income tax purposes, but may have alternative minimum tax consequences. See the Statement of Additional Information. Current federal tax law limits the types and volume of bonds qualifying for the federal income tax exemption of interest, which may have an effect on the ability of the Tax-Exempt Money Market Fund to purchase sufficient amounts of tax-exempt securities to satisfy the Code's requirements for the payment of exempt-interest dividends. 30 TAX STATUS OF DISTRIBUTIONS: BOND AND STATE TAX-EXEMPT BOND FUNDS Each Fund will distribute substantially all of its net investment income (including, for this purpose, net short-term capital gains) to Shareholders. Dividends from net investment income paid by the Funds will be taxable to Shareholders as ordinary income whether received in cash or in additional shares. Each of the Investment Grade Tax-Exempt Bond and State Tax-Exempt Bond Funds will distribute all of its net investment income (including net short-term capital gains) to Shareholders. If, at the close of each quarter of its taxable year, at least 50% of the value of a Fund's assets consist of obligations the interest on which is excludable from gross income, the Fund may pay "exempt-interest dividends" to its Shareholders. Those dividends constitute the portion of the aggregate dividends as designated by the Fund, equal to the excess of the excludable interest over certain amounts disallowed as deductions. Exempt-interest dividends are excludable from a Shareholder's gross income for regular federal income tax purposes, but may have alternative minimum tax consequences. See the Statement of Additional Information. Current federal tax law limits the types and volume of bonds qualifying for the federal income tax exemption of interest, which may have an effect on the ability of the Investment Grade Tax-Exempt Bond and State Tax-Exempt Bond Funds to purchase sufficient amounts of tax-exempt securities to satisfy the Code's requirements for the payment of exempt-interest dividends. TAX STATUS OF DISTRIBUTIONS: ALL FUNDS Dividends from net investment income will qualify for the dividends received deduction for corporate Shareholders only to the extent such distributions are derived from dividends paid by domestic corporations. Dividends from net capital gains (the excess of net long-term capital gains over net short-term capital loss) will be treated as long-term capital gains, regardless of how long the Shareholder has held shares and regardless of whether distributions are received in cash or in additional shares. For certain individual Shareholders, net long-term capital gains may be taxed at a lower rate than ordinary income. Each Fund will make annual reports to Shareholders of the federal income tax status of all distributions. Dividends declared by a Fund in October, November or December of any year and payable to Shareholders of record on a date in that month will be deemed to have been paid by the Fund and received by the Shareholders on December 31, of that year, if paid by the Fund any time during the following January. Income received on direct U.S. obligations is exempt from tax at the state level when received directly by a Fund and may be exempt, depending on the state, when received by a Shareholder from a Fund provided certain state-specific conditions are satisfied. Not all states permit such income dividends to be tax-exempt and some require that a certain minimum percentage of an investment company's income be derived from state tax-exempt interest. Each Fund will inform Shareholders annually of the percentage of income and distributions derived from direct U.S. obligations. Shareholders should consult their tax advisors to determine whether any portion of the income dividends received from a Fund is considered tax exempt in their particular states. Income derived by a Fund from obligations of foreign issuers may be subject to foreign withholding taxes. No Fund will be able to elect to treat Shareholders as having paid their proportionate share of such foreign taxes. 31 Interest on indebtedness incurred or continued by a Shareholder in order to purchase shares of a "tax-exempt" Fund is not deductible. Furthermore, entities or persons who are "substantial users" (or persons related to "substantial users") of facilities financed by "private activity bonds" or certain industrial development bonds should consult their tax advisors before purchasing shares. For these purposes, the term "substantial user" is defined generally to include a "non-exempt person" who regularly uses in trade or business a part of a facility financed from the proceeds of such bonds. See the Statement of Additional Information. A sale, exchange or redemption of Fund shares is a taxable event to the Shareholder. STI CLASSIC FUNDS INFORMATION THE TRUST The Trust was organized as a Massachusetts Business Trust under a Declaration of Trust dated January 15, 1992. The Declaration of Trust permits the Trust to offer separate portfolios of shares and different classes of each Fund. All consideration received by the Trust for shares of any Fund and all assets of such Fund belong to that Fund and would be subject to liabilities related thereto. The Trust pays its expenses, including fees of its service providers, audit and legal expenses, expenses of preparing prospectuses, proxy solicitation material and reports to Shareholders, costs of custodial services and registering the shares under federal and state securities laws, pricing, insurance expenses, litigation and other extraordinary expenses, brokerage costs, interest charges, taxes and organization expenses. BOARD OF TRUSTEES The management and affairs of the Trust are supervised by the Trustees under the laws governing business trusts in the Commonwealth of Massachusetts. The Trustees have approved contracts under which, as described below, certain companies provide essential management services to the Trust. INVESTMENT ADVISORS The Advisors are indirect wholly-owned subsidiaries of SunTrust Banks, Inc. ("SunTrust"), a southeastern regional bank holding company with assets of $44.2 billion as of June 30, 1995. SunTrust ranks among the twenty largest U.S. banking companies. Its three principal subsidiaries--SunTrust Banks of Florida, Inc., SunTrust Banks of Georgia, Inc. and SunTrust Banks of Tennessee, Inc.--provide a wide range of personal and corporate banking, trust, and investment services through more than 600 locations in the three-state area. Total discretionary assets under management with SunTrust Banks, Inc. equalled approximately $42 billion as of December 31, 1994. Trusco Capital Management, Inc. ("Trusco") serves as the Advisor to the Money Market, Short-Term U.S. Treasury Securities, Short-Term Bond and U.S. Government Securities Funds. As of June 30, 1995, Trusco had approximately $11.5 billion in assets under management. The principal business address of Trusco is 50 Hurt Plaza, Suite 1400, Atlanta, GA 30303. STI Capital Management, N.A. ("STI Capital") (formerly SunBank Capital Management, N.A.) serves as the Advisor to the Limited-Term Federal Mortgage Securities, Investment Grade Bond, Investment Grade Tax-Exempt Bond and Florida Tax-Exempt Bond Funds. As of June 30, 32 1995, STI Capital had discretionary management authority with respect to assets of approximately $11.1 billion. The principal business address of STI Capital is P.O. Box 3808, Orlando, FL 32802. SunTrust Bank, Chattanooga, N.A. ("SunTrust Bank, Chattanooga") (formerly American National Bank & Trust Company) serves as the Advisor to the Tennessee Tax-Exempt Bond Fund. SunTrust Bank, Chattanooga, N.A. had approximately $1.5 billion in assets under management as of June 30, 1995. The principal business address of SunTrust Bank, Chattanooga, N.A. is 736 Market Street, Chattanooga, TN 37402. SunTrust Bank, Atlanta (formerly Trust Company Bank) serves as the Advisor to the Georgia Tax-Exempt Bond Fund. As of December 31, 1994, SunTrust Bank, Atlanta had approximately $17.4 billion in assets under management. The principal address for SunTrust Bank, Atlanta is 25 Park Place, Atlanta, GA 30303. The Trust and the above Advisors have entered into advisory agreements (the "Advisory Agreements"). Under the Advisory Agreements, the Advisors make the investment decisions for the assets of the Fund(s) they advise and continuously review, supervise and administer their respective Fund's investment program. The Advisors discharge their responsibilities subject to the supervision of, and policies established by, the Trustees of the Trust. STI CLASSIC FUNDS ARE NOT DEPOSITS, ARE NOT INSURED OR GUARANTEED BY THE FDIC OR ANY OTHER GOVERNMENT AGENCY, AND ARE NOT ENDORSED OR GUARANTEED BY AND DO NOT CONSTITUTE OBLIGATIONS OF SUNTRUST BANKS, INC. OR ANY OF ITS AFFILIATES. INVESTMENTS IN THE FUNDS INVOLVE RISK, INCLUDING THE POSSIBLE LOSS OF PRINCIPAL. RETURNS AND PRINCIPAL VALUES WILL FLUCTUATE AND SHARES AT REDEMPTION MAY BE WORTH MORE OR LESS THAN THEIR ORIGINAL COST. THERE IS NO GUARANTEE THAT ANY STI CLASSIC FUND WILL ACHIEVE ITS INVESTMENT OBJECTIVE. With respect to all Funds, the Advisors may execute brokerage or other agency transactions through affiliates of the Advisors. For the services provided and expenses incurred pursuant to the Advisory Agreements: Trusco is entitled to receive advisory fees computed daily and paid monthly at the annual rate of .74%, .65%, .65%, .55%, .65% and .65% of the average daily net assets of the U.S. Government Securities Fund, Prime Quality Money Market Fund, U.S. Government Securities Money Market Fund, Tax-Exempt Money Market Fund, Short-Term U.S. Treasury Securities Fund and Short-Term Bond Fund, respectively; STI Capital is entitled to receive advisory fees computed daily and paid monthly at the annual rate of .65%, .74%, .74% and .65% of the average daily net assets of the Florida Tax-Exempt Bond Fund, Investment Grade Bond Fund, Investment Grade Tax-Exempt Bond Fund and Limited-Term Federal Mortgage Securities Fund, respectively; SunTrust Bank, Chattanooga is entitled to receive advisory fees computed daily and paid monthly at the annual rates of .65% of the average daily net assets of the Tennessee Tax-Exempt Bond Fund; and SunTrust Bank, Atlanta is entitled to receive advisory fees computed daily and paid monthly at the annual rate of .65% of the average daily net assets of the Georgia Tax-Exempt Bond Fund. From time to time, an Advisor may waive (either voluntarily or pursuant to applicable state limitations) advisory fees payable by a Fund. Currently, the Advisors and the Distributor have agreed to voluntary reductions in their respective fees as well as reductions in service and distribution fees in amounts necessary to maintain the total operating expenses at the amounts set forth in the Expense Summary. Voluntary reductions of fees may be terminated at anytime. 33 For the fiscal year ended May 31, 1995: Trusco received advisory fees computed daily and paid monthly at the annual rate of .50%, .50%, .46%, .19%, .42% and .0% of the average daily net assets of the Prime Quality Money Market Fund, U.S. Government Securities Money Market Fund, Tax-Exempt Money Market Fund, Short-Term U.S. Treasury Securities Fund, Short-Term Bond Fund and U.S. Government Securities Fund, respectively; STI Capital received advisory fees computed daily and paid monthly at the annual rate of .12%, .62%, .61%, and .33% of the average daily net assets of the Florida Tax-Exempt Bond Fund, Investment Grade Bond Fund, Investment Grade Tax-Exempt Bond Fund and Limited-Term Federal Mortgage Securities Fund, respectively; SunTrust Bank, Chattanooga received advisory fees computed daily and paid monthly at the annual rates of .0% of the average daily net assets of the Tennessee Tax-Exempt Bond Fund and SunTrust Bank, Atlanta received advisory fees computed daily and paid monthly at the annual rate of .27% of the average daily net assets of the Georgia Tax-Exempt Bond Fund. PORTFOLIO MANAGERS Mr. Charles B. Leonard, CFA, First Vice President of Trusco, and Michael L. Ford, an Associate of Trusco, have been responsible for the day-to-day management of the U.S. Government Securities Fund since its inception. Mr. Leonard has been with Trusco since 1986 as the senior fixed income manager. Mr. Ford has been with Trusco since April 1994. Prior to joining Trusco, Mr. Ford served as a senior securities analyst with Liberty Capital Advisors from January, 1992 to April, 1994 and has served as a securities analyst at Southern Farm Bureau Life Insurance Company from 1990 to 1992. Mr. Ford was a graduate student at Millsaps College from 1989 to 1991. Mr. L. Earl Denney, CFA, and Mr. Dave E. West, CFA, have been responsible for the day-to-day management of the Limited-Term Federal Mortgage Securities Fund since its inception. Mr. Denney has served as Executive Vice President of STI Capital since 1983. Mr. West has served as a fixed income portfolio manager with STI Capital since 1989. Mr. Denney has also been responsible for the day-to-day management of the Investment Grade Bond Fund since its inception. Ms. Gay Cash has been responsible for the day-to-day management of the Georgia Tax-Exempt Bond Fund since its inception. Ms. Cash has served as a Vice President of SunTrust, Atlanta since January 1, 1987. Mr. Ronald Schwartz, CFA, has been responsible for the day-to-day management of the Florida Tax-Exempt Bond and Investment Grade Tax-Exempt Bond Funds since their inception. Mr. Schwartz joined STI Capital in 1988 and currently serves as a Senior Vice President. Mr. Schwartz, has also been responsible for the day-to-day management of the Tennessee Tax-Exempt Bond Fund since July, 1995. Mr. Schwartz serves as Vice President and Trust Investment Officer of SunTrust Bank, Chattanooga. Starting September, 1995, Patricia Love became co-portfolio manager of the Tennessee Tax-Exempt Bond Fund. Ms. Love serves as Vice President and Trust Investment Officer of SunTrust Bank, Chattanooga. Ms. Love is also a portfolio manager at STI Capital. Ms. Love has been with SunTrust Bank, Chattanooga since 1993 and prior to that served as a portfolio analyst with First City Texas from 1986 to 1993. Ms. Agnes Pampush has been responsible for the day-to-day management of the Short-Term Bond and Short-Term U.S. Treasury Securities Funds since their inception. Ms. Pampush has 34 served as Vice President and Fixed Income Portfolio Manager of Trusco since 1988. BANKING LAWS Banking laws and regulations, including the Glass-Steagall Act as presently interpreted by the Board of Governors of the Federal Reserve System, presently (a) prohibit a bank holding company registered under the Federal Bank Holding Company Act of 1956 or its affiliates from sponsoring, organizing, controlling, or distributing the shares of a registered, open-end investment company continuously engaged in the issuance of its shares, and generally prohibit banks from underwriting securities, but (b) do not prohibit such a bank holding company or affiliate or banks generally from acting as an investment advisor, transfer agent, or custodian to such an investment company or from purchasing shares of such a company as agent for and upon the order of a customer. The Advisors believe that each may perform the services for STI Classic Funds contemplated by their agreements described in this Prospectus without violation of applicable banking laws or regulations. However, future changes in legal requirements relating to the permissible activities of banks and their affiliates, as well as future interpretations of present requirements, could prevent the Advisors from continuing to perform services for STI Classic Funds. If the Advisors were prohibited from providing services to STI Classic Funds, the Board of Trustees would consider selecting other qualified firms. Any new investment advisory agreements would be subject to Shareholder approval. If current restrictions preventing a bank or its affiliates from legally sponsoring, organizing, controlling, or distributing shares of an investment company were relaxed, the Advisors, or their affiliates, would consider the possibility of offering to perform additional services for STI Classic Funds. It is not possible, of course, to predict whether or in what form such legislation might be enacted or the terms upon which the Advisors, or such affiliates, might offer to provide such services. In addition, state securities laws on this issue may differ from the interpretations of federal law expressed herein and banks and financial institutions may be required to register as dealers pursuant to state law. DISTRIBUTION SEI Financial Services Company (the "Distributor"), a wholly-owned subsidiary of SEI Corporation ("SEI"), and the Trust, are parties to a Distribution Agreement ("Distribution Agreement") dated May 29, 1992. The Investor Shares of each Fund have a distribution plan dated May 29, 1992, as amended ("Investor Plan"). The Distribution Agreement and the Investor Plan provide that the Investor Shares of the Funds may pay a distribution services fee to the Distributor of up to .20% of the average daily net assets of the Prime Quality Money Market Fund, .17% of the average daily net assets of the U.S. Government Securities Money Market Fund, .15% of the average daily net assets of the Tax-Exempt Money Market Fund, .18% of the average daily net assets of the Short-Term U.S. Treasury Securities Fund, .23% of the average daily net assets of the Short-Term Bond Fund, .43% of the average daily net assets of the Investment Grade Bond Fund, .43% of the average daily net assets of the Investment Grade Tax-Exempt Bond Fund, .18% of the average daily net assets of the Florida Tax-Exempt Bond Fund, .18% of the average daily net assets of the Georgia Tax-Exempt Bond Fund, .18% of the average daily net assets of the Tennessee Tax-Exempt Bond Fund, .38% of the average daily net assets of 35 the U.S. Government Securities Fund and .23% of the average daily net assets of the Limited-Term Federal Mortgage Securities Fund. The Distributor will waive all or a portion of the distribution fee in order to limit the net expenses of the Investor Shares to the amounts set forth under "Expense Summary." The Distributor may apply this fee toward: (a) compensation for its services in connection with distribution assistance or provision of shareholder services; or (b) payments to financial institutions and intermediaries such as banks (including SunTrust Banks, Inc.'s affiliate banks), savings and loan associations, insurance companies, and investment counselors, broker-dealers, and the Distributor's affiliates and subsidiaries as compensation for services, reimbursement of expenses incurred in connection with distribution assistance, or provision of Shareholder services. The Investor Plan is characterized as a compensation plan since the distribution fee will be paid to the Distributor without regard to the distribution or shareholder service expenses incurred by the Distributor or the amount of payments made to financial institutions and intermediaries. SunTrust Banks, Inc.'s affiliate banks and certain correspondent banks may serve as shareholder servicing agents to the Trust. A prospective investor may visit any one of the Investment Services offices of the SunTrust Banks, Inc.'s affiliate banks, as listed on the last pages of the Prospectus, SunTrust Securities, Inc. or certain correspondent banks of SunTrust Banks, Inc. to receive copies of the Prospectuses for the Investor Shares of the Trust and application forms. Trust Shares of each Fund are offered without a sales charge or a distribution fee primarily to institutional investors, including affiliates and correspondents for the investment of funds in which they act in a fiduciary, agency, investment advisory or custodial capacity. It is possible that a financial institution may offer different classes of shares to its customers and thus receive different compensation with respect to different classes of shares. Each Fund may execute brokerage or other agency transactions through the Distributor, for which the Distributor receives compensation. ADMINISTRATION SEI Financial Management Corporation (the "Administrator"), a wholly-owned subsidiary of SEI, and the Trust are parties to an Administration Agreement (the "Administration Agreement"). Under the terms of the Administration Agreement, the Administrator provides the Trust with certain administrative services, other than investment advisory services, including regulatory reporting, all necessary office space, equipment, personnel, and facilities. The Administrator is entitled to a fee, which is calculated daily and paid monthly, at an annual rate as follows:
AVERAGE AGGREGATE DAILY NET ASSETS FEE - -------------------------------------------- --------- $1 - $1 billion .10% over $1 billion to $5 billion .07% over $5 billion to $8 billion .05% over $8 billion to $10 billion .045% over $10 billion .04%
From time to time, the Administrator may waive (either voluntarily or pursuant to applicable state limitations) all or a portion of the administration fee payable with respect to the Trust. TRANSFER AGENT AND DIVIDEND DISBURSING AGENT Federated Services Company, Pittsburgh, PA is the Transfer Agent for the shares of the Trust and dividend disbursing agent for the Trust. 36 CUSTODIAN SunTrust Bank, Atlanta, c/o STI Trust and Investment Operations, Inc., 303 Peachtree Street N.E., 14th Floor, Atlanta, GA 30308, serves as Custodian of the assets of each Fund of the Trust except the International Equity Index Fund. The Bank of California, 475 Sansome Street, Suite 1200, San Francisco, CA 94111, serves as Custodian for the International Equity Index Fund. The Custodians hold cash, securities and other assets of the Trust as required by the Investment Company Act of 1940. LEGAL COUNSEL Morgan, Lewis & Bockius, LLP, Philadelphia, PA, serves as legal counsel to the Trust. INDEPENDENT PUBLIC ACCOUNTANTS The independent public accountants to the Trust are Arthur Andersen, LLP, Philadelphia, PA. OTHER INFORMATION VOTING RIGHTS Each share held entitles the Shareholder of record to one vote. Each Fund or class of a Fund will vote separately on matters relating solely to that Fund or class. As a Massachusetts business trust, the Trust is not required to hold annual meetings of Shareholders but approval will be sought for certain changes in the operation of the Trust and for the election of Trustees under certain circumstances. In addition, a Trustee may be removed by the remaining Trustees or by Shareholders at a special meeting called upon written request of Shareholders owning at least 10% of the outstanding shares of the Trust. In the event that such a meeting is requested the Trust will provide appropriate assistance and information to the Shareholders requesting the meeting. REPORTING The Trust issues unaudited financial information semi-annually and audited financial statements annually. The Trust furnishes proxy statements and other reports to Shareholders of record. SHAREHOLDER INQUIRIES Shareholders may contact the Transfer Agent in order to obtain information on account statements, procedures and other related information by calling 1-800-428-6970. DESCRIPTION OF PERMITTED INVESTMENTS The following is a description of the permitted investments for the Funds. Further discussion is contained in the Statement of Additional Information. AMERICAN DEPOSITARY RECEIPTS ("ADRs") -- ADRs are securities, typically issued by a U.S. financial institution (a "depositary"), that evidence ownership interests in a security or a pool of securities issued by a foreign issuer and deposited with the depositary. ADRs may be available through "sponsored" or "unsponsored" facilities. A sponsored facility is established jointly by the issuer of the security underlying the receipt and a depositary, whereas an unsponsored facility may be established by a depositary without participation by the issuer of the underlying security. Holders of unsponsored depositary receipts generally bear all the costs of the unsponsored facility. The depositary of an unsponsored facility frequently is under no obligation to distribute shareholder communications received from the issuer of the deposited 37 security or to pass through, to the holders of the receipts, voting rights with respect to the deposited securities. ASSET-BACKED SECURITIES -- Asset-backed securities are securities secured by non-mortgage assets such as company receivables, truck and auto loans, leases and credit card receivables. Such securities are generally issued as pass-through certificates, which represent undivided fractional ownership interests in the underlying pools of assets. Such securities also may be debt instruments, which are also known as collateralized obligations and are generally issued as the debt of a special purpose entity, such as a trust, organized solely for the purpose of owning such assets and issuing such debt. Asset-backed securities are not issued or guaranteed by the U.S. Government or its agencies or instrumentalities; however, the payment of principal and interest on such obligations may be guaranteed up to certain amounts and for a certain period by a letter of credit issued by a financial institution (such as a bank or insurance company) unaffiliated with the issuers of such securities. The purchase of asset-backed securities raises risk considerations peculiar to the financing of the instruments underlying such securities. For example, there is a risk that another party could acquire an interest in the obligations superior to that of the holders of the asset-backed securities. There also is the possibility that recoveries on repossessed collateral may not, in some cases, be available to support payments on those securities. Asset-backed securities entail prepayment risk, which may vary depending on the type of asset, but is generally less than the prepayment risk associated with mortgage-backed securities. In addition, credit card receivables are unsecured obligations of the card holder. The market for asset-backed securities is at a relatively early stage of development. Accordingly, there may be a limited secondary market for such securities. BANKERS' ACCEPTANCES -- Bankers' acceptances are bills of exchange or time drafts drawn on and accepted by a commercial bank. Bankers' acceptances are used by corporations to finance the shipment and storage of goods. Maturities are generally six months or less. CERTIFICATES OF DEPOSIT -- Certificates of deposit are interest bearing instruments with a specific maturity. They are issued by banks and savings and loan institutions in exchange for the deposit of funds and normally can be traded in the secondary market prior to maturity. Certificates of deposit with penalties for early withdrawal will be considered illiquid. COMMERCIAL PAPER -- Commercial paper is a term used to describe unsecured short-term promissory notes issued by banks, municipalities, corporations and other entities. Maturities on these issues vary from a few to 270 days. CORPORATE DEBT OBLIGATIONS -- Corporate debt obligations are debt instruments issued by corporations with maturities exceeding 270 days. Such instruments may include putable corporate bonds and zero coupon bonds. CUSTODIAL RECEIPTS -- Custodial receipts are interests in separately traded interest and principal component parts of U.S. Treasury obligations that are issued by banks or brokerage firms and are created by depositing U.S. Treasury obligations into a special account at a custodian bank. The custodian holds the interest and principal payments for the benefit of the registered owners of the certificates or 38 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"). Receipts are sold as zero coupon securities which means that they are sold at a substantial discount and redeemed at face value at their maturity date without interim cash payments of interest or principal. This discount is accreted over the life of the security, and such accretion will constitute the income earned on the security for both accounting and tax purposes. Because of these features, such securities may be subject to greater interest rate volatility than interest paying investments. See "Zero Coupon Obligations." DERIVATIVES -- Derivatives are securities whose value is derived from an underlying contract, index or security, or any combination thereof. This includes: futures, swap agreements, and some mortgage-back securities (CMOs, REMICs, IOs and POs). See elsewhere in this "Description of Permitted Investments" for discussions of these various instruments, and see "Investment Policies and Strategies" for more information about any investment policies and limitations applicable to their use. DOLLAR ROLLS -- Dollar rolls are transactions in which securities are sold for delivery in the current month and the seller simultaneously contracts to repurchase substantially similar securities on a specified future date. Any difference between the sale price and the purchase price is netted against the interest income foregone on the securities sold to arrive at an implied borrowing rate. Alternatively, the sale and purchase transactions can be executed at the same price, with the Fund being paid a fee as consideration for entering into the commitment to purchase. 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. EURODOLLAR AND YANKEE BANK OBLIGATIONS -- Eurodollar bank obligations are U.S. dollar-denominated certificates of deposit or time deposits issued outside the United States by foreign branches of U.S. banks or by foreign banks. Yankee bank obligations are U.S. dollar denominated obligations issued in the United States by foreign banks. FUTURES CONTRACTS AND OPTIONS ON FUTURES CONTRACTS -- Futures contracts provide for the future sale by one party and purchase by another party of a specified amount of a specific security at a specified future time and at a specified price. An option on a futures contract gives the purchaser the right, in exchange for a premium, to assume a position in a futures contract at a specified exercise price during the term of the option. A Fund may use futures contracts and related options for bona fide hedging purposes, to offset changes in the value of securities held or 39 expected to be acquired, to minimize fluctuations in foreign currencies, or to gain exposure to a particular market or instrument. A Fund will minimize the risk that it will be unable to close out a futures contract by only entering into futures contracts which are traded on national futures exchanges. Stock index futures are futures contracts for various stock indices that are traded on registered securities exchanges. A stock index futures contract obligates the seller to deliver (and the purchaser to take) an amount of cash equal to a specific dollar amount times the difference between the value of a specific stock index at the close of the last trading day of the contract and the price at which the agreement is made. There are risks associated with these activities, including the following: (1) the success of a hedging strategy may depend on an ability to predict movements in the prices of individual securities, fluctuations in markets and movements in interest rates, (2) there may be an imperfect or no correlation between the changes in market value of the securities held by the Fund and the prices of futures and options on futures, (3) there may not be a liquid secondary market for a futures contract or option, (4) trading restrictions or limitations may be imposed by an exchange, and (5) government regulations may restrict trading in futures contracts and futures options. GUARANTEED INVESTMENT CONTRACTS ("GICs") -- GICs are contracts issued by U.S. insurance companies. Pursuant to such contracts, the Fund makes cash contributions to a deposit fund of the insurance company's general account. The insurance company then credits to the Fund on a monthly basis guaranteed interest at either a fixed, variable or floating rate. A GIC provides that this guaranteed interest will not be less than a certain minimum rate. A GIC is a general obligation of the issuing insurance company and not a separate account. The purchase price paid for a GIC becomes part of the general assets of the issuer, and the contract is paid at maturity from the general assets of the issuer. Generally, GICs are not assignable or transferable without the permission of the issuing insurance company. For this reason, an active secondary market in GICs does not currently exist and GICs are considered to be illiquid investments. ILLIQUID SECURITIES -- Illiquid securities are securities that cannot be disposed of within seven business days at approximately the price at which they are being carried on the Fund's books. An illiquid security includes a demand instrument with a demand notice period exceeding seven days, where there is no secondary market for such security, and repurchase agreements with durations (or maturities) over seven days in length. LOAN PARTICIPATIONS -- Loan participations are interests in loans to U.S. corporations which are administered by the lending bank or agent for a syndicate of lending banks, and sold by the lending bank or syndicate member ("intermediary bank"). In a loan participation, the borrower corporation will be deemed to be 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 such borrower as a result of improper conduct by the intermediary bank. In addition, in the event the underlying corporate 40 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 such 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. MEDIUM TERM NOTES -- Medium term notes are periodically or continuously offered corporate or agency debt that differs from traditionally underwritten corporate bonds only in the process by which they are issued. MORTGAGE-BACKED SECURITIES -- Mortgage-backed securities are instruments that entitle the holder to a share of all interest and principal payments from mortgages underlying the security. The mortgages backing these securities include conventional thirty-year fixed rate mortgages, graduated payment mortgages, and adjustable rate mortgages. During periods of declining interest rates, prepayment of mortgages underlying mortgage-backed securities can be expected to accelerate. Prepayment of mortgages which underlie securities purchased at a premium often results in capital losses, while prepayment of mortgages purchased at a discount often results in capital gains. Because of these unpredictable prepayment characteristics, it is often not possible to predict accurately the average life or realized yield of a particular issue. GOVERNMENT PASS-THROUGH SECURITIES: These are securities that are issued or guaranteed by a U.S. Government agency representing an interest in a pool of mortgage loans. The primary issuers or guarantors of these mortgage-backed securities are GNMA, FNMA and FHLMC. FNMA and FHLMC obligations are not backed by the full faith and credit of the U.S. Government as GNMA certificates are, but FNMA and FHLMC securities are supported by the instrumentalities' right to borrow from the U.S. Treasury. GNMA, FNMA and FHLMC each guarantees timely distributions of interest to certificate holders. GNMA and FNMA also each guarantees timely distributions of scheduled principal. FHLMC has in the past guaranteed only the ultimate collection of principal of the underlying mortgage loan; however, FHLMC now issues mortgage-backed securities (FHLMC Gold PCs) which also guarantee timely payment of monthly principal reductions. Government and private guarantees do not extend to the securities' value, which is likely to vary inversely with fluctuations in interest rates. PRIVATE PASS-THROUGH SECURITIES: These are mortgage-backed securities issued by a non-governmental entity, such as a trust. These securities include collateralized mortgage obligations ("CMOs") and real estate mortgage investment conduits ("REMICs") that are rated in one of the top two rating categories. While they are generally structured with one or more types of credit enhancement, private pass-through securities typically lack a guarantee by an entity having the credit status of a governmental agency or instrumentality. COLLATERALIZED MORTGAGE OBLIGATIONS ("CMOS"): CMOs are debt obligations or multiclass pass-through certificates issued by agencies or instrumentalities of the U.S. Government or by private originators or investors in mortgage loans. In a CMO, series of bonds or certificates are usually issued in multiple classes. Principal and interest paid on the underlying mortgage assets may be allocated among the several 41 classes of a series of a CMO in a variety of ways. Each class of a CMO, often referred to as a "tranche," is issued with a specific fixed or floating coupon rate and has a stated maturity or final distribution date. Principal payments on the underlying mortgage assets may cause CMOs to be retired substantially earlier then their stated maturities or final distribution dates, resulting in a loss of all or part of any premium paid. REMICS: A REMIC is a CMO that qualifies for special tax treatment under the Internal Revenue Code and invests in certain mortgages principally secured by interests in real property. Investors may purchase beneficial interests in REMICs, which are known as "regular" interests, or "residual" interests. Guaranteed REMIC pass-through certificates ("REMIC Certificates") issued by FNMA or FHLMC represent beneficial ownership interests in a REMIC trust consisting principally of mortgage loans or FNMA, FHLMC or GNMA-guaranteed mortgage pass-through certificates. For FHLMC REMIC Certificates, FHLMC guarantees the timely payment of interest, and also guarantees the payment of principal as payments are required to be made on the underlying mortgage participation certificates. FNMA REMIC Certificates are issued and guaranteed as to timely distribution of principal and interest by FNMA. STRIPPED MORTGAGE-BACKED SECURITIES ("SMBS"): SMBs are usually structured with two classes that receive specified proportions of the monthly interest and principal payments from a pool of mortgage securities. One class may receive all of the interest payments and is thus termed an interest-only class ("IO"), while the other class may receive all of the principal payments and thus is termed the principal-only class ("PO"). The value of IOs tends to increase as rates rise and decrease as rates fall; the opposite is true of POs. SMBs are extremely sensitive to changes in interest rates because of the impact thereon of prepayment of principal on the underlying mortgage securities. The market for SMBs is not as fully developed as other markets; SMBs therefore may be illiquid. RISK FACTORS: Due to the possibility of prepayments of the underlying mortgage instruments, mortgage-backed securities generally do not have a known maturity. In the absence of a known maturity, market participants generally refer to an estimated average life. An average life estimate is a function of an assumption regarding anticipated prepayment patterns, based upon current interest rates, current conditions in the relevant housing markets and other factors. The assumption is necessarily subjective, and thus different market participants can produce different average life estimates with regard to the same security. There can be no assurance that estimated average life will be a security's actual average life. MUNICIPAL FORWARDS -- Municipal forwards are forward commitments for the purchase of tax-exempt bonds with a specified coupon to be delivered by an issuer at a future date, typically exceeding 45 days but normally less than one year after the commitment date. Municipal forwards are normally used as a refunding mechanism for bonds that may only be redeemed on a designated future date. A Fund will enter into municipal forwards when the price and yield of the underlying bonds are believed to be favorable when compared to current prices and yields. As with forward commitments, municipal forwards are subject to market fluctuations due to changes in market interest rates between the commitment date and the settlement date. municipal forwards may be considered to be illiquid investments. To avoid any leveraging concerns, a Fund will maintain liquid, high grade securities in a 42 segregated account at least equal to the purchase price of the municipal forward. MUNICIPAL LEASE OBLIGATIONS -- Municipal lease obligations are securities issued by state and local governments and authorities to finance the acquisition of equipment and facilities. They may take the form of a lease, an installment purchase contract, a conditional sales contract, or a participation interest in any of the above. Depending upon the market for such securities, municipal lease obligations may be illiquid. MUNICIPAL SECURITIES -- Municipal securities consist of (i) debt obligations issued by or on behalf of public authorities to obtain funds to be used for various public facilities, for refunding outstanding obligations, for general operating expenses, and for lending such funds to other public institutions and facilities, and (ii) certain private activity and industrial development bonds issued by or on behalf of public authorities to obtain funds to provide for the construction, equipment, repair or improvement of privately operated facilities. General obligation bonds are backed by the taxing power of the issuing municipality. Revenue bonds are backed by the revenues of a project or facility (tolls from a bridge, for example). Certificates of participation represent an interest in an underlying obligation or commitment, such as an obligation issued in connection with a leasing arrangement. The payment of principal and interest on private activity and industrial development bonds generally is dependent solely on the ability of a facility's user to meet its financial obligations and the pledge, if any, of real and personal property as security for such payment. Municipal securities include both municipal notes and municipal bonds. Municipal notes include general obligation notes, tax anticipation notes, revenue anticipation notes, bond anticipation notes, certificates of indebtedness, demand notes and construction loan notes and participation interests in municipal notes. Municipal bonds include general obligation bonds, revenue or special obligation bonds, private activity and industrial development bonds and participation interests in municipal bonds. OBLIGATIONS OF SUPRANATIONAL ENTITIES -- Supranational entities are entities established through the joint participation of several governments, and include the Asian Development Bank, the Inter-American Development Bank, International Bank for Reconstruction and Development (World Bank), African Development Bank, European Economic Community, European Investment Bank and the Nordic Investment Bank. REPURCHASE AGREEMENTS -- Repurchase agreements are agreements by which a Fund obtains a security and simultaneously commits to return the security to the seller at an agreed upon price on an agreed upon date within a number of days from the date of purchase. The custodian will hold the security as collateral for the repurchase agreement. A Fund bears a risk of loss in the event the other party defaults on its obligations and the Fund is delayed or prevented from exercising its right to dispose of the collateral or if the Fund realizes a loss on the sale of the collateral. A Fund will enter into repurchase agreements only with financial institutions deemed to present minimal risk of bankruptcy during the term of the agreement based on established guidelines. Repurchase agreements are considered loans under the Investment Company Act of 1940. RESTRAINTS ON INVESTMENTS BY MONEY MARKET FUNDS -- Investments by a money market fund are subject to limitations imposed 43 under regulations adopted by the Securities and Exchange Commission. Under these regulations, money market funds may only acquire obligations that present minimal credit risk and that are "eligible securities," which means they are (i) rated, at the time of investment, by at least two nationally recognized security rating organizations (one if it is the only organization rating such obligation) in the highest rating category or, if unrated, determined to be of comparable quality (a "first tier security"), or (ii) rated according to the foregoing criteria in the second highest rating category or, if unrated, determined to be of comparable quality ("second tier security"). A security is not considered to be unrated if its issuer has outstanding obligations of comparable priority and security that have a short-term rating. In the case of taxable money market funds, investments in second tier securities are subject to the further constraints in that (i) no more than 5% of a Fund's assets may be invested in second tier securities and (ii) any investment in securities of any one such issuer is limited to the greater of 1% of the Fund's total assets or $1 million. A taxable money market fund may also hold more than 5% of its assets in first tier securities of a single issuer for three "business days" (that is, any day other than a Saturday, Sunday or customary business holiday). RESTRICTED SECURITIES -- Restricted securities are securities that may not be sold freely to the public absent registration under the Securities Act of 1933 or an exemption from registration. Rule 144A securities are securities that have not been registered under the Securities Act of 1933 but which may be traded between certain institutional investors including investment companies. The Trust's Board of Trustees is responsible for developing guidelines and procedures for determining the liquidity of restricted securities, and for monitoring the Advisor's implementation of the guidelines and procedures. SECURITIES LENDING -- In order to generate additional income, a Fund may lend securities which it owns pursuant to agreements requiring that the loan be continuously secured by collateral consisting of cash, securities of the U.S. Government or its agencies equal to at least 100% of the market value of the securities lent. A Fund continues to receive interest on the securities lent while simultaneously earning interest on the investment of cash collateral. Collateral is marked to market daily. There may be risks of delay in recovery of the securities or even loss of rights in the collateral should the borrower of the securities fail financially or become insolvent. SECURITIES OF FOREIGN ISSUERS -- There are certain risks connected with investing in foreign securities. These include risks of adverse political and economic developments (including possible governmental seizure or nationalization of assets), the possible imposition of exchange controls or other governmental restrictions, less uniformity in accounting and reporting requirements, the possibility that there will be less information on such securities and their issuers available to the public, the difficulty of obtaining or enforcing court judgments abroad, restrictions on foreign investments in other jurisdictions, difficulties in effecting repatriation of capital invested abroad, and difficulties in transaction settlements and the effect of delay on shareholder equity. Foreign securities may be subject to foreign taxes, and may be less marketable than comparable U.S. securities. The value of a Fund's investments denominated in foreign currencies will depend on the relative strengths of those currencies and the U.S. dollar, and a Fund may be affected 44 favorably or unfavorably by changes in the exchange rates or exchange control regulations between foreign currencies and the U.S. dollar. Changes in foreign currency exchange rates also may affect the value of dividends and interest earned, gains and losses realized on the sale of securities and net investment income and gains, if any, to be distributed to shareholders by a Fund. STANDBY COMMITMENTS AND PUTS -- Securities subject to standby commitments or puts permit the holder thereof to sell the securities at a fixed price prior to maturity. Securities subject to a standby commitment or put may be sold at any time at the current market price. However, unless the standby commitment or put was an integral part of the security as originally issued, it may not be marketable or assignable; therefore, the standby commitment or put would only have value to the Fund owning the security to which it relates. In certain cases, a premium may be paid for a standby commitment or put, which premium will have the effect of reducing the yield otherwise payable on the underlying security. The Fund will limit standby commitment or put transactions to institutions believed to present minimal credit risk. TIME DEPOSITS -- Time deposits are non-negotiable receipts issued by a bank in exchange for the deposit of funds. Like a certificate of deposit, it earns a specified rate of interest over a definite period of time; however, it cannot be traded in the secondary market. Time deposits are considered to be illiquid securities. U.S. GOVERNMENT AGENCIES -- Obligations issued or guaranteed by agencies of the U.S. Government, including, among others, the Federal Farm Credit Bank, the Federal Housing Administration and the Small Business Administration, and obligations issued or guaranteed by instrumentalities of the U.S. Government, including, among others, the Federal Home Loan Mortgage Corporation, the Federal Land Banks and the U.S. Postal Service. Some of these securities are supported by the full faith and credit of the U.S. Treasury (e.g., Government National Mortgage Association), others are supported by the right of the issuer to borrow from the Treasury (e.g., Federal Farm Credit Bank), while still others are supported only by the credit of the instrumentality (e.g., Federal National Mortgage Association). Guarantees of principal by agencies or instrumentalities of the U.S. Government may be a guarantee of payment at the maturity of the obligation so that in the event of a default prior to maturity there might not be a market and thus no means of realizing on the obligation prior to maturity. Guarantees as to the timely payment of principal and interest do not extend to the value or yield of these securities nor to the value of the Fund's shares. U.S. GOVERNMENT SUBSIDIARY CORPORATIONS -- Securities of wholly-owned corporations of the U.S. Government (within the Department of Housing and Urban Development) which are secured by the full faith and credit of the U.S. Government (e.g., GNMA). U.S. TREASURY OBLIGATIONS -- U.S. Treasury obligations consist of bills, notes and bonds issued by the U.S. Treasury and separately traded interest and principal component parts of such obligations that are transferable through the Federal book-entry system known as Separately Traded Registered Interest and Principal Securities ("STRIPS") and Coupon Under Book Entry Safekeeping ("CUBES"). VARIABLE AND FLOATING RATE INSTRUMENTS -- Certain obligations may carry variable or floating rates of interest, and may involve a conditional or unconditional demand feature. 45 Such instruments bear interest at rates which are not fixed, but which vary with changes in specified market rates or indices. The interest rates on these securities may be reset daily, weekly, quarterly or some other reset period, and may have a floor or ceiling on interest rate changes. There is a risk that the current interest rate on such obligations may not accurately reflect existing market interest rates. A demand instrument with a demand notice exceeding seven days may be considered illiquid if there is no secondary market for such security. WHEN-ISSUED AND DELAYED DELIVERY SECURITIES -- When-issued or delayed delivery basis transactions involve the purchase of an instrument with payment and delivery taking place in the future. Delivery of and payment for these securities may occur a month or more after the date of the purchase commitment. The Fund will segregate liquid high grade debt securities or cash in an amount at least equal to these commitments. The interest rate realized on these securities is fixed as of the purchase date and no interest accrues to the Fund before settlement. These securities are subject to market fluctuation due to changes in market interest rates and it is possible that the market value at the time of settlement could be higher or lower than the purchase price if the general level of interest rates has changed. Although a Fund generally purchases securities on a when-issued or forward commitment basis with the intention of actually acquiring securities for its portfolio, a Fund may dispose of a when- issued security or forward commitment prior to settlement if it deems appropriate. ZERO COUPON OBLIGATIONS -- Zero coupon obligations are debt securities that do not bear any interest, but instead are issued at a deep discount from par. The value of a zero coupon obligation increases over time to reflect the interest accreted. Such obligations will not result in the payment of interest until maturity, and will have greater price volatility than similar securities that are issued at par and pay interest periodically. A-1 APPENDIX I. BOND RATINGS *CORPORATE AND MUNICIPAL BONDS The following are descriptions of Standard & Poor's Corporation ("S&P") and Moody's Investors Service, Inc. ("Moody's") corporate and municipal bond ratings. Bonds rated AAA have the highest rating S&P assigns to a debt obligation. Such a rating indicates an extremely strong capacity to pay principal and interest. Bonds rated AA also qualify as high-quality debt obligations. Capacity to pay principal and interest is very strong, and in the majority of instances they differ from AAA issues only in small degree. Debt rated A has a strong capacity to pay interest and repay principal although it is somewhat more susceptible to the adverse effects of changes in circumstances and economic conditions than debt in higher rated categories. Bonds which are rated BBB are considered to be medium-grade obligations (i.e., they are neither highly protected nor poorly secured). Interest payments and principal security appear adequate for the present but certain protective elements may be lacking or may be characteristically unreliable over any great length of time. Such bonds lack outstanding investment characteristics and in fact have speculative characteristics as well. Bonds which are rated Aaa by Moody's are judged to be of the best quality. They carry the smallest degree of investment risk and are generally referred to as "gilt edge." Interest payments are protected by a large, or an exceptionally stable, margin and principal is secure. While the various protective elements are likely to change, such changes as can be visualized are most unlikely to impair the fundamentally strong position of such issues. Bonds rated Aa by Moody's are judged by Moody's to be of high quality by all standards. Together with bonds rated Aaa, they comprise what are generally known as high-grade bonds. They are rated lower than the best bonds because margins of protection may not be as large as in Aaa securities or fluctuation of protective elements may be of greater amplitude or there may be other elements present which make the long-term risks appear somewhat larger than in Aaa securities. Bonds which are rated A possess many favorable investment attributes and are to be considered as upper-medium grade obligations. Factors giving security to principal and interest are considered adequate, but elements may be present which suggest a susceptibility to impairment sometime in the future. Debt rated Baa is regarded as having an adequate capacity to pay interest and repay principal. Whereas it normally exhibits adequate protection parameters, adverse economic conditions or changing circumstances are more likely to lead to a weakened capacity to pay interest and repay principal for debt in this category than in higher rated categories. *MUNICIPAL NOTE RATINGS Moody's highest rating for state and municipal and other short-term notes is MIG-1 and VMIG-1. Short-term municipal securities rated MIG-1 or VMIG-1 are of the best quality. They have strong protection from established cash flows of funds for their servicing or from established and broad-based access to the market for refinancing or both. Short-term municipal securities rated MIG-2 and VMIG-2 are of high quality. Margins of protection are ample although not so large as in the preceding group. A-2 An S&P note rating reflects the liquidity concerns and market access risks unique to notes. Notes due in 3 years or less will likely receive a note rating. Notes maturing beyond 3 years will most likely receive a long-term debt rating. The following criteria will be used in making that assessment. - - Amortization schedule (the larger the final maturity relative to other maturities the more likely it will be treated as a note). - - Source of Payment (the more dependent the issue is on the market for its refinancing, the more likely it will be treated as a note). Note rating symbols are as follows: SP-1. Very strong or strong capacity to pay principal and interest. Those issues determined to possess overwhelming safety characteristics will be given a plus (+) designation. SP-2. Satisfactory capacity to pay principal and interest. II. COMMERCIAL PAPER AND SHORT-TERM RATINGS The following descriptions of commercial paper ratings have been published by S&P, Moody's, Fitch Investors Service, Inc. ("Fitch"), Duff and Phelps ("Duff") and IBCA Limited ("IBCA"), respectively. Commercial paper rated A by S&P is regarded by S&P as having the greatest capacity for timely payment. Issues rated A are further refined by use of the numbers 1+ and 1. Issues rated A-1+ are those with an "overwhelming degree" of credit protection. Those rated A-1 reflect a "very strong" degree of safety regarding timely payment. Those rated A-2 reflect a safety regarding timely payment but not as high as A-1. Commercial paper issues rated Prime-1 and Prime-2 by Moody's are judged by Moody's to have superior ability and strong ability for repayment, respectively. The rating Fitch-1 (Highest Grade) is the highest commercial rating assigned by Fitch. Paper rated Fitch-1 is regarded as having the strongest degree of assurance for timely payment. The rating Fitch-2 (Very Good Grade) is the second highest commercial paper rating assigned by Fitch which reflects an assurance of timely payment only slightly less in degree than the strongest issues. The rating Duff-1 is the highest commercial paper rating assigned by Duff. Paper rated Duff-1 is regarded as having very high certainty of timely payment with excellent liquidity factors which are supported by ample asset protection. Risk factors are minor. Paper rated Duff-2 is regarded as having good certainty of timely payment, good access to capital markets and sound liquidit y factors and company fundamentals. Risk factors are small. The designation A1 by IBCA indicates that the obligation is supported by a very strong capacity for timely repayment. Those obligations rated A1+ are supported by the highest capacity for timely repayment. Obligations rated A2 are supported by a strong capacity for timely repayment, although such capacity may be susceptible to adverse changes in business, economic or financial conditions. (THIS PAGE INTENTIONALLY LEFT BLANK) (THIS PAGE INTENTIONALLY LEFT BLANK) (THIS PAGE INTENTIONALLY LEFT BLANK) (THIS PAGE INTENTIONALLY LEFT BLANK) TRUST AND INVESTMENT SERVICES OFFICES OF SUNTRUST BANKS, INC. AFFILIATE BANKS: FLORIDA: (STATEWIDE TOLL FREE) 1-800-526-1177 SUNTRUST BANK, CENTRAL FLORIDA, N.A. 200 S. Orange Avenue Tower 10 Orlando, FL 32801 (407) 237-4380 1-800-432-4760, ext. 4380 SUNTRUST BANK, SOUTH FLORIDA, N.A. 501 E. Las Olas Boulevard Ft. Lauderdale, FL 33301 (305) 765-7422 Boca Raton Office 800 S. Federal Highway Boca Raton, FL 33435 (407) 243-6707 Coral Ridge Office 2626 E. Oakland Park Blvd. Ft. Lauderdale, FL 33306 (305) 765-2155 Delray Beach Office 302 E. Atlantic Avenue Delray Beach, FL 33483 (407) 243-6750 Hollywood Office 2001 Hollywood Blvd. Hollywood, FL 33021 (305) 765-7062 Palm Beach Office 303 Royal Poinciana Plaza Palm Beach, FL 33480 (407) 838-2855 PGA Office 2570 PGA Blvd. Palm Beach Gardens, FL 33410 (407) 835-2802 SUNTRUST BANK, MIAMI, N.A. 777 Brickell Avenue Miami, FL 33131 (305) 579-7450 SUNTRUST BANK, TAMPA BAY 315 E. Madison Street Tampa, FL 33602 (813) 224-2517 SUNTRUST BANK, TREASURE COAST, N.A. 700 Virginia Avenue Ft. Pierce, FL 34982 (407) 467-6459 Osceola Office 111 East Osceola Street Stuart, FL 34994 (407) 223-6012 SUNTRUST BANK, EAST CENTRAL FLORIDA Belnova Office 1590 S. Nova Road Daytona Beach, FL 32114 (904) 258-2660 Bill France Office 299 Bill France Blvd. Daytona Beach, FL 32114 (904) 258-2654 Deland Office 302 E. New York Avenue Deland, FL 32724 (904) 822-5891 SUNTRUST BANK, NORTH FLORIDA, N.A. 200 W. Forsyth Street Jacksonville, FL 32202 (904) 632-2534 SUNTRUST BANK, SOUTHWEST FLORIDA 12730 New Brittany Blvd. Ft. Myers, FL 33907 (813) 277-2531 Pelican Bay Office 801 Laurel Oak Drive Naples, FL 33963 (813) 598-0515 SUNTRUST BANK, GOLF COAST South Gate Office 3400 S. Tamiami Trail Sarasota, FL 34230 (813) 951-3218 Port Charlotte Office 18501 Murdock Circle Port Charlotte, FL 33949 (813) 625-9286 North Beneva Office 3577 Fruitville Road Sarasota, FL 34237 (813) 951-3040 South Beneva Office 8181 S. Tamiami Trail Sarasota, FL 34231 (813) 951-3053 Venice Office 200 Nokomis Avenue South Venice, FL 34285 (813) 951-3053 SUNTRUST BANK, MID-FLORIDA, N.A. 210 Security Square Winter Haven, FL 33880 (813) 297-6855 Okeechobee Office 815 S. Parrott Avenue Okeechobee, FL 34974 (813) 763-6417 SUNTRUST BANK, NATURE COAST One East Jefferson Street Brooksville, FL 34601 (904) 754-5799 Crystal River Office 1502 SE Highway 19 Crystal River, FL 32629 (904) 795-8214 Seven Hills Office 1170 Mariner Blvd. Spring Hill, FL 34609 (904) 754-5779 SUNTRUST BANK, NORTH CENTRAL FLORIDA 203 E. Silver Springs Blvd. Ocala, FL 34470 (904) 368-6477 SUNTRUST BANK, TALLAHASSEE, N.A. 3522 Thomasville Road Tallahassee, FL 32312 (904) 298-5030 SUNTRUST BANK, WEST FLORIDA 511 W. 23rd Street Panama City, FL 32405 (904) 872-6087 GEORGIA: SUNTRUST BANK, ATLANTA 55 Park Place First Floor Adams, GA 30303 (404) 588-7315 1-800-241-0901 Ext. 7315 SUNTRUST BANK, NORTHEAST GEORGIA, N.A. 101 N. Lumpkin Street Athens, GA 30601 (706) 354-5346 GAINSVILLE BRANCH 104 Green Street Gainsville, GA 30503 (770) 503-8674 SUNTRUST BANK, NORTHEAST GEORGIA, N.A. 100 East Second Avenue Rome, GA 30161 (706) 236-4325 SUNTRUST BANK, AUGUSTA, N.A. 2815 Wrightsboro Road Augusta, GA 30909 (706) 821-2015 SUNTRUST BANK, MIDDLE GEORGIA, N.A. 606 Cherry Street Macon, GA 31208 (912) 755-5175 SUNTRUST BANK, WEST GEORGIA, N.A. 1246 First Avenue Columbus, GA 31901 (706) 649-3631 SUNTRUST BANK, SAVANNAH, N.A. 33 Bull Street Savannah, GA 31401 (912) 944-1165 SUNTRUST BANK, SOUTH GEORGIA, N.A. 410 W. Broad Avenue Albany, GA 31701 (912) 430-5468 Coffee County Branch 201 S. Peterson Avenue Douglas, GA 31533 (912) 384-1820 SUNTRUST BANK, SOUTHEAST GEORGIA, N.A. 510 Gloucester Street Brunswick, GA 31520 (912) 262-5322 SEA ISLAND ROAD BRANCH 701 Sea Island Road St. Simons Island, GA 31522 (912) 638-3620 (912) 262-2227 TENNESSEE: SUNTRUST BANK, NASHVILLE, N.A. 424 Church Street 4th Floor Nashville, TN 37230 (615) 748-4477 1-800-932-2652 SUNTRUST BANK, CHATTANOOGA, N.A. 736 Market Street Chattanooga, TN 37402 (615) 757-3085 TN WATS 1-800-572-7306, Ext. 3085 Bordering States WATS 1-800-874-1083, Ext. 3085 SUNTRUST BANK, EAST TENNESSEE, N.A. 700 East Hill Avenue Knoxville, TN 37997 (615) 544-2181 1-800-225-0913, Ext. 2181 SUNTRUST BANK, NORTHEAST TENNESSEE 207 Mockingbird Lane Johnson City, TN 37604 (615) 461-1005 SUNTRUST BANK, SOUTH CENTRAL TENNESSEE, N.A. 25 Public Square Lawrenceburg, TN 38464 (615) 762-3511 ALABAMA: SUNTRUST BANK, ALABAMA, N.A. 201 South Court Street Florence, AL 35630 (205) 767-8463 STI CLASSIC FUNDS ORGANIZATIONAL OVERVIEW * INVESTMENT ADVISORS Trusco Capital Management, Inc. 50 Hurt Plaza Suite 1400 Atlanta, GA 30303 STI Capital Management, N.A. P.O. Box 3808 Orlando, FL 32802 SunTrust Bank, Chattanooga, N.A. 736 Market Street Chattanooga, TN 37402 SunTrust Bank, Atlanta 25 Park Place Atlanta, GA 30303 * DISTRIBUTOR SEI Financial Services Company 680 E. Swedesford Road Wayne, PA 19087 * ADMINISTRATOR SEI Financial Management Corporation 680 E. Swedesford Road Wayne, PA 19087 * TRANSFER AGENT Federated Services Company Federated Investors Tower Pittsburgh, PA 15222-3779 * CUSTODIAN SunTrust Bank, Atlanta c/o STI Trust & Investment Operations, Inc. 303 Peachtree Street N.E. 14th Floor Atlanta, GA 30308 * LEGAL COUNSEL Morgan, Lewis & Bockius LLP 2000 One Logan Square Philadelphia, PA 19103 * INDEPENDENT PUBLIC ACCOUNTANTS Arthur Andersen, LLP 1601 Market Street Philadelphia, PA 19103
100487/10-95 DISTRIBUTOR SEI Financial Services Company ............................................................................... PROSPECTUS INVESTOR SHARES INVESTMENT GRADE BOND FUND INVESTMENT GRADE TAX-EXEMPT BOND FUND U.S. GOVERNMENT SECURITIES FUND LIMITED-TERM FEDERAL MORTGAGE SECURITIES FUND SHORT-TERM BOND FUND SHORT-TERM U.S. TREASURY SECURITIES FUND FLORIDA TAX-EXEMPT BOND FUND GEORGIA TAX-EXEMPT BOND FUND TENNESSEE TAX-EXEMPT BOND FUND PRIME QUALITY MONEY MARKET FUND U.S. GOVERNMENT SECURITIES MONEY MARKET FUND TAX-EXEMPT MONEY MARKET FUND INVESTMENT ADVISORS TRUSCO CAPITAL MANAGEMENT, INC. STI CAPITAL MANAGEMENT, N.A. SUNTRUST BANK, CHATTANOOGA, N.A. SUNTRUST BANK, ATLANTA OCTOBER 1, 1995 ABCD STI CLASSIC FUNDS FLEX SHARES INVESTMENT GRADE BOND FUND INVESTMENT GRADE TAX-EXEMPT BOND FUND U.S. GOVERNMENT SECURITIES FUND LIMITED-TERM FEDERAL MORTGAGE SECURITIES FUND SHORT-TERM BOND FUND SHORT-TERM U.S. TREASURY SECURITIES FUND FLORIDA TAX-EXEMPT BOND FUND GEORGIA TAX-EXEMPT BOND FUND TENNESSEE TAX-EXEMPT BOND FUND CAPITAL GROWTH FUND VALUE INCOME STOCK FUND AGGRESSIVE GROWTH FUND BALANCED FUND SUNBELT EQUITY FUND INTERNATIONAL EQUITY INDEX FUND INVESTMENT ADVISORS TO THE FUNDS: TRUSCO CAPITAL MANAGEMENT, INC. STI CAPITAL MANAGEMENT, N.A. SUNTRUST BANK, CHATTANOOGA SUNTRUST BANK, ATLANTA The STI Classic Funds (the "Trust") is a mutual fund that offers shares in a number of separate investment portfolios. This Prospectus sets forth concisely the information about the Flex Shares of the above-referenced Funds (each a "Fund" and, collectively, the "Funds"). Investors are advised to read this Prospectus and retain it for future reference. A Statement of Additional Information relating to the Funds dated the same date as this Prospectus has been filed with the Securities and Exchange Commission and is available without charge through the Distributor, SEI Financial Services Company, 680 East Swedesford Road, Wayne, PA 19087-1658 or by calling 1-800-428-6970. The Statement of Additional Information is incorporated into this Prospectus by reference. THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. THE TRUST'S SHARES ARE NOT SPONSORED, ENDORSED, OR GUARANTEED BY, AND DO NOT CONSTITUTE OBLIGATIONS OR DEPOSITS OF, THE ADVISORS OR ANY OF THEIR AFFILIATES OR CORRESPONDENTS INCLUDING SUNTRUST BANKS, INC., ARE NOT GUARANTEED OR INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION, THE FEDERAL RESERVE BOARD OR ANY OTHER GOVERNMENTAL AGENCY, AND INVOLVE INVESTMENT RISKS, INCLUDING THE POSSIBLE LOSS OF THE PRINCIPAL AMOUNT INVESTED. OCTOBER 1, 1995 2 No person has been authorized to give any information or to make any representations not contained in this Prospectus, or in the Trust's Statement of Additional Information in connection with the offering made by this Prospectus and, if given or made, such information or representations must not be relied upon as having been authorized by the Trust or SEI Financial Services Company (the "Distributor"). This Prospectus does not constitute an offering by the Trust or by the Distributor in any jurisdiction in which such offering may not lawfully be made. Throughout this Prospectus, the Investment Grade Bond Fund, Investment Grade Tax-Exempt Bond Fund, Short-Term U.S. Treasury Securities Fund, Short-Term Bond Fund, U.S. Government Securities Fund and Limited-Term Federal Mortgage Securities Fund, which invest primarily in bonds and other fixed income instruments, may be referred to as the "Bond Funds;" and the Florida Tax-Exempt Bond Fund, Georgia Tax-Exempt Bond Fund and Tennessee Tax-Exempt Bond Fund, which invest primarily in tax-exempt bonds and other fixed income instruments, may be referred to as the "State Tax-Exempt Bond Funds" and the Capital Growth Fund, Value Income Stock Fund, Aggressive Growth Fund, Sunbelt Equity Fund and International Equity Index Fund, which invest primarily in equity securities, may be referred to as the "Equity Funds." TABLE OF CONTENTS Expense Summary...................... 3 The Trust............................ 7 Funds and Investment Objectives...... 7 Investment Policies and Strategies... 8 General Investment Policies and Strategies......................... 20 Investment Risks..................... 21 Investment Limitations............... 23 Performance Information.............. 24 General Performance Information...... 24 Fundlink............................. 24 Purchase of Fund Shares.............. 24 Redemption of Fund Shares............ 27 Exchanges............................ 28 Dividends and Distributions.......... 28 Tax Information...................... 29 STI Classic Funds Information........ 30 Board of Trustees.................... 31 Investment Advisors.................. 31 Portfolio Managers................... 33 Banking Laws......................... 34 Distribution......................... 34 Administration....................... 35 Transfer Agent and Dividend Disbursing Agent................... 36 Custodian............................ 36 Legal Counsel........................ 36 Independent Public Accountants....... 36 Other Information.................... 36 Voting Rights........................ 36 Reporting............................ 36 Shareholder Inquiries................ 36 Description of Permitted Investments........................ 36 Appendix............................. A-1
3 EXPENSE SUMMARY FLEX SHARES Below is a summary of the transaction expenses and annual operating expenses for the Flex Shares of each Fund described in this Prospectus. A hypothetical example based on the estimated expenses is also shown. Actual expenses may vary. SHAREHOLDER TRANSACTION EXPENSES - ----------------------------------------------------------------------------------------------
ALL FUNDS - ---------------------------------------------------------------------------------------------- Maximum Sales Charge Imposed on Purchases (as a percentage of offering price)................................................................... None Maximum Sales Charge Imposed on Reinvested Dividends........................................................... None Maximum Contingent Deferred Sales Charge...................................................................... 2.00% Redemption Fees(1)................................................................. None Exchange Fee....................................................................... None - ---------------------------------------------------------------------------------------------- - ----------------------------------------------------------------------------------------------
(1) There is a $7.00 wire charge for redemptions for all funds processed from retail accounts which require wires to particular banks. 4 ANNUAL OPERATING EXPENSES (as a percentage of average net assets)
INVESTMENT GRADE LIMITED-TERM INVESTMENT GRADE TAX- EXEMPT BOND U.S. GOVERNMENT FEDERAL MORTGAGE SHORT-TERM BOND BOND FUND FUND SECURITIES FUND SECURITIES FUND FUND - ------------------------------------------------------------------------------------------------------------------------------ Advisory Fees (After Voluntary Reductions)(1).............. .62 % .61 % .00 % .33 % .42 % All Other Expenses (After Voluntary Reductions)(1).... .37 % .29 % 1.15 % .57 % .36 % 12b-1 Distribution & Service Expenses (After Voluntary Reductions)(1).............. .65 % .73 % .50 % .35 % .42 % - ------------------------------------------------------------------------------------------------------------------------------ Total Operating Expenses (After Voluntary Reductions)(1).............. 1.64 % 1.63 % 1.65 % 1.25 % 1.20 % - ------------------------------------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------------------------------------ SHORT-TERM U.S. TREASURY SECURITIES FUND - ------------------------------ Advisory Fees (After Voluntary Reductions)(1).............. .19 % All Other Expenses (After Voluntary Reductions)(1).... .52 % 12b-1 Distribution & Service Expenses (After Voluntary Reductions)(1).............. .34 % - ------------------------------ Total Operating Expenses (After Voluntary Reductions)(1).............. 1.05 % - ------------------------------ - ------------------------------
(1) Absent voluntary reductions and reimbursements by the Advisor and Administrator, advisory fees, other expenses, service and distribution expenses, and total operating expenses expressed as a percentage of average net assets, respectively, for the Flex Shares of each Fund would be: Investment Grade Bond Fund -- .74%, .37%, 1.00% and 2.11%; Investment Grade Tax Exempt Bond Fund -- .74%, .29%, 1.00% and 2.03%; US Government Securities Fund -- .74%, 5.72%, 1.00% and 7.46%; Limited-Term Federal Mortgage Securities Fund -- .65%, 6.86%, 1.00% and 8.51%; Short-Term Bond Fund -- .65%, .68%, 1.00% and 2.33%; and Short-Term US Treasury Securities Fund -- .65%, .52%, 1.00% and 2.17%. Fee reductions are voluntary and may be terminated at any time. Additional information may be found under "Investment Advisors," "Administration" and "Distribution." A person that purchases shares through an account with a financial institution may be charged separate fees by the financial institution.
LIMITED-TERM INVESTMENT INVESTMENT GRADE FEDERAL GRADE BOND TAX- EXEMPT BOND U.S. GOVERNMENT MORTGAGE SHORT-TERM BOND EXAMPLE FUND FUND SECURITIES FUND SECURITIES FUND FUND - ------------------------------------------------------------------------------------------------------------------------- An investor would pay the following expenses on a $1,000 investment assuming: (1) 5% annual return and (2) redemption at the end of each time period: ONE YEAR Assuming a complete redemption at end of period................... $ 37 $ 37 $ 37 $ 33 $ 32 Assuming no redemptions... 17 17 17 13 12 THREE YEARS Assuming a complete redemption at end of period................... 52 51 52 40 38 Assuming no redemptions... 52 51 52 40 38 FIVE YEARS Assuming a complete redemption at end of period................... 89 89 90 69 66 Assuming no redemptions... 89 89 90 69 66 TEN YEARS Assuming a complete redemption at end of period................... 194 193 195 151 145 Assuming no redemptions... 194 193 195 151 145 - ------------------------------------------------------------------------------------------------------------------------- - ------------------------------------------------------------------------------------------------------------------------- SHORT-TERM U.S. TREASURY SECURITIES EXAMPLE FUND - ------------------------------ An investor would pay the following expenses on a $1,000 investment assuming: (1) 5% annual return and (2) redemption at the end of each time period: ONE YEAR Assuming a complete redemption at end of period................... $ 31 Assuming no redemptions... 11 THREE YEARS Assuming a complete redemption at end of period................... 33 Assuming no redemptions... 33 FIVE YEARS Assuming a complete redemption at end of period................... 58 Assuming no redemptions... 58 TEN YEARS Assuming a complete redemption at end of period................... 128 Assuming no redemptions... 128 - ------------------------------ - ------------------------------
THE EXAMPLE IS BASED UPON THE TOTAL OPERATING EXPENSES OF A FUND AND SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE EXPENSES. ACTUAL EXPENSES MAY BE GREATER OR LESS THAN THOSE SHOWN. The purpose of this table is to assist the investor in understanding the various costs and expenses that may be directly or indirectly borne by investors in the Trust. The information set forth in the foregoing table and example relates only to Flex Shares. The Trust also offers Trust Shares and Investor Shares of each Fund which are subject to the same expenses except for variations in distribution and service fees, transfer agent fees and sales charges. The rules of the Securities and Exchange Commission require that the maximum sales charge be reflected in the above table. However, certain investors may qualify for reduced sales charges. See "Purchase of Fund Shares." Long-term Flex Shareholders may eventually pay more than the economic equivalent of the maximum front-end sales charges otherwise permitted by the National Association of Securities Dealers, Inc.'s Rules of Fair Practice. 5 ANNUAL OPERATING EXPENSES (as a percentage of average net assets)
TENNESSEE FLORIDA TAX- GEORGIA TAX- TAX-EXEMPT BOND EXEMPT BOND FUND EXEMPT BOND FUND FUND - --------------------------------------------------------------------------------------------------------------------------------- Advisory Fees (After Voluntary Reductions)(1)............................. .08 % .27 % .00 % All Other Expenses (After Voluntary Reductions)(1)........................ .74 % .53 % .70 % 12b-1 Distribution & Service Expenses (After Voluntary Reductions)(1)..... .53 % .55 % .65 % - --------------------------------------------------------------------------------------------------------------------------------- Total Operating Expenses (After Voluntary Reductions)(1).................. 1.35 % 1.35 % 1.35 % - --------------------------------------------------------------------------------------------------------------------------------- - ---------------------------------------------------------------------------------------------------------------------------------
(1) Absent voluntary reductions and reimbursements by the Advisor and Administrator, advisory fees, other expenses, service and distribution expenses, and total operating expenses expressed as a percentage of average net assets, respectively, for the Flex Shares of each Fund would be: Florida Tax-Exempt Bond Fund -- .65%, 1.08%, 1.00% and 2.35%; Georgia Tax Exempt Bond Fund -- .65%, .60%, 1.00% and 2.25%; Tennessee Tax-Exempt Bond Fund -- .65%, 1.27%, 1.00% and 2.92%. Fee reductions are voluntary and may be terminated at anytime. Additional information may be found under "Investment Advisors," "Administration," and "Distribution." A person that purchases shares through an account with a financial institution may be charged separate fees by the financial institution.
TENNESSEE FLORIDA TAX- GEORGIA TAX- TAX-EXEMPT BOND EXAMPLE EXEMPT BOND FUND EXEMPT BOND FUND FUND - --------------------------------------------------------------------------------------------------------------------------------- An investor would pay the following expenses on a $1,000 investment assuming: (1) 5% annual return and (2) redemption at the end of each time period: ONE YEAR Assuming a complete redemption at end of period....................... $ 34 $ 34 $ 34 Assuming no redemptions............................................... 14 14 14 THREE YEARS Assuming a complete redemption at end of period....................... 43 43 43 Assuming no redemptions............................................... 43 43 43 FIVE YEARS Assuming a complete redemption at end of period....................... 74 74 74 Assuming no redemptions............................................... 74 74 74 TEN YEARS Assuming a complete redemption at end of period....................... 162 162 162 Assuming no redemptions............................................... 162 162 162 - --------------------------------------------------------------------------------------------------------------------------------- - ---------------------------------------------------------------------------------------------------------------------------------
THE EXAMPLE IS BASED UPON THE TOTAL OPERATING EXPENSES OF A FUND AND SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE EXPENSES. ACTUAL EXPENSES MAY BE GREATER OR LESS THAN THOSE SHOWN. The purpose of this table is to assist the investor in understanding the various costs and expenses that may be directly or indirectly borne by investors in the Trust. The information set forth in the foregoing table and example relates only to Flex Shares. The Trust also offers Trust Shares and Investor Shares of each Fund which are subject to the same expenses except for variations in distribution and service fees, transfer agent fees and sales charges. The rules of the Securities and Exchange Commission require that the maximum sales charge be reflected in the above table. However, certain investors may qualify for reduced sales charges. See "Purchase of Fund Shares." Long-term Flex Shareholders may eventually pay more than the economic equivalent of the maximum front-end sales charges otherwise permitted by the National Association of Securities Dealers, Inc.'s Rules of Fair Practice. 6 ANNUAL OPERATING EXPENSES (as a percentage of average net assets)
CAPITAL VALUE AGGRESSIVE SUNBELT GROWTH INCOME STOCK GROWTH BALANCED EQUITY FUND FUND FUND FUND FUND - ----------------------------------------------------------------------------------------------------------------------------- Advisory Fees (After Voluntary Reductions)(1)............................... 1.02% .80% .95% .77% .98% All Other Expenses (After Voluntary Reductions)(1)............................... .28% .20% .49% .39% .37% 12b-1 Distribution & Service Expenses (After Voluntary Reductions)(1)..................... .97% 1.00% .76% .84% .85% - ----------------------------------------------------------------------------------------------------------------------------- Total Operating Expenses (After Voluntary Reductions)(1)............................... 2.27% 2.00% 2.20% 2.00% 2.20% - ----------------------------------------------------------------------------------------------------------------------------- - ----------------------------------------------------------------------------------------------------------------------------- INTERNATIONAL EQUITY INDEX FUND - ----------------------------------------------- Advisory Fees (After Voluntary Reductions)(1)............................... .64% All Other Expenses (After Voluntary Reductions)(1)............................... .81% 12b-1 Distribution & Service Expenses (After Voluntary Reductions)(1)..................... .65% - ----------------------------------------------- Total Operating Expenses (After Voluntary Reductions)(1)............................... 2.10% - ----------------------------------------------- - -----------------------------------------------
(1) Absent voluntary reductions and reimbursements by the Advisor and Administrator, advisory fees, other expenses, service and distribution expenses, and total operating expenses expressed as a percentage of average net assets, respectively, for the Investor Shares of each Fund would be: Capital Growth Fund -- 1.15%, .28%, 1.00% and 2.43%; Value Income Stock Fund -- .80%, .28%, 1.00% and 2.08%; Aggressive Growth Fund -- 1.15%, .69%, 1.00%, and 2.84%; Balanced Fund -- .95%, .57%, 1.00%, and 2.52%; Sunbelt Equity Fund -- 1.15%, .40%, 1.00%, and 2.55%; and International Equity Index Fund -- .90%, 1.16%, 1.00% and 3.06%. Fee reductions are voluntary and may be terminated at any time. Additional information may be found under "Investment Advisors," "Administration," and "Distribution." A person that purchases shares through an account with a financial institution may be charged separate fees by the financial institution.
CAPITAL VALUE AGGRESSIVE SUNBELT GROWTH INCOME STOCK GROWTH BALANCED EQUITY EXAMPLE FUND FUND FUND FUND FUND - -------------------------------------------------------------------------------------------------------------------------- An investor would pay the following expenses on a $1,000 investment assuming: (1) 5% annual return and (2) redemption at the end of each time period: ONE YEAR Assuming a complete redemption at end of period.................................... $ 44 $ 41 $ 43 $ 41 $ 43 Assuming no redemptions.................... 23 20 22 20 22 THREE YEARS Assuming a complete redemption at end of period.................................... 71 63 69 63 69 Assuming no redemptions.................... 71 63 69 63 69 FIVE YEARS Assuming a complete redemption at end of period.................................... 122 108 118 108 118 Assuming no redemptions.................... 122 108 118 108 118 TEN YEARS Assuming a complete redemption at end of period.................................... 261 233 253 233 253 Assuming no redemptions.................... 261 233 253 233 253 - -------------------------------------------------------------------------------------------------------------------------- INTERNATIONAL EQUITY INDEX EXAMPLE FUND - ----------------------------------------------- An investor would pay the following expenses on a $1,000 investment assuming: (1) 5% annual return and (2) redemption at the end of each time period: ONE YEAR Assuming a complete redemption at end of period.................................... $ 42 Assuming no redemptions.................... 21 THREE YEARS Assuming a complete redemption at end of period.................................... 66 Assuming no redemptions.................... 66 FIVE YEARS Assuming a complete redemption at end of period.................................... 113 Assuming no redemptions.................... 113 TEN YEARS Assuming a complete redemption at end of period.................................... 243 Assuming no redemptions.................... 243 - -----------------------------------------------
THE EXAMPLE IS BASED UPON THE TOTAL OPERATING EXPENSES OF A FUND AND SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE EXPENSES. ACTUAL EXPENSES MAY BE GREATER OR LESS THAN THOSE SHOWN. The purpose of this table is to assist the investor in understanding the various costs and expenses that may be directly or indirectly borne by investors in the Trust. The information set forth in the foregoing table and example relates only to Flex Shares. The Trust also offers Trust Shares and Investor Shares of each Fund which are subject to the same expenses except for variations in distribution and service fees, transfer agent fees and sales charges. The rules of the Securities and Exchange Commission require that the maximum sales charge be reflected in the above table. However, certain investors may qualify for reduced sales charges. See "Purchase of Fund Shares." Long-term Flex Shareholders may eventually pay more than the economic equivalent of the maximum front-end sales charges otherwise permitted by the National Association of Securities Dealers, Inc.'s Rules of Fair Practice. 7 THE TRUST STI CLASSIC FUNDS (the "Trust") is a diversified, open-end management investment company that provides a convenient and economical means of investing in several professionally managed portfolios of securities. The Trust currently offers units of beneficial interest ("shares") in a number of separate Funds. Shareholders may purchase shares in each Fund through three separate classes (Trust Shares, Investor Shares and Flex Shares), which provide for variations in distribution and service fees, transfer agent fees, sales charges, voting rights and dividends. Except for differences between classes, each share of each Fund represents an undivided, proportionate interest in that Fund. This Prospectus relates to the Flex Shares of the Funds described below. FUNDS AND INVESTMENT OBJECTIVES BOND FUNDS: THE INVESTMENT GRADE BOND FUND seeks to provide as high a level of total return through current income and capital appreciation as is consistent with the preservation of capital primarily through investment in investment grade fixed income securities. THE INVESTMENT GRADE TAX-EXEMPT BOND FUND seeks to provide as high a level of total return through federally tax-exempt current income and capital appreciation as is consistent with the preservation of capital primarily through investment in investment grade tax-exempt obligations. THE U.S. GOVERNMENT SECURITIES FUND seeks to provide as high a level of current income as is consistent with the preservation of capital by investing primarily in obligations issued or guaranteed by the U.S. Government or its agencies or instrumentalities. THE LIMITED-TERM FEDERAL MORTGAGE SECURITIES FUND seeks to provide as high a level of current income as is consistent with the preservation of capital by investing primarily in mortgage-related securities issued or guaranteed by U.S. Government agencies and instrumentalities. THE SHORT-TERM BOND FUND seeks to provide as high a level of current income, relative to funds with like investment objectives, as is consistent with the preservation of capital primarily through investment in short- to intermediate-term investment grade fixed income securities. THE SHORT-TERM U.S. TREASURY SECURITIES FUND seeks to provide as high a level of current income, relative to funds with like investment objectives, as is consistent with the preservation of capital through investment exclusively in short-term U.S. Treasury securities. STATE TAX-EXEMPT BOND FUNDS: THE FLORIDA TAX-EXEMPT BOND FUND seeks to provide current income exempt from federal income tax for Florida residents without undue investment risk. THE GEORGIA TAX-EXEMPT BOND FUND seeks to provide current income exempt from federal and state income tax for Georgia residents without undue investment risk. THE TENNESSEE TAX-EXEMPT BOND FUND seeks to provide current income exempt from federal and state income tax for Tennessee residents without undue investment risk. 8 EQUITY FUNDS: THE CAPITAL GROWTH FUND seeks to provide capital appreciation by investing primarily in a portfolio of common stocks, warrants and securities convertible into common stock which in the Advisor's opinion are undervalued in the marketplace at the time of purchase. THE VALUE INCOME STOCK FUND seeks to provide current income with the secondary goal of achieving capital appreciation by investing primarily in equity securities. THE AGGRESSIVE GROWTH FUND seeks to provide capital appreciation by investing primarily in a diversified portfolio of common stocks, preferred stocks and securities convertible into common stock of small to mid-sized companies with above-average growth of earnings. Current income will not be an important criterion of investment selection and any such income should be considered incidental. THE BALANCED FUND seeks to provide capital appreciation and current income by investing in common and preferred stocks, warrants, securities convertible into common stock and investment grade fixed income securities. THE SUNBELT EQUITY FUND seeks to provide capital appreciation by investing substantially all and under normal market conditions at least 65% of its assets in common stocks, preferred stocks, warrants and securities convertible into common stock of U.S. companies headquartered and/or conducting a substantial portion of their operations in the southern region of the United States. Current income will not be an important criterion of investment selection and any such income should be considered incidental. THE INTERNATIONAL EQUITY INDEX FUND seeks to provide investment results that correspond to the aggregate price and dividend performance of the securities included in the Gross Domestic Product Weighted Morgan Stanley Capital International Europe, Australasia and Far East Index (the "MSCI EAFE-GDP Index" or "EAFE-GDP Index"). 11"MSCI EAFE-GDP Index" is a registered service mark of Morgan Stanley Capital International which does not sponsor and is in no way affiliated with the International Equity Index Fund. There can be no assurance that a Fund will achieve its investment objective. The investment objectives of the Investment Grade Bond Fund, U.S. Government Securities Fund, Limited-Term Federal Mortgage Securities Fund, Short-Term Bond Fund, Short-Term U.S. Treasury Securities Fund, Capital Growth Fund, Value Income Stock Fund, Aggressive Growth Fund, Balanced Fund, Sunbelt Equity Fund and International Equity Index Fund are nonfundamental and may be changed without a shareholder vote. INVESTMENT POLICIES AND STRATEGIES *INVESTMENT GRADE BOND FUND The Investment Grade Bond Fund will invest exclusively in investment grade obligations rated BBB or better by Standard & Poor's Corporation ("S&P") or Baa or better by Moody's Investors Services, Inc. ("Moody's") or, if unrated, of comparable quality at the time of purchase as determined by the Advisor, including corporate debt obligations; mortgage-backed securities, collateralized mortgage obligations ("CMOs") and asset-backed securities; obligations issued or guaranteed as to principal and interest by the U.S. Government or its agencies or instrumentalities; custodial receipts involving U.S. Treasury obligations; securities of the government of Canada and its provincial and local 9 governments; securities issued or guaranteed by foreign governments, their political subdivisions, agencies or instrumentalities; obligations of supranational entities and sponsored American Depositary Receipts ("ADRs") that are traded on exchanges or listed on NASDAQ. Under normal circumstances, at least 65% of the Fund's total assets will be invested in corporate and government bonds and debentures. No more than 25% of the Fund's assets will be invested in securities rated BBB by S&P or Baa by Moody's or, if unrated, of comparable quality at the time of purchase as determined by the Advisor. The Fund may purchase mortgage-backed securities issued or guaranteed as to the payment of principal and interest by the U.S. Government or its agencies or instrumentalities or, subject to a limit of 25% of the Fund's assets, mortgage-backed securities issued by private issuers. These mortgage-backed securities may be backed or collateralized by fixed, adjustable or floating rate mortgages. The Fund may also invest in asset-backed securities which consist of securities backed by company receivables, truck and auto loans, leases, credit card receivables and home equity loans. In order to reduce interest rate risk, and subject to a general limit of 25% of the Fund's assets, the Fund may purchase floating or variable rate securities. It may also buy securities on a when-issued basis, medium term notes, putable securities and zero coupon securities. The Fund may also invest up to 10% of its assets in restricted securities that the Advisor determines are liquid under guidelines adopted by the Trust's Board of Trustees. The Fund may also engage in futures and options transactions and may engage in securities lending. Some floating or variable rate securities will be subject to interest rate "caps" or "floors." Under normal market conditions, it is anticipated that the Fund's average weighted maturity will range from 4 to 10 years. In the case of mortgage related securities and asset-backed securities, maturity will be determined based on the expected average life of the security. The Fund may shorten its average weighted maturity to as little as 90 days if deemed appropriate for temporary defensive purposes. By so limiting the maturity of its investments, the Fund expects that its net asset value will experience less price movement in response to changes in interest rates than the net asset values of mutual funds investing in similar credit quality securities with longer maturities. The Fund's portfolio turnover rate was 237.66% for the fiscal year ended May 31, 1995. This rate of turnover will likely result in higher transaction costs and higher levels of realized capital gains than if the turnover rate was lower. *INVESTMENT GRADE TAX-EXEMPT BOND FUND The Investment Grade Tax-Exempt Bond Fund intends to be fully invested in municipal securities the interest on which is exempt from federal income taxes in the opinion of bond counsel to the issuer. The issuers of these securities can be located in all fifty states, the District of Columbia, Puerto Rico and other U.S. territories and possessions. It is a fundamental policy of the Investment Grade Tax-Exempt Bond Fund to invest at least 80% of its total assets in securities the income from which is exempt from federal income tax and not treated as a preference item for purposes of the alternative minimum tax. At least 65% of the Fund's assets will be invested in municipal bonds and debentures, and at least 75% of its total assets invested in municipal bonds will be in securities rated A or better by S&P or Moody's. Municipal securities must be rated BBB or better by S&P or Baa or better by 10 Moody's in the case of bonds; SP-1, SP-2 or MIG-1, MIG-2 in the case of notes; A-1, A-2, P-1, P-2 in the case of tax-exempt commercial paper; and VMIG-1 or VMIG-2 in the case of variable rate demand obligations. The Fund will only acquire unrated securities if, at the time of purchase, the Advisor determines that such unrated obligations are of comparable quality to rated obligations that may be acquired by the Fund. The Fund may invest in floating or variable rate securities and commitments to purchase the above securities on a when-issued or delayed delivery basis, and may purchase municipal forwards, medium term notes, putable securities, and zero coupon securities. The Advisor has discretion to invest up to 20% of the Fund's total assets in taxable debt securities rated at least BBB or better by S&P or Baa or better by Moody's or, if unrated, of comparable quality at the time of purchase as determined by the Advisor, repurchase agreements, and securities subject to the alternative minimum tax. The Fund may also invest up to 10% of its assets in restricted securities that the Advisor determines are liquid under guidelines adopted by the Trust's Board of Trustees and may engage in futures and options transactions. Under normal market conditions, it is anticipated that the Fund's average weighted maturity will range from 4 to 10 years. The Fund may shorten its average weighted maturity to as little as 90 days if deemed appropriate for temporary defensive purposes. By so limiting the maturity of its investments, the Fund's net asset value is expected to experience less price movement in response to changes in interest rates than the net asset values of mutual funds investing in similar credit quality securities with longer maturities. The Fund's portfolio turnover rate was 591.91% for the fiscal year ended May 31, 1995. This rate of turnover, if continued, will likely result in higher transaction costs and higher levels of realized capital gains than if the turnover rate was lower. *U.S. GOVERNMENT SECURITIES FUND Under normal market conditions, the Fund will invest at least 65% of its assets in obligations issued or guaranteed by the U.S. Government or its agencies or instrumentalities, including mortgage-backed securities issued or guaranteed by U.S. Government agencies such as the Government National Mortgage Association ("GNMA"), the Federal National Mortgage Association ("FNMA") or the Federal Home Loan Mortgage Corporation ("FHLMC"). Mortgage-backed securities consisting of CMOs and real estate mortgage investment conduits ("REMICs") purchased by the Fund will be issued or guaranteed as to payment of principal and interest by the U.S. Government or its agencies or instrumentalities or, if issued by private issuers, rated in one of the two highest rating categories by an NRSRO. The principal governmental issuers or guarantors of mortgage-backed securities are GNMA, FNMA and FHLMC. Obligations of GNMA are backed by the full faith and credit of the U.S. Government while obligations of FNMA and FHLMC are supported by the respective agency only. The Fund may purchase mortgage-backed securities that are backed or collateralized by fixed, adjustable or floating rate mortgages. Mortgage-backed securities that are not issued or guaranteed by the U.S. Government or its agencies or instrumentalities, including securities nominally issued by a governmental entity (such as the Resolution Trust Corporation), are not obligations of a governmental entity and thus may bear a risk of nonpayment. The timely payment of principal 11 and interest normally is supported, at least partially, by various forms of insurance or guarantees. There can be no assurance, however, that such credit enhancement will support full payment of the principal and interest on such obligations. The average maturity of the Fund's investment portfolio will typically range from 7 to 14 years. With respect to the remaining 35% of its assets, the Fund may invest in corporate or government bonds that carry a rating of Baa or better by Moody's or BBB or better by S&P or better, or that are deemed by the Advisor to be of comparable quality; commercial paper rated at the time of purchase within the two highest ratings categories of an NRSRO; bankers' acceptances; certificates of deposit and time deposits; and U.S. Treasury obligations which includes custodial receipts and repurchase agreements involving securities that constitute permissible investments for the Fund. The Fund intends to invest in privately issued, mortgage-backed securities only if they are rated in one of the two highest rating categories. The Fund may purchase securities on a forward commitment or when-issued basis, which means that delivery and payment for such securities generally takes place after the customary securities settlement period. The Fund may purchase floating or variable rate securities, and may engage in dollar roll transactions. *LIMITED-TERM FEDERAL MORTGAGE SECURITIES FUND Under normal market conditions, the Limited-Term Federal Mortgage Securities Fund will invest at least 65% of its assets in mortgage-related securities issued or guaranteed by U.S. Government agencies such as GNMA, FNMA or the FHLMC. Obligations of GNMA are backed by the full faith and credit of the U.S. Government while obligations of FNMA and FHLMC are supported by the respective agency only. The Fund may purchase mortgage-backed securities that are backed or collateralized by fixed, adjustable or floating rate mortgages. The Fund's holdings of mortgage-backed securities will typically have an average life of from one to five years. Mortgage-backed securities consisting of CMOs and REMICs purchased by the Fund will be either issued or guaranteed as to payment of principal and interest by the U.S. Government or its agencies or instrumentalities or, if issued by private issuers, rated in one of the two highest rating categories by an NRSRO. Mortgage-backed securities that are not issued or guaranteed by the U.S. Government or its agencies or instrumentalities, including securities nominally issued by a governmental entity (such as the Resolution Trust Corporation), are not obligations of the U.S. Government and thus bear a risk of nonpayment. The timely payment of principal and interest normally is supported, at least partially, by various forms of insurance or guarantees. There can be no assurance, however, that such credit enhancement will support full payment of the principal and interest on such obligations. With respect to the remaining 35% of its assets, the Fund may invest in corporate or government bonds that carry a rating of Baa or better by Moody's or BBB or better by S&P, or that are deemed by the Advisor to be of comparable quality; asset backed securities; commercial paper rated at the time of purchase in the two highest ratings categories of an NRSRO rating bankers' acceptances; certificates of deposit and time deposits; U.S. Treasury obligations and custodial receipts; and repurchase agreements involving securities that constitute permissible investments for the Fund. 12 The Fund may purchase securities on a forward commitment or when-issued basis, which means that delivery and payment for such securities generally takes place after the customary securities settlement period. The Fund may purchase floating or variable rate securities, and may engage in dollar roll transactions. The Fund may also purchase stripped mortgage-backed securities, but will limit such purchase to 5% of its net assets. *SHORT-TERM BOND FUND Under normal circumstances, the Short-Term Bond Fund will invest solely in investment grade obligations rated BBB or better by S&P or Baa or better by Moody's or, if unrated, of comparable quality at the time of purchase as determined by the Advisor consisting of debt obligations of U.S. and foreign corporations, mortgage-backed securities; CMOs; asset-backed securities; obligations (including mortgage-backed securities) issued or guaranteed as to principal and interest by the U.S. Government or its agencies or instrumentalities; and custodial receipts involving U.S. Treasury obligations (including STRIPS and CUBES). Under normal circumstances, at least 65% of the Fund's total assets will be invested in corporate and government bonds and debentures. No more than 25% of the Fund's assets will be invested in securities rated BBB by S&P or Baa by Moody's or, if unrated, of comparable quality at the time of purchase by the Advisor. The Fund may purchase, without limitation, mortgage-backed securities issued or guaranteed as to the payment of principal and interest by the U.S. Government or its agencies or instrumentalities and, subject to a limit of 25% of the Fund's assets, mortgage-backed securities issued by private issuers. These mortgage-backed securities may be backed or collateralized by fixed, adjustable or floating rate mortgages. The Fund may also invest in asset-backed securities, which consist of securities backed by company receivables, truck and auto loans; leases; credit card receivables; and home equity loans. The Fund will purchase mortgage-backed and asset-backed securities only if they are rated at least AA by S&P or Aa by Moody's or, if unrated, determined to be of comparable quality at the time of purchase by the Advisor. The Fund may purchase securities on a when-issued basis and may acquire floating or variable rate securities, medium term notes, putable securities, and zero coupon securities. The Fund may also purchase securities issued by foreign governments and supranational agencies. The Fund may also invest in municipal securities when the Advisor feels it is consistent with the Fund's investment objective. The Fund will not invest in municipal securities unless the Advisor believes that the yield will be higher than the yield for comparable taxable investments in which the Fund is permitted to invest. The following quality criteria apply to the Fund's investments in municipal securities. The Fund's investments in municipal notes will be limited to those obligations (i) where both principal and interest are backed by the full faith and credit of the United States, (ii) which are rated MIG-2 or V-MIG-2 at the time of investment by Moody's, (iii) which are rated SP-2 at the time of investment by S&P, or (iv) which, if not rated, are of equivalent quality to MIG-2, V-MIG-2, or SP-2 in the Advisor's judgment. The Fund's investment in municipal bonds will be limited to bonds rated BBB or better by S&P or Baa or better by Moody's, or, if unrated, deemed by the Advisor to be of comparable quality. For the Fund's investments in other types of tax-exempt municipal investments, such as participation interests in municipal lease/purchase agreements, the quality of the underlying credit or of the bank 13 providing a credit support arrangement must, in the Advisor's opinion, be equivalent to the municipal note or bond ratings stated above. The Fund is also authorized to invest up to 10% of its assets in restricted securities, including Rule 144A securities, that the Advisor determines are liquid under guidelines adopted by the Trust's Board of Trustees. The Fund may also enter into bond futures contracts and options on bond futures contracts and engage in securities lending. The Fund intends to maintain a dollar-weighted average maturity of 3 years or less, and the maximum remaining maturity for any security held by the Fund is 7 years. Under normal market conditions it is anticipated that the Fund's dollar-weighted average maturity will range from 2 to 3 years. In the case of mortgage related securities and asset-backed securities, maturity will be determined based on the expected average life of the security. The Fund may shorten its average weighted maturity to as little as 90 days if deemed appropriate for temporary defensive purposes. By so limiting the maturity of its investments, the Fund expects that its net asset value will experience less price movement in response to changes in interest rates than the net asset values of mutual funds investing in similar credit quality securities with longer maturities. The Fund's turnover rate was 200.49% for the fiscal year ended May 31, 1995. This rate of turnover, if continued, will likely result in higher transaction costs and higher levels of realized capital gains than if the turnover rate was lower. *SHORT-TERM U.S. TREASURY SECURITIES FUND The Short-Term U.S. Treasury Securities Fund will invest exclusively in obligations issued by the U.S. Treasury with maximum remaining maturities of 3 years or less. U.S. Treasury securities are considered to be among the safest investments available. The Fund will not invest in repurchase agreements. The Fund may borrow money for temporary or emergency purposes in an amount not exceeding one-third of its total assets, but has no present intention to do so. Under normal market conditions, it is anticipated that the Fund's average maturity will range from one to two years. Furthermore, for temporary defensive purposes during periods when the Advisor determines that market conditions warrant, the Short-Term U.S. Treasury Securities Fund may reduce its average weighted maturity to less than one year. *FLORIDA TAX-EXEMPT BOND FUND The Florida Tax-Exempt Bond Fund intends to be fully invested in municipal securities the interest on which is exempt from federal income taxes based on opinions from bond counsel to the issuers. The issuers of these securities can be located in Florida, the District of Columbia, Puerto Rico and other U.S. territories and possessions. It is a fundamental policy of the Fund to invest at least 80% of its total assets in securities the income from which is exempt from federal income tax and not treated as a preference item for purposes of the alternative minimum tax. At least 65% of the Fund's assets will be invested in Florida municipal bonds and debentures, and at least 75% of its total assets invested in municipal bonds will be in securities rated A or better by S&P or Moody's. Municipal securities must be rated BBB or better by S&P or Baa or better by Moody's in the case of bonds; SP-1, SP-2 or MIG-1, MIG-2 in the case of notes; A-1, A-2, or P-1, P-2 in the case of tax-exempt commercial paper; and VMIG-1 or VMIG-2 in the case of variable rate demand obligations. No more than 25% of the Fund's assets will be invested in bonds rated BBB by S&P or Baa by Moody's. The Fund will only acquire unrated securities if, 14 at the time of purchase, the Advisor determines that such unrated obligations are of comparable quality to rated obligations that may be acquired by the Fund. The Fund may invest in floating or variable rate securities, commitments to purchase the above securities on a when-issued or delayed delivery basis, and may purchase municipal forwards, putable securities, medium term notes, and zero coupon securities. The Advisor has discretion to invest up to 20% of the Fund's total assets in taxable debt securities rated at least BBB or better by S&P or Baa or better by Moody's or, if unrated, of comparable quality at the time of purchase as determined by the Advisor, repurchase agreements, and securities subject to the alternative minimum tax. The Fund may also invest in futures and options, but has no present intention to do so for other than hedging purposes. Under normal market conditions, it is anticipated that the Fund's average weighted maturity will range from 6 to 25 years. The Fund may shorten its average weighted maturity to as little as 90 days if deemed appropriate for temporary defensive purposes. The Fund's portfolio turnover rate was 105.01% for the fiscal year ended May 31, 1995. This rate of turnover, if continued, will likely result in higher transaction costs and higher levels of realized capital gains than if the turnover rate was lower. *GEORGIA TAX-EXEMPT BOND FUND The Georgia Tax-Exempt Bond Fund intends to be fully invested in municipal securities the interest on which is exempt from federal income taxes and substantially exempt from State of Georgia income taxes based on opinions from bond counsel to the issuers. The issuers of these securities can be located in Georgia, the District of Columbia, Puerto Rico and other U.S. territories and possessions. It is a fundamental policy of the Fund to invest at least 80% of its total assets in securities the income from which is exempt from federal income tax and not treated as a preference item for purposes of alternative minimum tax. At least 65% of the Fund's assets will be invested in Georgia municipal bonds and debentures, and at least 75% of its total assets invested in municipal bonds will be in securities rated A or better by S&P or Moody's. Municipal securities must be rated BBB or better by S&P or Baa or better by Moody's in the case of bonds; SP-1, SP-2 or MIG-1, MIG-2 in the case of notes; A-1, A-2, or P-1, P-2 in the case of tax-exempt commercial paper; and VMIG-1 or VMIG-2 in the case of variable rate demand obligations. No more than 25% of the Fund's assets will be invested in bonds rated BBB by S&P or Baa by Moody's. The Fund will only acquire unrated securities if, at the time of purchase, the Advisor determines that such unrated obligations are of comparable quality to rated obligations that may be acquired by the Fund. The Fund may invest in floating or variable rate securities, commitments to purchase the above securities on a when-issued or delayed delivery basis, and may purchase municipal forwards, putable securities, medium term notes and zero coupon securities. The Advisor has discretion to invest up to 20% of the Fund's total assets in taxable debt securities rated at least BBB or better by S&P or Baa or better by Moody's or, if unrated, of comparable quality at the time of purchase as determined by the Advisor, repurchase agreements, and securities subject to the alternative minimum tax. The Fund may also invest in futures and options, but has no present intention to do so for other than hedging purposes. Under normal market conditions, it is anticipated that the Fund's average weighted maturity will range from 6 to 25 years. The 15 Fund may shorten its average weighted maturity to as little as 90 days if deemed appropriate for temporary defensive purposes. *TENNESSEE TAX-EXEMPT BOND FUND The Tennessee Tax-Exempt Bond Fund intends to be fully invested in municipal securities the interest on which is exempt from federal income taxes and substantially exempt from State of Tennessee income taxes based on opinions from bond counsel to the issuers. The issuers of these securities can be located in Tennessee, the District of Columbia, Puerto Rico and other U.S. territories and possessions. It is a fundamental policy of the Fund to invest at least 80% of its total assets in securities the income from which is exempt from federal income tax and not treated as a preference item for purposes of the alternative minimum tax. At least 65% of the Fund's assets will be invested in Tennessee municipal bonds and debentures, and at least 75% of its total assets invested in municipal bonds will be in securities rated A or better by S&P or Moody's. Municipal securities must be rated BBB or better by S&P or Baa or better by Moody's in the case of bonds; SP-1, SP-2 or MIG-1, MIG-2 in the case of notes; A-1, A-2, or P-1, P-2 in the case of tax-exempt commercial paper; and VMIG-1 or VMIG-2 in the case of variable rate demand obligations. No more than 25% of the Fund's assets will be invested in bonds rated BBB by S&P or Baa by Moody's. The Fund will only acquire unrated securities if, at the time of purchase, the Advisor determines that such unrated obligations are of comparable quality to rated obligations that may be acquired by the Fund. The Fund may invest in floating or variable rate securities, commitments to purchase the above securities on a when-issued or delayed delivery basis, and may purchase municipal forwards, putable securities, medium term notes and zero coupon securities. The Advisor has discretion to invest up to 20% of the Fund's total assets in taxable debt securities rated at least BBB or better by S&P or Baa or better by Moody's or, if unrated, of comparable quality at the time of purchase as determined by the Advisor, repurchase agreements, and securities subject to the alternative minimum tax. The Fund may also invest in futures and options, but has no present intention to do so for other than hedging purposes. Under normal market conditions, it is anticipated that the Fund's average weighted maturity will range from 6 to 25 years. The Fund may shorten its average weighted maturity to as little as 90 days if deemed appropriate for temporary defensive purposes. *CAPITAL GROWTH FUND The Capital Growth Fund invests primarily in a diversified portfolio of common stocks, warrants, and securities convertible into common stocks which, in the Advisor's opinion, are undervalued in the marketplace at the time of purchase. In selecting securities for the Fund, the Advisor will evaluate factors believed to affect capital appreciation such as the issuer's background, industry position, historical returns on equity and experience and qualifications of the management team. Dividend and interest income is incidental to growth of capital. The Advisor will rotate the Capital Growth Fund's holdings between various market sectors based on economic analysis of the overall business cycle. Under normal conditions, at least 65% of the total assets of the Capital Growth Fund will be invested in common stocks. All of the common stocks in which the Fund invests are traded on registered exchanges or on the over-the-counter market in the United States. Assets of the Capital Growth Fund not 16 invested in the securities described above may be invested in U.S. dollar denominated equity securities of foreign issuers (including sponsored American Depositary Receipts ("ADRs") that are traded on exchanges or listed on NASDAQ); securities issued by money market mutual funds; pay-in-kind securities; and bonds. The bonds that the Capital Growth Fund may purchase may be rated in any rating category or may be unrated, provided that no more than 10% of the Fund's total assets will be invested in bonds rated below BBB by Standard & Poor's Corporation ("S&P") or below Baa by Moody's Investors Service, Inc. ("Moody's") or unrated securities of comparable quality (see "Investment Risks -- High Yield - -- Lower Rated Bonds"). In addition, the Fund may invest up to 10% of its assets in restricted securities. The Fund's turnover rate for the fiscal year ended May 31, 1995 was 127.79%. This rate of turnover, if continued, will likely result in higher brokerage commissions and higher levels of realized capital gains than if the turnover rate was lower. *VALUE INCOME STOCK FUND The Value Income Stock Fund seeks to provide current income by structuring its investments in an attempt to maintain the Fund's yield at a level above the average dividend yield of the securities comprising the S&P 500 Stock Index. Achieving such a yield will be the Fund's primary consideration when purchasing securities. A secondary objective of the Fund will be capital appreciation. The Fund will invest at least 80% of its total assets in equity securities. Investments will consist primarily of common stocks, and, under normal market conditions, at least 65% of the Fund's assets will be invested in common stocks issued by corporations which have a history of paying regular dividends, although there can be no assurance that such corporations will continue to pay dividends. Other equity securities in which the Fund may invest are convertible debt securities, preferred stocks and warrants which are convertible into or exchangeable for common stocks; and U.S. dollar denominated equity securities of foreign issuers (including sponsored ADRs that are traded on exchanges or listed on NASDAQ). All of the common stocks in which the Fund invests are traded on registered exchanges such as the New York or American Stock Exchange or on the over-the-counter market in the United States (i.e., NASDAQ). The Fund may also purchase debt securities (corporate debt obligations and U.S. Treasury obligations) which may be rated in any rating category or may be unrated, provided that no more than 10% of the Fund's total assets will be invested in bonds rated below BBB by S&P or below Baa by Moody's or unrated securities of comparable quality. The Fund will invest primarily in stocks of companies operating in all aspects of the U.S. and world economies that have a market capitalization of at least $500 million or more, that the Advisor believes possess fundamentally favorable long-term characteristics. However, stocks of companies with smaller market capitalizations and stocks that are out of favor in the financial community and in which little opportunity for price appreciation is recognized by the financial community may also be purchased if the Advisor believes they are undervalued. The Fund's turnover rate for the fiscal year ended May 31, 1995 was 125.71%. This rate of turnover, if continued, will likely result in higher brokerage commissions and higher levels of realized capital gains than if the turnover rate was lower. 17 *AGGRESSIVE GROWTH FUND The Aggressive Growth Fund invests primarily in a diversified portfolio of common stocks, preferred stocks, and securities convertible into common stocks of small to midsize companies, (i.e., $50 million to $1 billion and $500 million to $5 billion, respectively, as measured by their market capitalization), with above-average growth of earnings. Current income will not be an important criterion of investment selection and any such income should be considered incidental. In selecting securities for the Fund, the Advisor will evaluate factors such as the issuer's background, industry position, historical returns on equity and experience and qualifications of the management team. Under normal conditions, at least 80% of the total assets of the Fund will be invested in equity securities. Most of the common stocks in which the Fund invests are traded on registered exchanges or on the over-the-counter market in the United States. Assets of the Fund not invested in the securities described above may be invested in U.S. dollar denominated equity securities of foreign issuers (including sponsored ADRs that are traded on exchanges or listed on NASDAQ); securities issued by mutual funds; repurchase agreements; and bonds. The bonds that the Fund may purchase, including any variable or floating rate instruments, must be rated B or better by S&P or Moody's, provided that this requirement shall not apply to the Fund's purchase of bonds issued by the government of Canada or by various supranational entities, and provided further that no more than 10% of the Fund's total assets will be invested in bonds rated below BBB by S&P or below Baa by Moody's or unrated securities of comparable quality. The Fund may invest up to 10% of its assets in restricted securities. *SUNBELT EQUITY FUND The Sunbelt Equity Fund seeks to provide capital appreciation by investing substantially all, and under normal market conditions at least 65%; of its assets in common stocks; preferred stocks; warrants; and securities convertible into common stock of U.S. companies headquartered and/or conducting a substantial portion of their operations in (i.e., maintaining at least 50% of their assets in or deriving at least 50% of their revenues and/or sales from) the southern region of the United States. Current income will not be an important criterion of investment selection and any such income should be considered incidental. The Advisor will seek to identify and purchase securities of companies that it believes to be undervalued and that possess a strong balance sheet, a strong earnings record, and adequate market liquidity. Most of the common stocks in which the Fund invests are traded on registered exchanges such as the New York or American Stock Exchange or on the over-the-counter market in the United States (i.e., NASDAQ). The Fund will invest no more than 10% of its assets in convertible securities rated lower than BBB. (See "Investment Risks -- High Yield, Lower Rated Bonds.") The Fund may invest up to 10% of its total assets in restricted securities. The Fund may also purchase futures and options for hedging purposes. Obligations relating to futures contracts will be limited to not more than 20% of the Fund's total assets. The Fund will invest primarily in stocks of U.S. companies headquartered and/or operating in the following U.S. states: Texas, Arkansas, Alabama, Mississippi, Tennessee, Kentucky, Florida, Virginia, Georgia, North Carolina, South Carolina and Louisiana. To the extent that the Fund's investments are not as geographically dispersed across the U.S. as other funds with 18 comparable objectives, Shareholders will be more subject to the impact of economic forces on and the relative economic conditions of these states. *BALANCED FUND The Balanced Fund seeks to provide capital appreciation and current income through investments in a diversified portfolio of common and preferred stocks, warrants, securities convertible into common stocks, and investment grade fixed income securities. Under normal conditions, no more than 70% of the total assets of the Fund will be invested in common stocks and other equity securities, and no more than 60% of the Fund's total assets will be invested in bonds and other fixed income securities. The Fund will maintain at least 25% of its total assets in senior fixed income securities. In selecting equity securities for the Fund, the Advisor will evaluate factors believed to affect capital appreciation such as the issuer's background, industry position, historical returns on equity and experience and qualifications of the management team. The Advisor will rotate the Fund's holdings between various market sectors based on economic analysis of the overall business cycle. All of the common stocks in which the Fund invests are traded on registered exchanges or on the over-the-counter market in the United States. Assets of the Fund not invested in the securities described above may be invested in U.S. dollar denominated equity securities of foreign issuers (including sponsored ADRs that are traded on exchanges or listed on NASDAQ), securities issued by investment companies, and bonds. The Fund will invest in investment grade fixed income securities rated BBB or better by S&P or Baa or better by Moody's or, if unrated, of comparable quality at the time of purchase as determined by the Advisor, including corporate debt obligations; mortgage-backed securities, collateralized mortgage obligations and asset-backed securities; obligations issued or guaranteed as to principal and interest by the U.S. Government or its agencies or instrumentalities; custodial receipts involving U.S. Treasury obligations; securities of the government of Canada and its provincial and local governments; securities issued or guaranteed by foreign governments, their political subdivisions, agencies or instrumentalities; and obligations of supranational entities. No more than 25% of the Fund's assets will be invested in securities rated BBB by S&P or Baa by Moody's or, if unrated, of comparable quality at the time of purchase as determined by the Fund's Advisor. The Fund may purchase mortgage-backed securities issued or guaranteed as to the payment of principal and interest by the U.S. Government or its agencies or instrumentalities or, subject to a limit of 25% of the Fund's assets, mortgage-backed securities issued by private issuers. These mortgage-backed securities may be backed or collateralized by fixed, adjustable or floating rate mortgages. The Fund may also invest in asset backed securities which consist of securities backed by company receivables, truck and auto loans, leases, credit card receivables and home equity loans. In order to reduce interest rate risk, the Fund may purchase floating or variable rate securities. It may also buy securities on a when-issued basis, putable securities, pay-in-kind securities, and zero coupon securities. The Fund may also invest futures and options. Some floating or variable rate securities will be subject to interest rate "caps" or "floors." The Balanced Fund's turnover rate for the fiscal year ended May 31, 1995 was 128% for the 19 equity portion of its portfolio and 193% for the fixed income portion of its portfolio. These rates of turnover, if continued will likely result in higher transaction costs and brokerage commissions and higher levels of realized capital gains than if the turnover rate was lower. *INTERNATIONAL EQUITY INDEX FUND The Fund will invest substantially all and, under normal market conditions, at least 65% of its assets in common and preferred stocks; warrants; options; and securities convertible into common stock of companies headquartered or based in the approximately twenty foreign countries included in the Morgan Stanley Capital International EAFE-GDP Index. The Fund will invest only in the 1088 or so companies included in the EAFE-GDP Index. Because it is impractical to invest in every company included in the Index, the Fund will select a representative sample of securities in each country using a statistical-based optimization process. Morgan Stanley & Co. Incorporated maintains the optimization computer programs which will be utilized to select companies within each country. The Fund will be constructed to have aggregate investment characteristics similar to those of the EAFE-GDP Index. The Fund will invest in a statistically selected sample of the securities included in the EAFE-GDP Index, although not all countries nor all companies within a country will be represented in the Fund's portfolio of securities at any time. The Fund expects to invest in approximately 300 stocks so that the results fall within the targeted tracking error. From time to time, adjustments may be made in the Fund's portfolio because of changes in the composition of the EAFE-GDP Index. No attempt will be made to manage the portfolio using traditional economic, financial and market analyses. The Fund expects that there will be a close correlation between the Fund's performance and that of the EAFE-GDP Index. A 1.00 correlation would indicate perfect correlation, which would be achieved when the net asset value of the Fund, including the value of its dividend and capital gains distributions, increases or decreases in exact proportion to changes in the EAFE-GDP Index. The correlation between the Fund and the EAFE-GDP Index is expected to be over 0.95 on an annual basis. The Fund's ability to track the EAFE-GDP Index, however may be affected by, among other things, transaction costs, changes in either the composition of the EAFE-GDP Index or number of shares outstanding for the component companies of the EAFE-GDP Index, and the timing and amount of purchases and redemptions. Securities of foreign issuers purchased by the Fund may be purchased in foreign markets, on United States registered exchanges, the over-the-counter market or in the form of sponsored or unsponsored ADRs traded on registered exchanges or NASDAQ, or sponsored or unsponsored European Depositary Receipts ("EDRs"). The Fund may enter into forward foreign currency contracts as a hedge against possible variations in foreign exchange rates. A forward foreign currency contract is a commitment to purchase or sell a specified currency, at a specified future date, at a specified price. The Fund may enter into forward foreign currency contracts to hedge a specific security transaction or to hedge a portfolio position. These contracts may be bought or sold to protect the Fund, to some degree, against a possible loss resulting from an adverse change in the relationship between foreign currencies and the U.S. dollar. The Fund expects to be fully invested in the investments, described above, but may invest 20 up to 35% of its total assets in U.S. and non-U.S. denominated money market instruments; repurchase agreements; futures contracts, including stock index futures contracts; and options on futures contracts. Obligations relating to futures contracts will be limited to not more than 20% of the Fund's total assets. The Fund is also permitted to acquire floating and variable rate securities; purchase securities on a when-issued basis; and purchase illiquid securities. GENERAL INVESTMENT POLICIES AND STRATEGIES For temporary defensive purposes during periods when its Advisor determines that market conditions warrant, each Fund, except the Short-Term U.S. Treasury Securities Fund, may invest up to 100% of its assets in money market instruments consisting of securities issued or guaranteed as to principal and interest by the U.S. Government, its agencies or instrumentalities, custodial receipts involving U.S. Treasury obligations, repurchase agreements, certificates of deposit, bankers' acceptances, and time deposits issued by banks or savings and loan associations and commercial paper rated in the highest rating category, and may hold a portion of its assets in cash. A Fund may not be pursuing its investment objective when it is engaged in temporary defensive investing. The Equity Funds and the Balanced Fund may invest in money market instruments for liquidity purposes. The municipal bonds that the Investment Grade Tax-Exempt Bond Fund and State Tax-Exempt Bond Funds may purchase include general obligation bonds, revenue or special obligation bonds, and private activity and industrial development bonds. General obligation bonds are backed by the taxing power of the issuing municipality while revenue or special obligation bonds are backed by a specific project or facility. The State Tax-Exempt Bond Funds may also purchase certificates of participation which represent an interest in an underlying obligation or commitment such as an obligation issued in connection with a leasing arrangement. The payment of principal and interest on private activity and industrial development bonds generally is dependent solely on the ability of the facility's user to meet its obligation and the pledge, if any, of real or personal property as security for such payment. The Advisor to a State Tax-Exempt Bond Fund or the Investment Grade Tax-Exempt Bond Fund may buy or sell portfolio securities with the intention of generating capital gains. Such gains will increase the Fund's total return and will be taxable upon distribution to Shareholders. See "Tax Information." In the event that a security owned by a Fund is downgraded below the stated rating categories, the Advisor will review and take appropriate action with regard to the security. A Fund's purchase of shares of other investment companies is limited by the Investment Company Act of 1940 (the "1940 Act") and will ordinarily result in an additional layer of charges and expenses. Each of the Funds may engage in securities lending and will limit such practice to 33 1/3% of 21 its total assets. No Fund may purchase additional securities while its outstanding borrowings exceed 5% of its assets. It is a non-fundamental policy of each Fund to invest no more than 15% of its net assets in illiquid securities. An illiquid security is a security which cannot be disposed of in the usual course of business within seven days at a price approximating its carrying value. The Capital Growth Fund, Value Income Stock Fund, Aggressive Growth Fund, Balanced Fund and Sunbelt Equity Fund may purchase restricted securities, including Rule 144A securities, that its Advisor determines are liquid pursuant to the guidelines established by the Trust's Board of Trustees. For additional information regarding permitted investments, see "Description of Permitted Investments" in this Prospectus and in the Statement of Additional Information. INVESTMENT RISKS ZERO COUPON OBLIGATIONS Each Fund may invest, subject to its investment objective and policies, in zero coupon obligations. Zero coupon obligations are sold at original issue discount and do not make periodic payments. Zero coupon obligations may be subject to greater fluctuations in value due to interest rate changes than interest bearing obligations. A Fund will be required to include the imputed interest in zero coupon obligations in its current income. Because each Fund distributes all of its net investment income to Shareholders, a Fund may have to sell portfolio securities to distribute the income attributable to these obligations and securities at a time when the Advisor would not have chosen to sell such obligations or securities and which may result in a taxable gain or loss. FOREIGN SECURITIES AND FOREIGN CURRENCY CONTRACTS Investing in the securities of foreign companies involves special risks and considerations not typically associated with investing in U.S. companies. These risks and considerations include differences in accounting, auditing and financial reporting standards, generally higher commission rates on foreign portfolio transactions, the possibility of expropriation or confiscatory taxation, adverse changes in investment or exchange control regulations, political instability which could affect U.S. investment in foreign countries and potential restrictions of the flow of international capital and currencies. Foreign companies may also be subject to less government regulation than U.S. companies. Moreover, the dividends payable on the foreign securities may be subject to foreign withholding taxes, thus reducing the net amount of income available for distribution to the Fund's Shareholders. Further, foreign securities often trade with less frequency and volume than domestic securities and, therefore, may exhibit greater price volatility. Changes in foreign exchange rates will affect, favorably or unfavorably, the value of those securities which are denominated or quoted in currencies other than the U.S. dollar. By entering into forward foreign currency contracts, the International Equity Index Fund will seek to protect the value of its investment securities against a decline in the value of a currency. However, these forward foreign currency contracts will not eliminate fluctuations in the underlying prices of the securities. Rather, they simply establish a rate of exchange which one can obtain at some future point in time. Although such contracts tend to minimize the risk of loss due to a decline in the value of the hedged currency, also, they tend to limit any potential gain which might result should the value of such currency increase. 22 EQUITY SECURITIES Investment in equity securities are generally subject to market risks that may cause their prices to fluctuate over time. The values of convertible equity securities are also affected by prevailing interest rates, the credit quality of the issuer and any call provision. Fluctuations in the value of equity securities in which a Fund invests will cause the net asset value of the Fund to fluctuate. MORTGAGE-BACKED SECURITIES Mortgage-backed securities are subject to the risk of prepayment of the underlying mortgages. During periods of declining interest rates, prepayment of mortgages underlying these securities can be expected to accelerate. When the mortgage-backed securities held by a Fund are prepaid, the Fund must reinvest the proceeds in securities the yield of which reflects prevailing interest rates, which may be lower than the prepaid security. FIXED INCOME SECURITIES The market value of a Fund's fixed income investments will change in response to interest rate changes and other factors. During periods of falling interest rates, the values of outstanding fixed income securities generally rise. Conversely, during periods of rising interest rates, the values of such securities generally decline. Securities with longer maturities are subject to greater fluctuations in value than securities with shorter maturities. Changes by an NRSRO to the rating of any fixed income security and in the ability of an issuer to make payments of interest and principal also affect the value of these investments. Changes in the value of a Fund's securities will not affect cash income derived from these securities but will affect the Fund's net asset value. Fixed income securities rated BBB by S&P or Baa by Moody's (investment grade bonds) are deemed by these rating services to have speculative characteristics. Guarantees of a Fund's securities by the U.S. Government or its agencies or instrumentalities guarantee only the payment of principal and interest on the guaranteed securities, and do not guarantee the securities' yield or value or the yield or value of a Fund's shares. There is a risk that the current interest rate on floating and variable rate instruments may not accurately reflect existing market interest rates. MUNICIPAL SECURITIES Since each State Tax-Exempt Bond Fund invests in municipal securities issued by governmental entities of each of their specific states, the performance of each State Tax-Exempt Bond Fund may be especially affected by factors pertaining to such state's economy and other factors specifically affecting the ability of issuers in that state to meet their obligations. As a result, the value of each State Tax-Exempt Bond Fund's shares may fluctuate more widely than the value of shares of a portfolio investing in securities relating to a number of different states. The ability of state, county, or local governments to meet their obligations will depend primarily on the availability of tax and other revenues to those governments and on their fiscal conditions generally. Municipal securities may be affected from time to time by economic, political, geographic and demographic conditions. In addition, constitutional amendments, legislative measures, executive orders, administrative regulations and voter initiatives may limit a government's power to raise revenues or increase taxes and thus could adversely affect the ability to meet financial obligations. 23 HIGH YIELD, LOWER RATED BONDS A Fund's investments in high yield, lower rated bonds ("junk bonds") involve greater risk of default or price declines than investments in investment grade securities (securities rated BBB or higher by S&P or Baa or higher by Moody's) due to changes in the issuer's creditworthiness. The market for high risk, high yield securities may be thinner and less active, causing market price volatility and limited liquidity in the secondary market. This may limit the ability of the Fund to sell such securities at their fair market value either to meet redemption requests or in response to changes in the economy or the financial markets. Market prices for high risk, high yield securities may also be affected by investors' perception of the issuer's credit quality and the outlook for economic growth. Thus, prices for high risk, high yield securities may move independently of interest rates and the overall bond market. In addition, the market for high risk, high yield securities may be adversely affected by legislative and regulatory developments. INVESTMENT LIMITATIONS The following investment limitations constitute fundamental policies of each Fund. Fundamental policies cannot be changed with respect to a Fund without the consent of the holders of a majority of the Fund's outstanding shares. The term "majority of the outstanding shares" means the vote of (i) 67% or more of a Fund's shares present at a meeting, if more than 50% of the outstanding shares of the Fund are present or represented by proxy, or (ii) more than 50% of a Fund's outstanding shares, whichever is less. Each Fund may not: 1. Purchase securities of any issuer (except securities issued or guaranteed by the United States, its agencies or instrumentalities and repurchase agreements involving such securities) if as a result more than 5% of the total assets of a Fund would be invested in the securities of such issuer; provided, however, that a Fund may invest up to 25% of its total assets without regard to this restriction as permitted by applicable law. 2. Purchase any securities which would cause more than 25% of the total assets of a Fund to be invested in the securities of one or more issuers conducting their principal business activities in the same industry, provided that this limitation does not apply to investments in obligations issued or guaranteed by the U.S. Government or its agencies and instrumentalities, repurchase agreements involving such securities or tax-exempt securities issued by governments or political subdivisions of governments. For purposes of this limitation, (i) utility companies will be divided according to their services, for example, gas, gas transmission, electric and telephone will each be considered a separate industry; (ii) financial service companies will be classified according to the end users of their services, for example, automobile finance, bank finance and diversified finance will each be considered a separate industry; and (iii) supranational entities will be considered to be a separate industry. It is a non-fundamental policy of the Investment Grade Tax-Exempt Bond Fund that it will not invest more than 25% of its net assets in securities of one or more issuers conducting their principal activities in the same state. In addition, the Investment Grade Tax-Exempt Bond Fund and State Tax-Exempt Bond Funds will not invest more than 25% of their total assets in securities the interest on which is derived from revenues of similar type projects. The foregoing percentages will apply at the time of the purchase of a security. Additional investment limitations are set forth in the Statement of Additional Information. 24 PERFORMANCE INFORMATION From time to time, the Funds may advertise yield and total return. These figures will be based on historical earnings and are not intended to indicate future performance. The yield of a Fund refers to the annualized income generated by an investment in that Fund over a specified 30-day period. The yield is calculated by assuming that the income generated by the investment during that period is generated over one year and is shown as a percentage of the investment. The Investment Grade Tax-Exempt and State Tax-Exempt Bond Funds may also advertise a "tax-equivalent yield," which is calculated by determining the rate of return that would have been achieved on a fully taxable investment to produce the after tax equivalent of the Fund's yield, assuming certain tax brackets for the Shareholder. The total return of a Fund refers to the average compounded rate of return to a hypothetical investment, including any sales charge imposed, for designated time periods (including but not limited to, the period from which a Fund commenced operations through the specified date), assuming that the entire investment is redeemed at the end of each period and assuming the reinvestment of all dividend and capital gains distributions. GENERAL PERFORMANCE INFORMATION The performance of the Trust's Investor Shares and Flex Shares will normally be lower than for Trust Shares because Investor Shares and Flex Shares are subject to distribution, services, and certain transfer agent fees not charged to Trust Shares. The performance of Flex Shares in comparison to Investor Shares will vary depending upon the investment time horizon. Each Fund may periodically compare its performance to other mutual funds tracked by mutual fund rating services, to broad groups of comparable mutual funds or to unmanaged indices which may assume reinvestment of dividends but generally do not reflect deductions for administrative and management costs. FUNDLINK All purchases and redemptions of STI Classic Fund Flex Shares may be completed via FUNDLINK, a telephone activated service that allows Shareholders to transfer money between the STI Classic Funds and a Shareholder's SunTrust bank account(s). To initiate a FUNDLINK transaction, Shareholders are provided a toll-free telephone number (1-800-428-6970) to call the Trust's Transfer Agent. To utilize this service, a Shareholder must contact an Investment Services Representative of a SunTrust Banks, Inc. affiliate bank and complete the appropriate application and authorization agreements. PURCHASE OF FUND SHARES Flex Shares are sold at net asset value (without an initial sales charge) and are subject to a deferred sales charge if redeemed within one year of purchase. Flex Shares provide the benefit of permitting all investor dollars to be invested from the initial time of purchase. Flex Shares are sold on a continuous basis and may be purchased by contacting the Trust's Transfer Agent, Federated Services Company (the "Transfer Agent"), either by mail, by telephone or by wire. Flex Shares may also be purchased through Investment Services Representatives of SunTrust Banks, Inc., affiliate banks which serve as Shareholder Servicing Agents to the Trust. Furthermore, Flex Shares 25 may be purchased through SunTrust Securities, Inc., as well as, certain correspondent banks of SunTrust Banks, Inc. Shares may be purchased on days on which the New York Stock Exchange is open for business ("business day"). A purchase order for any of the Funds will be effective as of the business day it is received by the Transfer Agent if the Transfer Agent receives the order before 4:00 p.m. Eastern time. The purchase price of Flex Shares of a Fund is the net asset value next determined after a purchase order is effective. The net asset value per share of a Fund is determined by dividing the total market value of the Fund's investments and other assets, less any liabilities, by the total outstanding shares of the Fund. Net asset value per share is determined daily as of the close of business of the New York Stock Exchange (currently 4:00 p.m. Eastern time) on any business day. Pursuant to guidelines established by the Trustees, the Trust may use a pricing service to provide market quotations or valuations for securities owned by each Fund. Purchases will be made in full and fractional shares of a Fund calculated to three decimal places. Purchases by mail are considered received after payment by check is converted into federal funds. Minimum initial and subsequent purchase amounts, respectively, for each Fund are $10,000 and $1,000 ($100 via statement coupon). The minimum initial purchase amount for retirement plans is $2,000. These minimums may be waived at the Distributor's discretion such as for any one trust or fiduciary account including employee benefit plans created under sections 401 or 457 of the Internal Revenue Code including related plans of the same employer. Financial institutions may impose an earlier cut-off time for receipt of purchase orders directed through them to allow for processing and transmittal of these orders to the Transfer Agent for effectiveness the same day. The Trust reserves the right to reject a purchase order when the Distributor determines that it is not in the best interest of the Trust and/or Shareholder(s). Neither the Trust's Transfer Agent nor the Trust will be responsible for any loss, liability, cost or expense for acting upon telephone or wire instructions reasonably believed to be genuine. The Trust and the Transfer Agent maintain procedures, including identification methods and other means, for ascertaining the identity of callers and authenticity of instructions. Shares of the Funds are offered only to residents of states in which the shares are eligible for purchase. Investors in certain states may be required to purchase shares through institutions registered as brokers/dealers in such states. Although the methodology and procedures for calculating the net asset value of Flex Shares are identical to those for Trust and Investor Shares, the net asset value per share of the classes may differ because of the distribution, service, and certain transfer agent expenses charged to Flex Shares and Investor Shares. In deciding whether to purchase Investor Shares or Flex Shares, investors should take into consideration their present and anticipated purchase amounts, and time horizons. Investors should consider, based on the anticipated life of their Funds(s) investment, whether the accumulated distribution fees and contingent deferred sales charge on Flex Shares would be less than the initial sales charge on the Investor Shares or Trust Shares purchased at the same time. And, simultaneously and to what extent such differential would be offset by the higher dividend distributions per share on the Investor 26 Shares or Trust Shares. To assist investors in making this decision, an analysis program is available through a local SunTrust Trust and Investment Service representative upon request. *SYSTEMATIC INVESTMENT PLAN Shares of each Fund may be purchased systematically through deductions from checking or savings accounts maintained through SunTrust Banks, Inc. affiliate banks. The Systematic Investment Plan is subject to subsequent minimum maintained balance requirements. The minimum initial purchase amount for the Systematic Investment Plan is $500. Since the minimum normal initial investment amount for Flex Shares is $10,000 per Fund, it is expected that Systematic Investment Plan purchases will total $10,000 per Fund within a two-year period. The distributor maintains the right to terminate a Systematic Investment Plan account if the account fails to reach this $10,000 total cumulative purchase amount within the two-year period. Investors may purchase shares on a fixed schedule (semi-monthly or monthly) with amounts from $50 up to $100,000. The purchases will be effective on the business day that the Transfer Agent receives the transmission. *CONTINGENT DEFERRED SALES CHARGE INFORMATION Flex Shares of the Funds may be purchased at their net asset value. Shares redeemed within the first year after purchase will be subject to a contingent deferred sales charge ("CDSC") equal to 2.00% of the lesser of the net asset value of the shares at the time of purchase or the net asset value of the shares at the time of redemption, in accordance with the following schedule:
CONTINGENT DEFERRED SALES CHARGE AS A PERCENTAGE OF YEAR SINCE DOLLAR AMOUNT SUBJECT TO PURCHASE CHARGE ----------- --------------------------- First 2.00% Second None
The CDSC will not apply to shares purchased through reinvestment of dividends or capital gain distributions, accordingly, no sales charge is imposed on increases in net asset value above the initial purchase price. In determining whether a particular redemption is subject to a CDSC, it is assumed that the redemption is first of shares held for over one year or shares acquired through reinvestment of dividends or other distributions. No CDSC will be charged on exchanges of Flex Shares of any Fund for Flex Shares of any other Fund. See "Exchanges." In determining the amount of the Flex Shares CDSC that applies, all purchases shall be considered as having been made on the trade date. The contingent deferred sales charge will not be imposed when a redemption results from a tax-free return under the following circumstances: (i) a total or partial distribution from a qualified plan, other than an IRA, Keogh Plan, or a custodial account following retirement; (ii) a total or partial distribution from an IRA, Keogh Plan, or a custodial account after the beneficial owner or participant attains age 59 1/2 or (iii) from the death or complete disability (as defined in the Internal Revenue Code or evidenced by a certificate from the U.S. Social Security Administration) of the beneficial owner or participant. The exemption from the contigent deferred sales charge for qualified plans, an IRA, Keogh Plan, or a custodial account does not extend to account transfers, rollovers, and other redemptions made for purposes of reinvestment. Contingent deferred sales 27 charges are not charged in connection with exchanges of shares for shares in other STI Classic Fund Flex Shares or in connection with redemptions by the Fund of accounts with low balances. REDEMPTION OF FUND SHARES Shareholders may redeem their Flex Shares on any day that net asset value is calculated. Flex Shares may ordinarily be redeemed by mail or telephone request to the Transfer Agent. All redemption orders are effected at the net asset value per share next determined after receipt of a valid redemption request, reduced by any applicable CDSC. See "Sales Charge Information." However, all or part of a shareholder's holdings of Flex Shares may be redeemed in accordance with instructions and limitations pertaining to his or her account. Redemption orders must be received by the Transfer Agent before 4:00 p.m. Eastern time on any business day. Redemption proceeds are normally remitted within five business days following receipt of the order. Requests for redemptions from the Funds may be placed in writing or by telephone directly to an Investment Services Representative of a SunTrust Banks, Inc. affiliate bank, through SunTrust Securities, Inc. and through certain correspondent banks of SunTrust Banks, Inc. (or via FUNDLINK to the Transfer Agent). Redemptions placed via telephone or FUNDLINK (1-800-428-6970) can only be placed for a minimum of $1,000. Redemption proceeds can be wired, distributed by check, or transferred to a Shareholder's account via FUNDLINK. There will be a $7.00 wire charge for redemptions processed from accounts which require wires to particular banks. When Flex Shares are purchased by check the proceeds from the redemption of those Shares are not available, and the Shares may not be exchanged, until the Trust or its agents are reasonably certain that the purchase check has cleared, which could take up to 7 business days. A Shareholder may be required to redeem Flex Shares if the balance in a Shareholder's Fund account drops below $10,000 as a result of redemptions, and, the Shareholder does not increase its balance to at least $10,000 on 60 days' written notice. The Trust intends to pay cash for all shares redeemed, but under abnormal conditions which make payment in cash unwise, payment may be made wholly or partly in liquid portfolio securities with a market value equal to the redemption price. In such cases, an investor may incur brokerage costs in converting such securities to cash. Redemptions of $25,000 or greater for a Fund must be in writing and a signature guarantee must accompany the written request. *SYSTEMATIC WITHDRAWAL PLAN A systematic withdrawal plan can be established for any Fund account with a $10,000 minimum balance. Under the plan, redemptions can be automatically processed (monthly, quarterly, semi-annually or annually) by check or through an electronic transfer to a Shareholder's SunTrust Banks, Inc. affiliate bank account with a minimum redemption amount of $50. Because regular, systematic withdrawals of Flex Shares made within one year of purchase will be subject to the CDSC, it may not be in the best interest of Flex shareholders to participate in the Systematic Withdrawal Plan. Exceptions relating to systematic withdrawals from qualified retirement plans were previously referenced. 28 EXCHANGES Flex Shares of the Funds may be exchanged at net asset value only for Flex Shares of the other Funds of the Trust or for Investor Shares of the Money Market Funds of the Trust. No CDSC will be imposed on redemptions of Money Market Fund Shares acquired in an exchange, provided they are held for at least one year from the initial purchase date of the Flex Shares or are exchanged back into Flex Shares. Subsequent exchanges of Investor Shares of the Money Market Funds (which were acquired in an exchange of Flex Shares) may be only for Flex Shares of the Equity or Fixed Income Funds. Flex Shares may be exchanged for Trust Shares (Shares for which SunTrust Banks, Inc. or one of its affiliates acts in a fiduciary, agency, investment advisory or custodial capacity) at net asset value. Trust Shares acquired in an exchange of Flex Shares will not be subject to a CDSC upon redemption. Four exchanges may be made per calendar year. More than four exchanges in a year may be considered an abuse of the exchange privilege. The Fund reserves the right to charge a $10.00 fee for each exchange. A Shareholder with more than four exchanges per year will be notified prior to the imposition of any such fee. Exchanges may be requested through an Investment Services Representative of a SunTrust Banks, Inc. affiliate bank, SunTrust Securities, Inc. and certain correspondent banks of SunTrust Banks, Inc. either by telephone or in writing (or via FUNDLINK through the Fund's Transfer Agent). The minimum exchange amount is $1,000 subject to account minimum initial purchase amounts and minimum maintained balance requirements. This exchange offer is subject to change or termination by the Trust at any time upon sixty days' notice. DIVIDENDS AND DISTRIBUTIONS Dividends from net investment income (exclusive of capital gains) are declared on each business day and paid monthly by each of the Bond and State Tax-Exempt Bond Funds. Dividends from net investment income (exclusive of capital gains) are declared and paid quarterly by the Equity Funds and Balanced Fund, except that dividends are declared and paid annually by the International Equity Index Fund. Each Fund's net realized capital gains (including net short-term capital gains) are distributed at least annually. Net income for dividend purposes consists of (i) interest accrued and original issue discount earned on the Fund's assets, (ii) plus the amortization of market discount (except in the case of the Investment Grade Tax-Exempt Bond and State Tax-Exempt Bond Funds) and minus the amortization of market premium on such assets, (iii) plus dividend or distribution income on such assets, (iv) less accrued expenses directly attributable to the Fund and the general expenses of the Trust prorated to the Fund on the basis of its relative net assets. Flex Shares invested in the Bond and State Tax-Exempt Bond Funds are eligible to begin earning dividends that are declared on the business day after the purchase order is effective and continue to be eligible for dividends through and including the day the redemption order is effective. The net asset value of Flex Shares of the Funds will be reduced by the amount of any dividend or distribution. Dividends and distributions are paid in the form of additional Flex Shares of the same Fund unless the customer has elected prior to the date of distribution to receive payment in cash. Such election, or any revocation thereof, must be made in writing prior to the date of distribution to the Trust's transfer agent and will become effective with respect to dividends paid after its receipt. Dividends and distributions are paid within ten days of the end 29 of the time period to which the dividend relates. Dividends and distributions payable to a Shareholder are paid in cash within ten business days after a Shareholder's complete redemption of its Flex Shares in a Fund. The amount of dividends payable on Investor Shares and Flex Shares will be less than the dividends payable on Trust Shares because of the distribution and certain transfer agent expenses charged to Investor Shares and Flex Shares. The amount of dividends payable on Flex Shares generally will be less than the amount of dividends payable on Investor Shares due to the higher distribution and service expenses of Flex Shares. TAX INFORMATION The following summary of federal income tax consequences is based on current tax laws and regulations, which may be changed by legislative, judicial or administrative action. No attempt has been made to present a detailed explanation of the federal, state, or local income tax treatment of each Fund or its Shareholders. In particular, no attempt has been made herein to provide information on the tax laws of Florida, Georgia or Tennessee. Accordingly, Shareholders are urged to consult their tax advisors regarding specific questions as to federal, state and local income taxes. TAX STATUS OF EACH FUND Each Fund is treated as a separate entity for federal tax purposes, and is not combined with the Trust's other Funds. Each Fund intends to qualify for the special tax treatment afforded regulated investment companies by the Internal Revenue Code of 1986, as amended, (the "Code") so that it will be relieved of federal income tax on that part of its net investment income and net capital gains (the excess of long-term capital gains over net short-term capital loss) which is distributed to Shareholders. Each Fund intends to make sufficient distributions prior to the end of each calendar year to avoid liability for the federal excise tax applicable to regulated investment companies. TAX STATUS OF DISTRIBUTIONS: BOND AND STATE TAX-EXEMPT BOND FUNDS Each Fund will distribute substantially all of its net investment income (including, for this purpose, net short-term capital gains) to Shareholders. Dividends from net investment income paid by the Funds will be taxable to Shareholders as ordinary income whether received in cash or in additional shares. Each of the Investment Grade Tax-Exempt Bond and State Tax-Exempt Bond Funds will distribute all of its net investment income (including net short-term capital gains) to Shareholders. If, at the close of each quarter of its taxable year, at least 50% of the value of a Fund's assets consist of obligations the interest on which is excludable from gross income, the Fund may pay exempt-interest dividends to its Shareholders. Those dividends constitute the portion of the aggregate dividends as designated by the Fund, equal to the excess of the excludable interest over certain amounts disallowed as deductions. Exempt-interest dividends are excludable from a Shareholder's gross income for regular federal income tax purposes, but may have alternative minimum tax consequences. See the Statement of Additional Information. Current federal tax law limits the types and volume of bonds qualifying for the federal income tax exemption of interest, which may have an effect on the ability of the Investment Grade Tax-Exempt Bond and State Tax-Exempt Bond Funds to purchase sufficient amounts of tax-exempt securities to satisfy the Code's 30 requirements for the payment of exempt-interest dividends. TAX STATUS OF DISTRIBUTIONS: ALL FUNDS Dividends from net investment income will qualify for the dividends received deduction for corporate Shareholders only to the extent such distributions are derived from dividends paid by domestic corporations. Dividends from net capital gains (the excess of net long-term capital gains over net short-term capital loss) will be treated as long-term capital gains, regardless of how long the Shareholder has held shares and regardless of whether distributions are received in cash or in additional shares. For certain individual Shareholders, net long-term capital gains may be taxed at a lower rate than ordinary income. Each Fund will make annual reports to Shareholders of the federal income tax status of all distributions. Dividends declared by a Fund in October, November or December of any year and payable to Shareholders of record on a date in that month will be deemed to have been paid by the Fund and received by the Shareholders on December 31, of that year, if paid by the Fund any time during the following January. Income received on direct U.S. obligations is exempt from tax at the state level when received directly by a Fund and may be exempt, depending on the state, when received by a Shareholder from a Fund provided certain state-specific conditions are satisfied. Not all states permit such income dividends to be tax-exempt and some require that a certain minimum percentage of an investment company's income be derived from state tax-exempt interest. Each Fund will inform Shareholders annually of the percentage of income and distributions derived from direct U.S. obligations. Shareholders should consult their tax advisors to determine whether any portion of the income dividends received from a Fund is considered tax exempt in their particular states. Income derived by a Fund from obligations of foreign issuers may be subject to foreign withholding taxes. The International Equity Index Fund expects to elect to treat Shareholders as having paid their proportionate share of such foreign taxes. The other Funds will not be able to make this election. Interest on indebtedness incurred or continued by a Shareholder in order to purchase shares of a "tax-exempt" Fund is not deductible. Furthermore, entities or persons who are "substantial users" (or persons related to "substantial users") of facilities financed by "private activity bonds" or certain industrial development bonds should consult their tax advisors before purchasing shares. For these purposes, the term "substantial user" is defined generally to include a "non-exempt person" who regularly uses in trade or business a part of a facility financed from the proceeds of such bonds. See the Statement of Additional Information. A sale, exchange or redemption of Fund shares is a taxable event to the Shareholder. STI CLASSIC FUNDS INFORMATION THE TRUST The Trust was organized as a Massachusetts Business Trust under a Declaration of Trust dated January 15, 1992. The Declaration of Trust permits the Trust to offer separate portfolios of shares and different classes of each Fund. All consideration received by the Trust for shares of any Fund and all assets of such Fund belong to that Fund and would be subject to liabilities related thereto. The Trust pays its expenses, including fees of its service providers, audit and legal expenses, expenses of preparing prospectuses, proxy 31 solicitation material and reports to Shareholders, costs of custodial services and registering the shares under federal and state securities laws, pricing, insurance expenses, litigation and other extraordinary expenses, brokerage costs, interest charges, taxes and organization expenses. BOARD OF TRUSTEES The management and affairs of the Trust are supervised by the Trustees under the laws governing business trusts in the Commonwealth of Massachusetts. The Trustees have approved contracts under which, as described below, certain companies provide essential management services to the Trust. INVESTMENT ADVISORS The Advisors are indirect wholly-owned subsidiaries of SunTrust Banks, Inc. ("SunTrust"), a southeastern regional bank holding company with assets of $44.2 billion as of June 30, 1995. SunTrust ranks among the twenty largest U.S. banking companies. Its three principal subsidiaries--SunTrust Bank of Florida, Inc., SunTrust Banks of Georgia, Inc. and SunTrust Banks of Tennessee, Inc.--provide a wide range of personal and corporate banking, trust, and investment services through more than 600 locations in the three-state area. Total discretionary assets under management with SunTrust Banks, Inc. equalled approximately $42 billion as of December 31, 1994. Trusco Capital Management, Inc. ("Trusco") serves as the Advisor to the Short-Term U.S. Treasury Securities, Short-Term Bond, U.S. Government Securities and Sunbelt Equity Funds and joint advisor to the International Equity Index Fund. As of June 30, 1995, Trusco had approximately $11.5 billion in assets under management. The principal business address of Trusco is 50 Hurt Plaza, Suite 1400, Atlanta, GA 30303. STI Capital Management, N.A. ("STI Capital") (formerly SunBank Capital Management, N.A.) serves as the Advisor to the Limited-Term Federal Mortgage Securities, Investment Grade Bond, Investment Grade Tax-Exempt Bond, Florida Tax-Exempt Bond Capital Growth, Value Income Stock, Aggressive Growth and Balanced Funds and joint advisor to the International Equity Index Fund. As of June 30, 1995, STI Capital had discretionary management authority with respect to assets of approximately $11.1 billion. The principal business address of STI Capital is P.O. Box 3808, Orlando, FL 32802. SunTrust Bank, Chattanooga, N.A. ("SunTrust Bank, Chattanooga") (formerly American National Bank & Trust Company) serves as the Advisor to the Tennessee Tax-Exempt Bond Fund. SunTrust Bank, Chattanooga had approximately $1.5 billion in assets under management as of June 30, 1995. The principal business address of SunTrust Bank, Chattanooga is 736 Market Street, Chattanooga, TN 37402. SunTrust Bank, Atlanta (formerly Trust Company Bank) serves as the Advisor to the Georgia Tax-Exempt Bond Fund. As of December 31, 1994, SunTrust Bank, Atlanta had approximately $17.4 billion in assets under management. The principal address for SunTrust Bank, Atlanta is 25 Park Place, Atlanta, GA 30303. The Trust and the above Advisors have entered into advisory agreements (the "Advisory Agreements"). Under the Advisory Agreements, the Advisors make the investment decisions for the assets of the Fund(s) they advise and continuously review, supervise and administer their respective Fund's investment program. The Advisors discharge their responsibilities subject to the supervision of, and policies established by, the Trustees of the Trust. STI CLASSIC 32 FUNDS ARE NOT DEPOSITS, ARE NOT INSURED OR GUARANTEED BY THE FDIC OR ANY OTHER GOVERNMENT AGENCY, AND ARE NOT ENDORSED OR GUARANTEED BY AND DO NOT CONSTITUTE OBLIGATIONS OF SUNTRUST BANKS, INC. OR ANY OF ITS AFFILIATES. INVESTMENTS IN THE FUNDS INVOLVE RISK, INCLUDING THE POSSIBLE LOSS OF PRINCIPAL. RETURNS AND PRINCIPAL VALUES WILL FLUCTUATE AND SHARES AT REDEMPTION MAY BE WORTH MORE OR LESS THAN THEIR ORIGINAL COST. THERE IS NO GUARANTEE THAT ANY STI CLASSIC FUND WILL ACHIEVE ITS INVESTMENT OBJECTIVE. With respect to all Funds, the Advisors may execute brokerage or other agency transactions through affiliates of the Advisors. For the services provided and expenses incurred pursuant to the Advisory Agreements: Trusco is entitled to receive advisory fees computed daily and paid monthly at the annual rate of .74%, .65%, .65% and 1.15% of the average daily net assets of the U.S. Government Securities Fund, Short-Term U.S. Treasury Securities Fund, Short-Term Bond Fund and Sunbelt Equity Fund, respectively; STI Capital is entitled to receive advisory fees computed daily and paid monthly at the annual rate of .65%, .74%, .74%, .65%, 1.15%, .95%, 1.15% and .80% of the average daily net assets of the Florida Tax-Exempt Bond Fund, Investment Grade Bond Fund, Investment Grade Tax-Exempt Bond Fund, Limited-Term Federal Mortgage Securities Fund, Capital Growth Fund, Balanced Fund, Aggressive Growth Fund and Value Income Stock Fund, respectively. Trusco and STI Capital jointly are entitled to receive an advisory fee computed daily and paid monthly at the annual rate of .90% of the average daily net assets of the International Equity Index Fund; SunTrust Bank, Chattanooga is entitled to receive advisory fees computed daily and paid monthly at the annual rates of .65% of the average daily net assets of the Tennessee Tax-Exempt Bond Fund; and SunTrust Bank, Atlanta is entitled to receive advisory fees computed daily and paid monthly at the annual rate of .65% of the average daily net assets of the Georgia Tax-Exempt Bond Fund. Although the advisory fees for the Sunbelt Equity Fund, Capital Growth Fund, Balanced Fund, Aggressive Growth Fund, Value Income Stock Fund and International Equity Index Fund are higher than advisory fees paid by other mutual funds, the Trust believes that the fees are comparable to the advisory fees paid by many other mutual funds with similar investment objectives and policies. From time to time, an Advisor may waive (either voluntarily or pursuant to applicable state limitations) advisory fees payable by a Fund. Currently, the Advisors and the Distributor have agreed to voluntary reductions in their respective fees as well as reductions in service and distribution fees in amounts necessary to maintain the total operating expenses at the amounts set forth in the Expense Summary. Voluntary reductions of fees may be terminated at anytime. For the fiscal year ended May 31, 1995: Trusco received advisory fees computed daily and paid monthly at the annual rate of .18%, .41%, .98%, and .0% of the average daily net assets of the Short-Term U.S. Treasury Securities Fund, Short-Term Bond Fund, Sunbelt Equity Fund, and U.S. Government Securities Fund, respectively; STI Capital received advisory fees computed daily and paid monthly at the annual rate of .12%, .62%, .61%, 1.02%, .77%, .95%, .80% and .33%, of the average daily net assets of the Florida Tax-Exempt Bond Fund, Investment Grade Bond Fund, Investment Grade Tax-Exempt Bond Fund, Capital Growth Fund, Balanced Fund, Aggressive Growth Fund, Value Income Stock Fund and Limited-Term Federal Mortgage Securities Fund, respectively; SunTrust Bank, Chattanooga received advisory fees computed daily 33 and paid monthly at the annual rates of .0% of the average daily net assets of the Tennessee Tax-Exempt Bond Fund and SunTrust Bank, Atlanta received advisory fees computed daily and paid monthly at the annual rate of .27% of the average daily net assets of the Georgia Tax-Exempt Bond Fund. Trusco and STI Capital jointly received an advisory fee computed daily and paid monthly at the annual rate of .64% of the average daily net assets of the International Equity Index Fund. PORTFOLIO MANAGERS Mr. Charles B. Leonard, CFA, First Vice President of Trusco, and Michael L. Ford, an Associate of Trusco, have been responsible for the day-to-day management of the U.S. Government Securities Fund since its inception. Mr. Leonard has been with Trusco since 1986 as the senior fixed income manager. Mr. Ford has been with Trusco since April 1994. Prior to joining Trusco, Mr. Ford served as a senior securities analyst with Liberty Capital Advisors from January, 1992 to April, 1994 and has served as a securities analyst at Southern Farm Bureau Life Insurance Company from 1990 to 1992. Mr. Ford was a graduate student at Millsaps College from 1989 to 1991. Mr. L. Earl Denney, CFA, and Mr. Dave E. West, CFA, have been responsible for the day-to-day management of the Limited-Term Federal Mortgage Securities Fund since its inception. Mr. Denney has served as Executive Vice President of STI Capital since 1983. Mr. West has served as a fixed income portfolio manager with STI Capital since 1989. Mr. Denney has also been responsible for the day-to-day management of the Investment Grade Bond Fund since its inception and the fixed income portion of the Balanced Fund since its inception. Ms. Gay Cash has been responsible for the day-to-day management of the Georgia Tax-Exempt Bond Fund since its inception. Ms. Cash has served as a Vice President of SunTrust Bank, Atlanta since January 1, 1987. Mr. Ronald Schwartz, CFA, has been responsible for the day-to-day management of the Florida Tax-Exempt Bond and Investment Grade Tax-Exempt Bond Funds since their inception. Mr. Schwartz joined STI Capital in 1988 and currently serves as a Senior Vice President. Mr. Schwartz, has also been responsible for the day-to-day management of the Tennessee Tax-Exempt Bond Fund since July, 1995. Mr. Schwartz serves as Vice President and Trust Investment Officer of SunTrust Bank, Chattanooga. Mr. Mills Riddick, CFA, has been responsible for the day-to-day management of the Value Income Stock Fund since April, 1995. Mr. Riddick has been a value portfolio manager at STI Capital since 1989. Starting September, 1995, Patricia Love became co-portfolio manager of the Tennesse Tax-Exempt Bond Fund. Ms. Love serves as Vice President and Trust Investment Officer of SunTrust Bank, Chattanooga. Ms. Love is also a portfolio manager at STI Capital. Ms. Love has been with SunTrust Bank, Chattanooga since 1993 and prior to that served as a portfolio analyst with First City Texas from 1986 to 1993. Ms. Agnes Pampush has been responsible for the day-to-day management of the Short-Term Bond and Short-Term U.S. Treasury Securities Funds since their inception. Ms. Pampush has served as Vice President and Fixed Income Portfolio Manager of Trusco since 1988. Mr. Anthony Gray has been responsible for the day-to-day management of the Capital Growth Fund since its inception. Mr. Gray has served 34 as Chief Executive Officer and Chief Investment Officer of STI Capital since 1979. Mr. Gray has also been responsible for the day-to-day management of the equity portion of the Balanced Fund since its inception. Mr. Thomas Edgar has been responsible for the day-to-day management of the Aggressive Growth Fund since its inception. Mr. Edgar has served as Senior Vice President of STI Capital since 1990 and served as Senior Vice President of First Union Bank from 1988 to 1990. Mr. James Foster has been responsible for the day-to-day management of the Sunbelt Equity Fund since its inception. Mr. Foster has served as a Vice President of Trusco since 1989. BANKING LAWS Banking laws and regulations, including the Glass-Steagall Act as presently interpreted by the Board of Governors of the Federal Reserve System, presently (a) prohibit a bank holding company registered under the Federal Bank Holding Company Act of 1956 or its affiliates from sponsoring, organizing, controlling, or distributing the shares of a registered, open-end investment company continuously engaged in the issuance of its shares, and generally prohibit banks from underwriting securities, but (b) do not prohibit such a bank holding company or affiliate or banks generally from acting as an investment advisor, transfer agent, or custodian to such an investment company or from purchasing shares of such a company as agent for and upon the order of a customer. The Advisors believe that each may perform the services for STI Classic Funds contemplated by their agreements described in this Prospectus without violation of applicable banking laws or regulations. However, future changes in legal requirements relating to the permissible activities of banks and their affiliates, as well as future interpretations of present requirements, could prevent the Advisors from continuing to perform services for STI Classic Funds. If the Advisors were prohibited from providing services to STI Classic Funds, the Board of Trustees would consider selecting other qualified firms. Any new investment advisory agreements would be subject to Shareholder approval. If current restrictions preventing a bank or its affiliates from legally sponsoring, organizing, controlling, or distributing shares of an investment company were relaxed, the Advisors, or their affiliates, would consider the possibility of offering to perform additional services for STI Classic Funds. It is not possible, of course, to predict whether or in what form such legislation might be enacted or the terms upon which the Advisors, or such affiliates, might offer to provide such services. In addition, state securities laws on this issue may differ from the interpretations of federal law expressed herein and banks and financial institutions may be required to register as dealers pursuant to state law. DISTRIBUTION SEI Financial Services Company (the "Distributor"), a wholly-owned subsidiary of SEI Corporation ("SEI"), and the Trust, are parties to a Distribution Agreement ("Distribution Agreement") dated May 29, 1992. The Flex Shares of each Fund have a distribution plan ("Flex Plan"). The Distribution Agreement and the Flex Plan provide that the Flex Shares of the Funds may pay a distribution services fee to the Distributor of up to .75% of the average daily net assets of the Flex Shares of each Fund. Flex Shares are also subject to a service fee of up to .25% of the average daily net assets of the Flex Shares of each Fund. This service fee may be used for personal service and maintenance of shareholder accounts. 35 Asset-based sales charges are designed to permit an investor to purchase Fund shares without the assessment of a front-end sales charge. The Distributor will waive all or a portion of the distribution fee in order to limit the net expenses of the Flex Shares to the amounts set forth under "Expense Summary." The Distributor may apply the distribution fee toward: (a) compensation for its services in connection with distribution assistance or provision of shareholder services; or (b) payments to financial institutions and intermediaries such as banks (including SunTrust Banks, Inc.'s affiliate banks), savings and loan associations, insurance companies, and investment counselors, broker-dealers, and the Distributor's affiliates and subsidiaries as compensation for services, reimbursement of expenses incurred in connection with distribution assistance, or provision of Shareholder services. The Flex Plan is characterized as a compensation plan since the distribution fee will be paid to the Distributor without regard to the distribution or shareholder service expenses incurred by the Distributor or the amount of payments made to financial institutions and intermediaries. SunTrust Banks, Inc.'s affiliate banks and certain correspondent banks may serve as shareholder servicing agents to the Trust. A prospective investor may visit any one of the Investment Services offices of the SunTrust Banks, Inc.'s affiliate banks, as listed on the last pages of the Prospectus, SunTrust Securities, Inc. or certain correspondent banks of SunTrust Banks, Inc. to receive copies of the Prospectuses for the Flex Shares of the Trust and application forms. Trust Shares of each Fund are offered without a sales charge or a distribution or service fee primarily to institutional investors, including affiliates and correspondents for the investment of funds in which they act in a fiduciary, agency, investment advisory or custodial capacity. Investor Shares of each Fund are offered subject to a sales load on purchases and a distribution fee. The different sales charge option of the Investor Shares provides investors with an alternative purchase arrangement to the Flex Shares. It is possible that financial institutions and intermediaries may offer different classes of shares to their customers and thus receive different compensation with respect to different classes of shares. Each Fund may execute brokerage or other agency transactions through the Distributor, for which the Distributor receives compensation. ADMINISTRATION SEI Financial Management Corporation (the "Administrator"), a wholly-owned subsidiary of SEI, and the Trust are parties to an Administration Agreement (the "Administration Agreement"). Under the terms of the Administration Agreement, the Administrator provides the Trust with certain administrative services, other than investment advisory services, including regulatory reporting, all necessary office space, equipment, personnel, and facilities. The Administrator is entitled to a fee which is calculated daily and paid monthly at an annual rate as follows:
AVERAGE AGGREGATE DAILY NET ASSETS FEE - -------------------------------------------- --------- $1 - $1 billion............................. .10% over $1 billion to $5 billion............... .07% over $5 billion to $8 billion............... .05% over $8 billion to $10 billion.............. .045% over $10 billion............................ .04%
From time to time, the Administrator may waive (either voluntarily or pursuant to applicable state limitations) all or a portion of the administration fee payable with respect to the Trust. 36 TRANSFER AGENT AND DIVIDEND DISBURSING AGENT Federated Services Company, Pittsburgh, PA is the Transfer Agent for the shares of the Trust and dividend disbursing agent for the Trust. CUSTODIAN SunTrust Bank, Atlanta, c/o STI Trust & Investment Operations, Inc., 303 Peachtree Street, N.E., 14th floor, Atlanta, GA 30308, serves as Custodian of the assets of each Fund of the Trust except the International Equity Index Fund. The Bank of California, 475 Sansome Street, Suite 1200, San Francisco, CA 94111, serves as Custodian for the International Equity Index Fund. The Custodians hold cash, securities and other assets of the Trust as required by the Investment Company Act of 1940. LEGAL COUNSEL Morgan, Lewis & Bockius, LLP, Philadelphia, PA, serves as legal counsel to the Trust. INDEPENDENT PUBLIC ACCOUNTANTS The independent public accountants to the Trust are Arthur Andersen, LLP, Philadelphia, PA. OTHER INFORMATION VOTING RIGHTS Each share held entitles the Shareholder of record to one vote. Each Fund or class of a Fund will vote separately on matters relating solely to that Fund or class. As a Massachusetts business trust, the Trust is not required to hold annual meetings of Shareholders but approval will be sought for certain changes in the operation of the Trust and for the election of Trustees under certain circumstances. In addition, a Trustee may be removed by the remaining Trustees or by Shareholders at a special meeting called upon written request of Shareholders owning at least 10% of the outstanding shares of the Trust. In the event that such a meeting is requested the Trust will provide appropriate assistance and information to the Shareholders requesting the meeting. REPORTING The Trust issues unaudited financial information semi-annually and audited financial statements annually. The Trust furnishes proxy statements and other reports to Shareholders of record. SHAREHOLDER INQUIRIES Shareholders may contact the Transfer Agent in order to obtain information on account statements, procedures and other related information by calling 1-800-428-6970. DESCRIPTION OF PERMITTED INVESTMENTS The following is a description of the permitted investments for the Funds. Further discussion is contained in the Statement of Additional Information. AMERICAN DEPOSITARY RECEIPTS ("ADRs") -- ADRs are securities, typically issued by a U.S. financial institution (a "depositary"), that evidence ownership interests in a security or a pool of securities issued by a foreign issuer and deposited with the depositary. ADRs may be available through "sponsored" or "unsponsored" facilities. A sponsored facility is established jointly by the issuer of the security underlying the receipt and a depositary, whereas an unsponsored facility may be established by a depositary without 37 participation by the issuer of the underlying security. Holders of unsponsored depositary receipts generally bear all the costs of the unsponsored facility. The depositary of an unsponsored facility frequently is under no obligation to distribute shareholder communications received from the issuer of the deposited security or to pass through, to the holders of the receipts, voting rights with respect to the deposited securities. ASSET-BACKED SECURITIES -- Asset-backed securities are securities secured by non-mortgage assets such as company receivables, truck and auto loans, leases and credit card receivables. Such securities are generally issued as pass-through certificates, which represent undivided fractional ownership interests in the underlying pools of assets. Such securities also may be debt instruments, which are also known as collateralized obligations and are generally issued as the debt of a special purpose entity, such as a trust, organized solely for the purpose of owning such assets and issuing such debt. Asset-backed securities are not issued or guaranteed by the U.S. Government or its agencies or instrumentalities; however, the payment of principal and interest on such obligations may be guaranteed up to certain amounts and for a certain period by a letter of credit issued by a financial institution (such as a bank or insurance company) unaffiliated with the issuers of such securities. The purchase of asset-backed securities raises risk considerations peculiar to the financing of the instruments underlying such securities. For example, there is a risk that another party could acquire an interest in the obligations superior to that of the holders of the asset-backed securities. There also is the possibility that recoveries on repossessed collateral may not, in some cases, be available to support payments on those securities. Asset-backed securities entail prepayment risk, which may vary depending on the type of asset, but is generally less than the prepayment risk associated with mortgage-backed securities. In addition, credit card receivables are unsecured obligations of the card holder. The market for asset-backed securities is at a relatively early stage of development. Accordingly, there may be a limited secondary market for such securities. BANKERS' ACCEPTANCES -- Bankers' acceptances are bills of exchange or time drafts drawn on and accepted by a commercial bank. Bankers' acceptances are used by corporations to finance the shipment and storage of goods. Maturities are generally six months or less. CERTIFICATES OF DEPOSIT -- Certificates of deposit are interest bearing instruments with a specific maturity. They are issued by banks and savings and loan institutions in exchange for the deposit of funds and normally can be traded in the secondary market prior to maturity. Certificates of deposit with penalties for early withdrawal will be considered illiquid. COMMERCIAL PAPER -- Commercial paper is a term used to describe unsecured short-term promissory notes issued by banks, municipalities, corporations and other entities. Maturities on these issues vary from a few to 270 days. CONVERTIBLE SECURITIES -- Convertible securities are corporate securities that are exchangeable for a set number of another security at a prestated price. Convertible securities typically have characteristics similar to both fixed income and equity securities. Because of the conversion feature, the market value of a convertible security tends to move with the market value of the underlying stock. The value of a convertible security is also affected by prevailing interest rates, the credit quality of the issuer, and any call provisions. 38 CORPORATE DEBT OBLIGATIONS -- Corporate debt obligations are debt instruments issued by corporations with maturities exceeding 270 days. Such instruments may include putable corporate bonds and zero coupon bonds. CUSTODIAL RECEIPTS -- Custodial receipts are interests in separately traded interest and principal component parts of U.S. Treasury obligations that are issued by banks or brokerage firms and are created by depositing U.S. Treasury obligations into a special account at a custodian bank. The custodian holds the interest and principal payments for the benefit of the registered owners of the certificates or receipts. The custodian arranges for the issuance of the certificates or receipts evidencing ownership and maintains the register. Receipts include Treasury Receipts ("TRs"), Treasury Investment Growth Receipts ("TIGRs"), and Certificates of Accrual on Treasury Securities ("CATS"). Receipts are sold as zero coupon securities which means that they are sold at a substantial discount and redeemed at face value at their maturity date without interim cash payments of interest or principal. This discount is accreted over the life of the security, and such accretion will constitute the income earned on the security for both accounting and tax purposes. Because of these features, such securities may be subject to greater interest rate volatility than interest paying investments. See "Zero Coupon Obligations." DERIVATIVES -- Derivatives are securities whose value is derived from an underlying contract, index or security, or any combination thereof. This includes: futures, swap agreements, and some mortgage-back securities (CMOs, REMICs, IOs and POs). See elsewhere in this "Description of Permitted Investments" for discussions of these various instruments, and see "Investment Policies and Strategies" for more information about any investment policies and limitations applicable to their use. DOLLAR ROLLS -- Dollar rolls are transactions in which securities are sold for delivery in the current month and the seller simultaneously contracts to repurchase substantially similar securities on a specified future date. Any difference between the sale price and the purchase price is netted against the interest income foregone on the securities sold to arrive at an implied borrowing rate. Alternatively, the sale and purchase transactions can be executed at the same price, with the Fund being paid a fee as consideration for entering into the commitment to purchase. 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. EUROPEAN DEPOSITARY RECEIPTS ("EDRs") -- EDRs are securities, typically issued by a non-U.S. financial institution, that evidence ownership interests in a security or a pool of securities issued by either a U.S. or foreign issuer. EDRs may be available for investment through "sponsored" or "unsponsored" facilities. See "ADRs." 39 EURODOLLAR AND YANKEE BANK OBLIGATIONS -- Eurodollar bank obligations are U.S. dollar-denominated certificates of deposit or time deposits issued outside the United States by foreign branches of U.S. banks or by foreign banks. Yankee bank obligations are U.S. dollar denominated obligations issued in the United States by foreign banks. FORWARD FOREIGN CURRENCY CONTRACTS -- A forward foreign currency contract involves an obligation to purchase or sell a specific currency amount at a future date, agreed upon by the parties, at a price set at the time of the contract. A Fund may also enter into a contract to sell, for a fixed amount of U.S. dollars or other appropriate currency, the amount of foreign currency approximating the value of some or all of the Fund's securities denominated in such foreign currency. At the maturity of a forward contract, the Fund may either sell a portfolio security and make delivery of the foreign currency, or it may retain the security and terminate its contractual obligation to deliver the foreign currency by purchasing an "offsetting" contract with the same currency trader, obligating it to purchase, on the same maturity date, the same amount of the foreign currency. The Fund may realize a gain or loss from currency transactions. FUTURES CONTRACTS AND OPTIONS ON FUTURES CONTRACTS -- Futures contracts provide for the future sale by one party and purchase by another party of a specified amount of a specific security at a specified future time and at a specified price. An option on a futures contract gives the purchaser the right, in exchange for a premium, to assume a position in a futures contract at a specified exercise price during the term of the option. A Fund may use futures contracts and related options for bona fide hedging purposes, to offset changes in the value of securities held or expected to be acquired, to minimize fluctuations in foreign currencies, or to gain exposure to a particular market or instrument. A Fund will minimize the risk that it will be unable to close out a futures contract by only entering into futures contracts which are traded on national futures exchanges. Stock index futures are futures contracts for various stock indices that are traded on registered securities exchanges. A stock index futures contract obligates the seller to deliver (and the purchaser to take) an amount of cash equal to a specific dollar amount times the difference between the value of a specific stock index at the close of the last trading day of the contract and the price at which the agreement is made. There are risks associated with these activities, including the following: (1) the success of a hedging strategy may depend on an ability to predict movements in the prices of individual securities, fluctuations in markets and movements in interest rates, (2) there may be an imperfect or no correlation between the changes in market value of the securities held by the Fund and the prices of futures and options on futures, (3) there may not be a liquid secondary market for a futures contract or option, (4) trading restrictions or limitations may be imposed by an exchange, and (5) government regulations may restrict trading in futures contracts and futures options. GUARANTEED INVESTMENT CONTRACTS ("GICs") -- GICs are contracts issued by U.S. insurance companies. Pursuant to such contracts, the Fund makes cash contributions to a deposit fund of the insurance company's general account. The insurance company then credits to the Fund on a monthly basis guaranteed interest at either a fixed, variable or floating rate. A GIC provides that this guaranteed interest will not be less than a certain 40 minimum rate. A GIC is a general obligation of the issuing insurance company and not a separate account. The purchase price paid for a GIC becomes part of the general assets of the issuer, and the contract is paid at maturity from the general assets of the issuer. Generally, GICs are not assignable or transferable without the permission of the issuing insurance company. For this reason, an active secondary market in GICs does not currently exist and GICs are considered to be illiquid investments. ILLIQUID SECURITIES -- Illiquid securities are securities that cannot be disposed of within seven business days at approximately the price at which they are being carried on the Fund's books. An illiquid security includes a demand instrument with a demand notice period exceeding seven days, where there is no secondary market for such security, and repurchase agreements with durations (or maturities) over seven days in length. LOAN PARTICIPATIONS -- Loan participations are interests in loans to U.S. corporations which are administered by the lending bank or agent for a syndicate of lending banks, and sold by the lending bank or syndicate member ("intermediary bank"). In a loan participation, the borrower corporation will be deemed to be 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 such borrower as a result of improper conduct by the intermediary bank. In addition, in the event the underlying corporate borrower fails to pay principal and interest when due, the Fund may be subject to delays, expenses and risks that are greater than those that would have been involved if the Fund had purchased a direct obligation of such 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. MEDIUM TERM NOTES -- Medium term notes are periodically or continuously offered corporate or agency debt that differs from traditionally underwritten corporate bonds only in the process by which they are issued. MORTGAGE-BACKED SECURITIES -- Mortgage-backed securities are instruments that entitle the holder to a share of all interest and principal payments from mortgages underlying the security. The mortgages backing these securities include conventional thirty-year fixed rate mortgages, graduated payment mortgages, and adjustable rate mortgages. During periods of declining interest rates, prepayment of mortgages underlying mortgage-backed securities can be expected to accelerate. Prepayment of mortgages which underlie securities purchased at a premium often results in capital losses, while prepayment of mortgages purchased at a discount often results in capital gains. Because of these unpredictable prepayment characteristics, it is often not possible to predict accurately the average life or realized yield of a particular issue. GOVERNMENT PASS-THROUGH SECURITIES: These are securities that are issued or guaranteed by a U.S. Government agency representing an interest in a pool of mortgage loans. The primary issuers or guarantors of these mortgage- 41 backed securities are GNMA, FNMA and FHLMC. FNMA and FHLMC obligations are not backed by the full faith and credit of the U.S. Government as GNMA certificates are, but FNMA and FHLMC securities are supported by the instrumentalities' right to borrow from the U.S. Treasury. GNMA, FNMA and FHLMC each guarantees timely distributions of interest to certificate holders. GNMA and FNMA also each guarantees timely distributions of scheduled principal. FHLMC has in the past guaranteed only the ultimate collection of principal of the underlying mortgage loan; however, FHLMC now issues mortgage-backed securities (FHLMC Gold PCs) which also guarantee timely payment of monthly principal reductions. Government and private guarantees do not extend to the securities' value, which is likely to vary inversely with fluctuations in interest rates. PRIVATE PASS-THROUGH SECURITIES: These are mortgage-backed securities issued by a non-governmental entity, such as a trust. These securities include collateralized mortgage obligations ("CMOs") and real estate mortgage investment conduits ("REMICs") that are rated in one of the top two rating categories. While they are generally structured with one or more types of credit enhancement, private pass-through securities typically lack a guarantee by an entity having the credit status of a governmental agency or instrumentality. COLLATERALIZED MORTGAGE OBLIGATIONS ("CMOS"): CMOs are debt obligations or multiclass pass-through certificates issued by agencies or instrumentalities of the U.S. Government or by private originators or investors in mortgage loans. In a CMO, series of bonds or certificates are usually issued in multiple classes. Principal and interest paid on the underlying mortgage assets may be allocated among the several classes of a series of a CMO in a variety of ways. Each class of a CMO, often referred to as a "tranche," is issued with a specific fixed or floating coupon rate and has a stated maturity or final distribution date. Principal payments on the underlying mortgage assets may cause CMOs to be retired substantially earlier then their stated maturities or final distribution dates, resulting in a loss of all or part of any premium paid. REMICS: A REMIC is a CMO that qualifies for special tax treatment under the Internal Revenue Code and invests in certain mortgages principally secured by interests in real property. Investors may purchase beneficial interests in REMICs, which are known as "regular" interests, or "residual" interests. Guaranteed REMIC pass-through certificates ("REMIC Certificates") issued by FNMA or FHLMC represent beneficial ownership interests in a REMIC trust consisting principally of mortgage loans or FNMA, FHLMC or GNMA-guaranteed mortgage pass-through certificates. For FHLMC REMIC Certificates, FHLMC guarantees the timely payment of interest, and also guarantees the payment of principal as payments are required to be made on the underlying mortgage participation certificates. FNMA REMIC Certificates are issued and guaranteed as to timely distribution of principal and interest by FNMA. STRIPPED MORTGAGE-BACKED SECURITIES ("SMBS"): SMBs are usually structured with two classes that receive specified proportions of the monthly interest and principal payments from a pool of mortgage securities. One class may receive all of the interest payments and is thus termed an interest-only class ("IO"), while the other class may receive all of the principal payments and thus is termed the principal-only class ("PO"). The value of IOs tends to increase as rates rise and decrease as rates fall; the opposite is true of POs. SMBs are extremely sensitive to changes in interest rates because of the impact thereon of prepayment of principal on the underlying mortgage securities. The market for SMBs is not as fully 42 developed as other markets; SMBs therefore may be illiquid. RISK FACTORS: Due to the possibility of prepayments of the underlying mortgage instruments, mortgage-backed securities generally do not have a known maturity. In the absence of a known maturity, market participants generally refer to an estimated average life. An average life estimate is a function of an assumption regarding anticipated prepayment patterns, based upon current interest rates, current conditions in the relevant housing markets and other factors. The assumption is necessarily subjective, and thus different market participants can produce different average life estimates with regard to the same security. There can be no assurance that estimated average life will be a security's actual average life. MUNICIPAL FORWARDS -- Municipal forwards are forward commitments for the purchase of tax-exempt bonds with a specified coupon to be delivered by an issuer at a future date, typically exceeding 45 days but normally less than one year after the commitment date. Municipal forwards are normally used as a refunding mechanism for bonds that may only be redeemed on a designated future date. A Fund will enter into municipal forwards when the price and yield of the underlying bonds are believed to be favorable when compared to current prices and yields. As with forward commitments, municipal forwards are subject to market fluctuations due to changes in market interest rates between the commitment date and the settlement date. municipal forwards may be considered to be illiquid investments. To avoid any leveraging concerns, a Fund will maintain liquid, high grade securities in a segregated account at least equal to the purchase price of the municipal forward. MUNICIPAL LEASE OBLIGATIONS -- Municipal lease obligations are securities issued by state and local governments and authorities to finance the acquisition of equipment and facilities. They may take the form of a lease, an installment purchase contract, a conditional sales contract, or a participation interest in any of the above. Depending upon the market for such securities, municipal lease obligations may be illiquid. MUNICIPAL SECURITIES -- Municipal securities consist of (i) debt obligations issued by or on behalf of public authorities to obtain funds to be used for various public facilities, for refunding outstanding obligations, for general operating expenses, and for lending such funds to other public institutions and facilities, and (ii) certain private activity and industrial development bonds issued by or on behalf of public authorities to obtain funds to provide for the construction, equipment, repair or improvement of privately operated facilities. General obligation bonds are backed by the taxing power of the issuing municipality. Revenue bonds are backed by the revenues of a project or facility (tolls from a bridge, for example). Certificates of participation represent an interest in an underlying obligation or commitment, such as an obligation issued in connection with a leasing arrangement. The payment of principal and interest on private activity and industrial development bonds generally is dependent solely on the ability of a facility's user to meet its financial obligations and the pledge, if any, of real and personal property as security for such payment. Municipal securities include both municipal notes and municipal bonds. Municipal notes include general obligation notes, tax anticipation notes, revenue anticipation notes, bond anticipation notes, certificates of indebtedness, demand notes and construction loan notes and participation interests in municipal notes. Municipal bonds include general obligation bonds, 43 revenue or special obligation bonds, private activity and industrial development bonds and participation interests in municipal bonds. OPTIONS ON CURRENCIES -- The International Equity Index Fund may purchase and write put and call options on foreign currencies (traded on U.S. and foreign exchanges or over-the-counter markets) to manage the portfolio's exposure to changes in dollar exchange rates. Call options on foreign currency written by the Fund will be "covered," which means that the Fund will own an equal amount of the underlying foreign currency. With respect to put options on foreign currency written by the Fund, the Fund will establish a segregated account with its custodian bank consisting of cash, U.S. Government securities or other high grade liquid debt securities in an amount equal to the amount the Fund would be required to pay upon exercise of the put. OBLIGATIONS OF SUPRANATIONAL ENTITIES -- Supranational entities are entities established through the joint participation of several governments, and include the Asian Development Bank, the Inter-American Development Bank, International Bank for Reconstruction and Development (World Bank), African Development Bank, European Economic Community, European Investment Bank and the Nordic Investment Bank. PAY-IN-KIND SECURITIES -- Pay-in-Kind securities are bonds or preferred stock that pay interest or dividends in the form of additional bonds or preferred stock. REPURCHASE AGREEMENTS -- Repurchase agreements are agreements by which a Fund obtains a security and simultaneously commits to return the security to the seller at an agreed upon price on an agreed upon date within a number of days from the date of purchase. The custodian will hold the security as collateral for the repurchase agreement. A Fund bears a risk of loss in the event the other party defaults on its obligations and the Fund is delayed or prevented from exercising its right to dispose of the collateral or if the Fund realizes a loss on the sale of the collateral. A Fund will enter into repurchase agreements only with financial institutions deemed to present minimal risk of bankruptcy during the term of the agreement based on established guidelines. Repurchase agreements are considered loans under the Investment Company Act of 1940. RESTRAINTS ON INVESTMENTS BY MONEY MARKET FUNDS -- Investments by a money market fund are subject to limitations imposed under regulations adopted by the Securities and Exchange Commission. Under these regulations, money market funds may only acquire obligations that present minimal credit risk and that are "eligible securities," which means they are (i) rated, at the time of investment, by at least two nationally recognized security rating organizations (one if it is the only organization rating such obligation) in the highest rating category or, if unrated, determined to be of comparable quality (a "first tier security"), or (ii) rated according to the foregoing criteria in the second highest rating category or, if unrated, determined to be of comparable quality ("second tier security"). A security is not considered to be unrated if its issuer has outstanding obligations of comparable priority and security that have a short-term rating. In the case of taxable money market funds, investments in second tier securities are subject to the further constraints in that (i) no more than 5% of a Fund's assets may be invested in second tier securities and (ii) any investment in securities of any one such issuer is limited to the greater of 1% of the Fund's total assets or $1 million. A taxable money market fund may also hold more than 5% of its assets in first tier securities of a single issuer for three "business 44 days" (that is, any day other than a Saturday, Sunday or customary business holiday). RESTRICTED SECURITIES -- Restricted securities are securities that may not be sold freely to the public absent registration under the Securities Act of 1933 or an exemption from registration. Rule 144A securities are securities that have not been registered under the Securities Act of 1933 but which may be traded between certain institutional investors including investment companies. The Trust's Board of Trustees is responsible for developing guidelines and procedures for determining the liquidity of restricted securities, and for monitoring the Advisor's implementation of the guidelines and procedures. SECURITIES LENDING -- In order to generate additional income, a Fund may lend securities which it owns pursuant to agreements requiring that the loan be continuously secured by collateral consisting of cash, securities of the U.S. Government or its agencies equal to at least 100% of the market value of the securities lent. A Fund continues to receive interest on the securities lent while simultaneously earning interest on the investment of cash collateral. Collateral is marked to market daily. There may be risks of delay in recovery of the securities or even loss of rights in the collateral should the borrower of the securities fail financially or become insolvent. SECURITIES OF FOREIGN ISSUERS -- There are certain risks connected with investing in foreign securities. These include risks of adverse political and economic developments (including possible governmental seizure or nationalization of assets), the possible imposition of exchange controls or other governmental restrictions, less uniformity in accounting and reporting requirements, the possibility that there will be less information on such securities and their issuers available to the public, the difficulty of obtaining or enforcing court judgments abroad, restrictions on foreign investments in other jurisdictions, difficulties in effecting repatriation of capital invested abroad, and difficulties in transaction settlements and the effect of delay on shareholder equity. Foreign securities may be subject to foreign taxes, and may be less marketable than comparable U.S. securities. The value of a Fund's investments denominated in foreign currencies will depend on the relative strengths of those currencies and the U.S. dollar, and a Fund may be affected favorably or unfavorably by changes in the exchange rates or exchange control regulations between foreign currencies and the U.S. dollar. Changes in foreign currency exchange rates also may affect the value of dividends and interest earned, gains and losses realized on the sale of securities and net investment income and gains, if any, to be distributed to shareholders by a Fund. STANDBY COMMITMENTS AND PUTS -- Securities subject to standby commitments or puts permit the holder thereof to sell the securities at a fixed price prior to maturity. Securities subject to a standby commitment or put may be sold at any time at the current market price. However, unless the standby commitment or put was an integral part of the security as originally issued, it may not be marketable or assignable; therefore, the standby commitment or put would only have value to the Fund owning the security to which it relates. In certain cases, a premium may be paid for a standby commitment or put, which premium will have the effect of reducing the yield otherwise payable on the underlying security. The Fund will limit standby commitment or put transactions to institutions believed to present minimal credit risk. SWAPS, CAPS, FLOORS and COLLARS -- Interest rate swaps, mortgage swaps, currency swaps and other types of swap agreements such as caps, floors and collars are designed 45 to permit the purchaser to preserve a return or spread on a particular investment or portion of its portfolio, and to protect against any increase in the price of securities the Fund anticipates purchasing at a later date. In a typical interest rate swap, one party agrees to make regular payments equal to a floating interest rate times a "notional principal amount," in return for payments equal to a fixed rate times the same amount, for a specific period of time. If a swap agreement provides for payment in different currencies, the parties might agree to exchange the notional principal amount as well. Swaps may also depend on other prices or rates, such as the value of an index or mortgage prepayment rates. In a typical cap or floor agreement, one party agrees to make payments only under specified circumstances, usually in return for payment of a fee by the other party. For example, the buyer of an interest rate cap obtains the right to receive payments to the extent that a specific interest rate exceeds an agreed-upon level, while the seller of an interest rate floor is obligated to make payments to the extent that a specified interest rate falls below an agreed-upon level. An interest rate collar combines elements of buying a cap and selling a floor. Swap agreements are sophisticated hedging instruments that typically involve a small investment of cash relative to the magnitude of risk assumed. As a result, swaps can be highly volatile and have a considerable impact on the Fund's performance. Swap agreements are subject to risks related to the counterparty's ability to perform, and may decline in value if the counterparty's creditworthiness deteriorates. The Fund may also suffer losses if it is unable to terminate outstanding swap agreements or reduce its exposure through offsetting transactions. Any obligation the Fund may have under these types of arrangements will be covered by setting aside liquid high grade securities in a segregated account. TIME DEPOSITS -- Time deposits are non-negotiable receipts issued by a bank in exchange for the deposit of funds. Like a certificate of deposit, it earns a specified rate of interest over a definite period of time; however, it cannot be traded in the secondary market. Time deposits are considered to be illiquid securities. U.S. GOVERNMENT AGENCIES -- Obligations issued or guaranteed by agencies of the U.S. Government, including, among others, the Federal Farm Credit Bank, the Federal Housing Administration and the Small Business Administration, and obligations issued or guaranteed by instrumentalities of the U.S. Government, including, among others, the Federal Home Loan Mortgage Corporation, the Federal Land Banks and the U.S. Postal Service. Some of these securities are supported by the full faith and credit of the U.S. Treasury (e.g., Government National Mortgage Association), others are supported by the right of the issuer to borrow from the Treasury (e.g., Federal Farm Credit Bank), while still others are supported only by the credit of the instrumentality (e.g., Federal National Mortgage Association). Guarantees of principal by agencies or instrumentalities of the U.S. Government may be a guarantee of payment at the maturity of the obligation so that in the event of a default prior to maturity there might not be a market and thus no means of realizing on the obligation prior to maturity. Guarantees as to the timely payment of principal and interest do not extend to the value or yield of these securities nor to the value of the Fund's shares. U.S. GOVERNMENT SUBSIDIARY CORPORATIONS -- Securities of wholly-owned corporations of the U.S. Government (within the 46 Department of Housing and Urban Development) which are secured by the full faith and credit of the U.S. Government (e.g., GNMA). U.S. TREASURY OBLIGATIONS -- U.S. Treasury obligations consist of bills, notes and bonds issued by the U.S. Treasury and separately traded interest and principal component parts of such obligations that are transferable through the Federal book-entry system known as Separately Traded Registered Interest and Principal Securities ("STRIPS") and Coupon Under Book Entry Safekeeping ("CUBES"). VARIABLE AND FLOATING RATE INSTRUMENTS -- Certain obligations may carry variable or floating rates of interest, and may involve a conditional or unconditional demand feature. Such instruments bear interest at rates which are not fixed, but which vary with changes in specified market rates or indices. The interest rates on these securities may be reset daily, weekly, quarterly or some other reset period, and may have a floor or ceiling on interest rate changes. There is a risk that the current interest rate on such obligations may not accurately reflect existing market interest rates. A demand instrument with a demand notice exceeding seven days may be considered illiquid if there is no secondary market for such security. WHEN-ISSUED AND DELAYED DELIVERY SECURITIES -- When-issued or delayed delivery basis transactions involve the purchase of an instrument with payment and delivery taking place in the future. Delivery of and payment for these securities may occur a month or more after the date of the purchase commitment. The Fund will segregate with liquid high grade debt securities or cash in an amount at least equal to these commitments. The interest rate realized on these securities is fixed as of the purchase date and no interest accrues to the Fund before settlement. These securities are subject to market fluctuation due to changes in market interest rates and it is possible that the market value at the time of settlement could be higher or lower than the purchase price if the general level of interest rates has changed. Although a Fund generally purchases securities on a when-issued or forward commitment basis with the intention of actually acquiring securities for its portfolio, a Fund may dispose of a when- issued security or forward commitment prior to settlement if it deems appropriate. ZERO COUPON OBLIGATIONS -- Zero coupon obligations are debt securities that do not bear any interest, but instead are issued at a deep discount from par. The value of a zero coupon obligation increases over time to reflect the interest accreted. Such obligations will not result in the payment of interest until maturity, and will have greater price volatility than similar securities that are issued at par and pay interest periodically. (THIS PAGE INTENTIONALLY LEFT BLANK) A-1 APPENDIX I. BOND RATINGS *CORPORATE AND MUNICIPAL BONDS The following are descriptions of Standard & Poor's Corporation ("S&P") and Moody's Investors Service, Inc. ("Moody's") corporate and municipal bond ratings. Bonds rated AAA have the highest rating S&P assigns to a debt obligation. Such a rating indicates an extremely strong capacity to pay principal and interest. Bonds rated AA also qualify as high-quality debt obligations. Capacity to pay principal and interest is very strong, and in the majority of instances they differ from AAA issues only in small degree. Debt rated A has a strong capacity to pay interest and repay principal although it is somewhat more susceptible to the adverse effects of changes in circumstances and economic conditions than debt in higher rated categories. Bonds which are rated BBB are considered to be medium-grade obligations (i.e., they are neither highly protected nor poorly secured). Interest payments and principal security appear adequate for the present but certain protective elements may be lacking or may be characteristically unreliable over any great length of time. Such bonds lack outstanding investment characteristics and in fact have speculative characteristics as well. Debt rated BB, B, CCC, CC and C is regarded as having predominately speculative characteristics with respect to capacity to pay interest and repay principal. BB indicates the least degree of speculation and C the highest degree of speculation. While such debt will likely have some quality and protective characteristics, these are outweighed by large uncertainties or major risk exposure to adverse conditions. Bonds which are rated Aaa by Moody's are judged to be of the best quality. They carry the smallest degree of investment risk and are generally referred to as "gilt edge." Interest payments are protected by a large, or an exceptionally stable, margin and principal is secure. While the various protective elements are likely to change, such changes as can be visualized are most unlikely to impair the fundamentally strong position of such issues. Bonds rated Aa by Moody's are judged by Moody's to be of high quality by all standards. Together with bonds rated Aaa, they comprise what are generally known as high-grade bonds. They are rated lower than the best bonds because margins of protection may not be as large as in Aaa securities or fluctuation of protective elements may be of greater amplitude or there may be other elements present which make the long-term risks appear somewhat larger than in Aaa securities. Bonds which are rated A possess many favorable investment attributes and are to be considered as upper-medium grade obligations. Factors giving security to principal and interest are considered adequate, but elements may be present which suggest a susceptibility to impairment sometime in the future. Debt rated Baa is regarded as having an adequate capacity to pay interest and repay principal. Whereas it normally exhibits adequate protection parameters, adverse economic conditions or changing circumstances are more likely to lead to a weakened capacity to pay interest and repay principal for debt in this category than in higher rated categories. Bonds which are rated Ba are judged to have speculative elements; their future cannot be considered as well-assured. Often the protection of interest and principal payments may be very moderate and thereby not well safeguarded during both good and bad times A-2 over the future. Uncertainty of position characterizes bonds in this class. Bonds which are rated B generally lack characteristics of the desirable investment. Assurance of interest and principal payments or of maintenance of other terms of the contract over any long period of time may be small. Bonds which are rated Caa are of poor standing. Such issues may be in default or there may be present elements of danger with respect to principal and interest. Bonds which are rated Ca represent obligations which are speculative in a high degree. Such issues are often in default or have other marked shortcomings. Bonds which are rated C are the lowest rated class of bonds and issues so rated can be regarded as having extremely poor prospects of ever attaining any real investment standing. *MUNICIPAL NOTE RATINGS Moody's highest rating for state and municipal and other short-term notes is MIG-1 and VMIG-1. Short-term municipal securities rated MIG-1 or VMIG-1 are of the best quality. They have strong protection from established cash flows of funds for their servicing or from established and broad-based access to the market for refinancing or both. Short-term municipal securities rated MIG-2 and VMIG-2 are of high quality. Margins of protection are ample although not so large as in the preceding group. An S&P note rating reflects the liquidity concerns and market access risks unique to notes. Notes due in 3 years or less will likely receive a note rating. Notes maturing beyond 3 years will most likely receive a long-term debt rating. The following criteria will be used in making that assessment. - - Amortization schedule (the larger the final maturity relative to other maturities the more likely it will be treated as a note). - - Source of Payment (the more dependent the issue is on the market for its refinancing, the more likely it will be treated as a note). Note rating symbols are as follows: SP-1. Very strong or strong capacity to pay principal and interest. Those issues determined to possess overwhelming safety characteristics will be given a plus (+) designation. SP-2. Satisfactory capacity to pay principal and interest. II. COMMERCIAL PAPER AND SHORT-TERM RATINGS The following descriptions of commercial paper ratings have been published by S&P, Moody's, Fitch Investors Service, Inc. ("Fitch"), Duff and Phelps ("Duff") and IBCA Limited ("IBCA"), respectively. Commercial paper rated A by S&P is regarded by S&P as having the greatest capacity for timely payment. Issues rated A are further refined by use of the numbers 1+ and 1. Issues rated A-1+ are those with an "overwhelming degree" of credit protection. Those rated A-1 reflect a "very strong" degree of safety regarding timely payment. Those rated A-2 reflect a safety regarding timely payment but not as high as A-1. Commercial paper issues rated Prime-1 and Prime-2 by Moody's are judged by Moody's to have superior ability and strong ability for repayment, respectively. The rating Fitch-1+ (Exceptionally Strong Credit Quality) is the highest commercial rating assigned by Fitch. Paper rated Fitch-1+ is regarded as having the strongest degree of assurance for timely payment. The rating Fitch-1 (Strong Credit Quality) is the second highest commercial paper rating assigned by Fitch which reflects an assurance of timely A-3 payment only slightly less in degree than issues rated F-1+. The rating Duff-1 is the highest commercial paper rating assigned by Duff. Paper rated Duff-1 is regarded as having very high certainty of timely payment with excellent liquidity factors which are supported by ample asset protection. Risk factors are minor. Paper rated Duff-2 is regarded as having good certainty of timely payment, good access to capital markets and sound liquidity factors and company fundamentals. Risk factors are small. The designation A1 by IBCA indicates that the obligation is supported by a very strong capacity for timely repayment. Those obligations rated A1+ are supported by the highest capacity for timely repayment. Obligations rated A2 are supported by a strong capacity for timely repayment, although such capacity may be susceptible to adverse changes in business, economic or financial conditions. (THIS PAGE INTENTIONALLY LEFT BLANK) INVESTMENT SERVICES OFFICES OF SUNTRUST BANKS, INC. AFFILIATE BANKS: FLORIDA: (STATEWIDE TOLL FREE) 1-800-526-1177 SUNTRUST BANK, CENTRAL FLORIDA, N.A. 200 S. Orange Avenue Tower 10 Orlando, FL 32801 (407) 237-4380 1-800-432-4760, ext.4380 SUNTRUST BANK, SOUTH FLORIDA, N.A. 501 E. Las Olas Boulevard Ft. Lauderdale, FL 33301 (305) 765-7422 Boca Raton Office 800 S. Federal Highway Boca Raton, FL 33435 (407) 243-6707 Coral Ridge Office 2626 E. Oakland Park Blvd. Ft. Lauderdale, FL 33306 (305) 765-2155 Delray Beach Office 302 E. Atlantic Avenue Delray Beach, FL 33483 (407) 243-6750 Hollywood Office 2001 Hollywood Blvd. Hollywood, FL 33021 (305) 765-7062 Palm Beach Office 303 Royal Poinciana Plaza Palm Beach, FL 33480 (407) 835-2855 PGA Office 2570 PGA Blvd. Palm Beach Gardens, FL 33410 (407) 835-2802 SUNTRUST BANK, MIAMI, N.A. 777 Brickall Avenue Miami, FL 33131 (305) 579-7450 SUNTRUST BANK, TAMPA BAY 315 E. Madison Street Tampa, FL 33602 (813) 224-2517 SUNTRUST BANK, TREASURE COAST, N.A. 700 Virginia Avenue Ft. Pierce, FL 34982 (407) 467-6459 Osceola Office 111 East Osceola Street Stuart, FL 34994 (407) 223-6012 SUNTRUST BANK, EAST CENTRAL FLORIDA Belnova Office 1590 S. Nova Road Daytona Beach, FL 32114 (904) 258-2660 Bill France Office 299 Bill France Blvd. Daytona Beach, FL 32114 (904) 258-2654 Deland Office 302 E. New York Avenue Deland, FL 32724 (904) 822-5891 SUNTRUST BANK, NORTH FLORIDA, N.A. 200 W. Forsyth Street Jacksonville, FL 32202 (904) 632-2534 SUNTRUST BANK, SOUTHWEST FLORIDA 12730 New Brittany Blvd. Ft. Meyers, FL 33907 (813) 277-2531 Pelican Bay Office 801 Laurel Oak Drive Naples, FL 33963 (813) 598-0515 SUNTRUST BANK, GULF COAST South Gate Office 3400 S. Tamiami Trail Sarasota, FL 34230 (813) 951-3218 Port Charlotte Office 18501 Murdock Circle Port Charlotte, FL 33949 (813) 625-9286 North Beneva Office 3577 Fruitville Road Sarasota, FL 34237 (813) 951-3040 South Beneva Office 8181 S. Tamiami Trail Sarasota, FL 34231 (813) 951-3053 Venice Office 200 Nokomis Ave South Venice, FL 34285 (813) 486-4417 SUNTRUST BANK, MID-FLORIDA, N.A. 210 Security Square Winter Haven, FL 33880 (813) 297-6855 Okeechobee Office 815 S. Parrott Avenue Okeechobee, FL 34974 (813) 763-6417 SUNTRUST BANK, NATURE COAST One East Jefferson Street Brooksville, FL 34601 (904) 754-5799 Crystal River Office 1502 SE Highway 19 Crystal River, FL 32629 (904) 795-8214 Seven Hills Office 1170 Mariner Blvd. Spring Hill, FL 34609 (904) 754-5779 SUNTRUST BANK, NORTH CENTRAL FLORIDA 203 E. Silver Springs Blvd. Ocala, FL 34470 (904) 368-6477 SUNTRUST BANK, TALLAHASSEE, N.A. 3522 Thomasville Road Tallahassee, FL 32312 (904) 298-5030 SUNTRUST BANK, WEST FLORIDA 511 W. 23rd Street Panama City, FL 32405 (904) 872-6087 GEORGIA: SUNTRUST BANK, ATLANTA 55 Park Place First Floor Atlanta, GA 30303 (404) 588-7315 1-800-241-0901 Ext. 7315 SUNTRUST BANK, NORTHEAST GEORGIA, N.A. 101 N. Lumpkin Street Athens, GA 30601 (704) 354-5346 Gainesville Branch 104 Green Street Gainesville, GA 30503 (770) 503-8674 SUNTRUST BANK, NORTHWEST GEORGIA, N.A. 100 East Second Avenue Rome, GA 30161 (706) 236-4325 SUNTRUST BANK, AUGUSTA, N.A. 2815 Wrightsboro Road Augusta, GA 30909 (706) 821-2015 SUNTRUST BANK, MIDDLE GEORGIA, N.A. 606 Cherry Street Macon, GA 31208 (912) 755-5175 SUNTRUST BANK, WEST GEORGIA, N.A. 1246 First Avenue Columbus, GA 31901 (706) 649-3631 SUNTRUST BANK, SAVANNAH, N.A. 33 Bull Street Savannah, GA 31401 (912) 944-1165 SUNTRUST BANK, SOUTH GEORGIA, N.A. 410 W. Broad Avenue Albany, GA 31701 (912) 430-5468 Coffee County Branch 201 S. Peterson Avenue Douglas, GA 31533 (912) 384-1820 SUNTRUST BANK, SOUTHEAST GEORGIA, N.A. 510 Gloucester Street Brunswick, GA 31520 (912) 262-5322 SEA ISLAND ROAD BRANCH 701 Sea Island Road St. Simons Island, GA 31522 (912) 638-3620 (912) 262-2227 TENNESSEE: SUNTRUST BANK, NASHVILLE, N.A. 424 Church Street 4th Floor Nashville, TN 37230 (615) 748-4477 1-800-932-2652 SUNTRUST BANK, CHATTANOOGA, N.A. 736 Market Street Chattanooga, TN 37402 (615) 737-3085 TN WATS 1-800-572-7306, Ext. 3085 Bordering States WATS 1-800-874-1083, Ext. 3085 SUNTRUST BANK, EAST TENNESSEE, N.A. 700 East Hill Avenue Knoxville, TN 37997 (615) 544-2181 1-800-225-0913, Ext. 2181 SUNTRUST BANK, NORTHEAST TENNESSEE 207 Mockingbird Lane Johnson City, TN 37604 (615) 461-1005 SUNTRUST BANK, SOUTH CENTRAL TENNESSEE, N.A. 25 Public Square Lawrenceburg, TN 38464 615-762-3511 ALABAMA: SUNTRUST BANK, ALABAMA, N.A. 201 South Court Street Florence, AL 35630 (205) 767-8463 (THIS PAGE INTENTIONALLY LEFT BLANK) (THIS PAGE INTENTIONALLY LEFT BLANK) DISTRIBUTOR SEI Financial Services Company ............................................................................... 100159/10-95 PROSPECTUS STI CLASSIC FUNDS FLEX SHARES A CLASS OF NO INITIAL SALES CHARGE FUNDS INVESTMENT ADVISORS STI CAPITAL MANAGEMENT, N.A. TRUSCO CAPITAL MANAGEMENT, INC. SUNTRUST BANK, CHATTANOOGA, N.A., SUNTRUST BANK, ATLANTA OCTOBER 1, 1995 Z -----END PRIVACY-ENHANCED MESSAGE-----