-----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, OVy8x+25ZzSdxDgLHJLHvACekOVRYrcx08P9jojn3Haz3s9DIjsWbdVKitcDR2Vy zS2cbojjSL1zW1ZXLLlKlw== 0000916641-00-000365.txt : 20000329 0000916641-00-000365.hdr.sgml : 20000329 ACCESSION NUMBER: 0000916641-00-000365 CONFORMED SUBMISSION TYPE: 485BPOS PUBLIC DOCUMENT COUNT: 7 FILED AS OF DATE: 20000328 EFFECTIVENESS DATE: 20000328 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: 485BPOS SEC ACT: SEC FILE NUMBER: 033-45671 FILM NUMBER: 581206 FILING VALUES: FORM TYPE: 485BPOS SEC ACT: SEC FILE NUMBER: 811-06557 FILM NUMBER: 581207 BUSINESS ADDRESS: STREET 1: 2 OLIVER STREET CITY: BOSTON STATE: MA ZIP: 02109 BUSINESS PHONE: 6109896602 MAIL ADDRESS: STREET 1: 530 E SWEDESFORD ROAD CITY: WAYNE STATE: PA ZIP: 19087-1693 485BPOS 1 FORM N-1A AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MARCH 28, 2000 FILE NO. 33-45671 FILE NO. 811-6557 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM N-1A REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 / / POST-EFFECTIVE AMENDMENT NO. 35 /X/ AND REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 / / AMENDMENT NO. 37 /X/ STI CLASSIC FUNDS (EXACT NAME OF REGISTRANT AS SPECIFIED IN CHARTER) 2 OLIVER STREET BOSTON, MASSACHUSETTS 02109 (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES, ZIP CODE) REGISTRANT'S TELEPHONE NUMBER INCLUDING AREA CODE (800) 342-5734 MARK NAGLE C/O SEI INVESTMENTS COMPANY ONE FREEDOM VALLEY DRIVE OAKS, PENNSYLVANIA 19456 (NAME AND ADDRESS OF AGENT FOR SERVICE) Copies to: RICHARD W. GRANT, ESQ. JOHN MCGUIRE, ESQ. MORGAN, LEWIS & BOCKIUS LLP MORGAN, LEWIS & BOCKIUS LLP 1701 MARKET STREET 1800 M STREET, N.W. PHILADELPHIA, PA 19103 WASHINGTON, D.C. 20036 Title of Securities Being Registered................Units of Beneficial Interest It is proposed that this filing will become effective (check appropriate box) X Immediately upon filing pursuant to paragraph (b), or --- ___ On ____________ pursuant to paragraph (b), or ___ 60 days after filing pursuant to paragraph (a) or ___ 75 days after filing pursuant to paragraph (a) or ___ On _______ pursuant to paragraph (a) of Rule 485. STI CLASSIC FUNDS FLEX SHARES P R O S P E C T U S March 28, 2000 [GRAPHIC] HIGH INCOME FUND INVESTMENT ADVISER TO THE FUND: TRUSCO CAPITAL MANAGEMENT, INC. (THE "ADVISER") STI Classic Funds The Securities and Exchange Commission has not approved or disapproved these securities or passed upon the adequacy of this prospectus. Any representation to the contrary is a criminal offense. HOW TO READ THIS PROSPECTUS Flex Shares The STI Classic Funds is a mutual fund family that offers shares in separate investment portfolios (Funds). The Funds have individual investment goals and strategies. This prospectus gives you important information about the Flex Shares of the High Income Fund that you should know before investing. Please read this prospectus and keep it for future reference. This prospectus has been arranged into different sections so that you can easily review this important information. On the next page, there is some general information you should know about risk and return. For more detailed information about the Fund, please see:
Page PRINCIPAL INVESTMENT STRATEGIES, RISKS, PERFORMANCE INFORMATION AND EXPENSES ................................................... 3 MORE INFORMATION ABOUT RISK ............................................................. 6 THE FUND'S OTHER INVESTMENTS ............................................................ 6 THE INVESTMENT ADVISER AND PORTFOLIO MANAGER ............................................ 6 PURCHASING, SELLING AND EXCHANGING FUND SHARES .......................................... 7 DIVIDENDS, DISTRIBUTIONS AND TAXES ...................................................... 10 FINANCIAL HIGHLIGHTS .................................................................... 11 HOW TO OBTAIN MORE INFORMATION ABOUT THE STI CLASSIC FUNDS ...................... Back Cover
2 RISK/RETURN INFORMATION The Fund is a mutual fund. A mutual fund pools shareholders' money and, using professional investment managers, invests it in securities. The Fund has its own investment goal and strategies for reaching that goal. The investment manager invests Fund assets in a way that she believes will help the Fund achieve its goal. Still, investing in the Fund involves risk and there is no guarantee that the Fund will achieve its goal. An investment manager's judgments about the markets, the economy, or companies may not anticipate actual market movements, economic conditions or company performance, and these judgments may affect the return on your investment. In fact, no matter how good a job an investment manager does, you could lose money on your investment in the Fund, just as you could with other investments. A Fund share is not a bank deposit and it is not insured or guaranteed by the FDIC or any government agency. The value of your investment in the Fund is based on the market value of the securities the Fund holds. These prices change daily due to economic and other events that affect particular companies and other issuers. These price movements, sometimes called volatility, may be greater or lesser depending on the types of securities the Fund owns and the markets in which they trade. The effect on the Fund of a change in the value of a single security will depend on how widely the Fund diversifies its holdings. 3
HIGH INCOME FUND - -------------------------------------------------------------------------------- Fund Summary - -------------------------------------------------------------------------------- Investment Goals Primary High current income Secondary Total return - -------------------------------------------------------------------------------- Investment Focus High yield corporate, government, and other debt instruments of U.S. and non U.S. issuers - -------------------------------------------------------------------------------- Share Price Volatility High - -------------------------------------------------------------------------------- Principal Investment Strategy Attempts to identify lower-rated securities offering high current income of issuers generating more than adequate cash flow to meet their obligations - -------------------------------------------------------------------------------- Investor Profile Investors who seek high current income and who are willing to accept greater share price volatility through investment in high yield, below investment grade debt instruments - --------------------------------------------------------------------------------
Investment Strategy The High Income Fund invests primarily in a diversified portfolio of higher yielding, lower rated income producing securities of U.S. and non-U.S. issuers. The Fund will invest at least 65%, and may invest up to 100%, of its assets in securities rated as "non-investment grade" by Moody's Investor Services, Inc. ("Moody's") or by Standard & Poor's Rating Services ("S&P"), or in unrated securities if, in the Adviser's opinion, they are of comparable quality. Such securities are commonly known as "junk bonds" and offer greater risks than investment grade bonds (i.e. rated BBB- or above by S&P or Baa3 or above by Moody's). The primary basis for security selection is the potential income offered by the security relative to the Adviser's assessment of the issuer's ability to generate the cash flow required to meet its obligation. The Adviser employs a "bottom-up" approach, identifying investment opportunities based on the underlying financial and economic fundamentals of the specific issuer. Due to its investment strategy, the Fund may buy and sell securities frequently. This may result in higher transaction costs and additional capital gains tax liabilities. What are the risks of investing in this Fund? The prices of the Fund's fixed income securities respond to economic developments, particularly interest rate changes, as well as to perceptions about the creditworthiness of individual issuers, including governments. Generally, the Fund's fixed income securities will decrease in value if interest rates rise and vice versa, and the volatility of lower rated securities is even greater than that of higher rated securities. Also, longer-term securities are generally more volatile, so the average maturity or duration of these securities affects risk. High yield securities involve greater risks of default or downgrade and are more volatile than investment grade securities. High yield bonds involve greater risk of default or price declines than investment grade securities due to actual or perceived changes in an issuer's creditworthiness. In addition, issuers of high yield bonds may be more susceptible than other issuers to economic downturns. High yield bonds are subject to the risk that the issuer may not be able to pay interest or dividends and ultimately to repay principal upon maturity. Discontinuation of these payments could substantially adversely affect the market value of the security. Investing in foreign countries poses additional risks since political and economic events unique to a country or region will affect those markets and their issuers. These events will not necessarily affect the U.S. economy or similar issuers located in the United States. In addition, investments in foreign countries are generally denominated in a foreign currency. As a result, changes in the value of those currencies compared to the U.S. dollar may affect (positively or negatively) the value of a Fund's investments. These currency movements may happen separately from and in response to events that do not otherwise affect the value of the security in the issuer's home country. These various risks will be even greater for investments in emerging market countries since political turmoil and rapid changes in economic conditions are more likely to occur in these countries. 4 - -------------------------------------------------------------------------------- Performance Information The bar chart and the performance table below illustrate the risks and volatility of an investment in the Fund. Of course, the Fund's past performance does not necessarily indicate how the Fund will perform in the future. The periods prior to March 28, 2000 represent the performance of Class A shares of the ESC Strategic Income Fund, the Fund's predecessor. This bar chart shows changes in the Fund's performance from year to year. This chart does not reflect sales charges. If sales charges had been reflected, returns would be less than those shown below.* [BAR CHART] 14.91% 5.84% 5.05% 4.43% 1.28% ------ ----- ----- ----- ----- 1995 1996 1997 1998 1999 Best Quarter Worst Quarter 6.79% -2.24% (3/31/95) (9/30/99) * The performance information shown above is based on a calendar year. This table compares the Fund's average annual total returns for the periods ended December 31, 1999, to those of the Lehman Brothers High Yield Bond Index. Flex Shares 1 Year 5 Years Since Inception - -------------------------------------------------------- High Income Fund -0.58% 6.21% 5.20%* - -------------------------------------------------------- Lehman Brothers High Yield Bond Index 2.41% 9.32% 8.48%** - -------------------------------------------------------- * Since 5/4/94 ** Since 5/31/94 What is an Index? An index measures the market prices of a specific group of securities in a particular market or securities in a market sector. You cannot invest directly in an index. Unlike a mutual fund, an index does not have an investment adviser and does not pay any commissions or expenses. If an index had expenses, it performance would be lower. The Lehman Brothers High Yield Bond Index is a widely-recognized, market value-weighted (bonds with a higher market value have more influence than bonds with a lower market value) index which covers the universe of fixed rate, non-investment grade debt. Fund Fees and Expenses This table describes the Fund's fees and expenses that you may pay if you buy and hold Fund shares. - -------------------------------------------------------- Shareholder Fees (fees paid directly from your investment) - -------------------------------------------------------- Flex Shares Maximum Sales Charge (Load) Imposed on Purchases (as a percentage of offering price) None Maximum Deferred Sales Charge (Load) (as a percentage of net asset value)* 2.00% - -------------------------------------------------------- * This sales charge is imposed if you sell Flex Shares within 1 year of your purchase. See "Selling Fund Shares." - -------------------------------------------------------- Annual Fund Operating Expenses (expenses deducted from Fund assets)* - -------------------------------------------------------- Flex Shares - -------------------------------------------------------- Investment Advisory Fees 0.80% Distribution and Service (12b-1) Fees 1.00% Other Expenses 0.35% - -------------------------------------------------------- Total Annual Fund Operating Expenses 2.15% - -------------------------------------------------------- * Annual Fund operating expenses have been restated to reflect current fees of the Fund as if they had been in effect for the Fund's predecessor during the previous year. 5 - -------------------------------------------------------------------------------- - -------------------------------------------------------- Example - -------------------------------------------------------- This Example is intended to help you compare the cost of investing in the Fund with the cost of investing in other mutual funds. The Example assumes that you invest $10,000 in the Fund for the time periods indicated. The Example also assumes that each year your investment has a 5% return and Fund expenses remain the same. Although your actual costs and returns might be different, your approximate costs of investing $10,000 in the Fund would be: If you sell your shares at the end of the period: 1 Year 3 Years 5 Years 10 Years $424 $673 $1,154 $2,483 If you do not sell your shares at the end of the period: 1 Year 3 Years 5 Years 10 Years $218 $673 $1,154 $2,483 Fund Expenses Every mutual fund has operating expenses to pay for professional advisory, shareholder, distribution, administration and custody services. The Fund's restated expenses in the table are shown as a percentage of the Fund's net assets. These expenses are deducted from Fund assets. The table shows the highest expenses that could be currently charged to the Fund. Actual expenses are expected to be lower because the Adviser and Distributor are voluntarily waiving a portion of their fees. Actual Investment Advisory Fees, Distribution Fees and Total Operating Expenses are expected to be 0.65%,0.40% and 1.40%, respectively. The Adviser and Distributor could discontinue these voluntary waivers at any time. For more information about these fees, see "Investment Adviser" and "Distribution of Fund Shares." 6 - -------------------------------------------------------------------------------- MORE INFORMATION ABOUT RISK Fixed Income Risk -- The market value of fixed income investments 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. Moreover, while securities with longer maturities tend to produce higher yields, the prices of longer maturity securities are also subject to greater market fluctuations as a result of changes in interest rates. Foreign Security Risks -- Investments in securities of foreign companies or governments can be more volatile than investments in U.S. companies or governments. Diplomatic, political, or economic developments, including nationalization or appropriation, could affect investments in foreign countries. Foreign securities markets generally have less trading volume and less liquidity than U.S. markets. In addition, the value of securities denominated in foreign currencies, and of dividends from such securities, can change significantly when foreign currencies strengthen or weaken relative to the U.S. dollar. Foreign companies or governments generally are not subject to uniform accounting, auditing, and financial reporting standards comparable to those applicable to domestic U.S. companies or governments. Transaction costs are generally higher than those in the U.S. and expenses for custodial arrangements of foreign securities may be somewhat greater than typical expenses for custodial arrangements of similar U.S. securities. Some foreign governments levy withholding taxes against dividend and interest income. Although in some countries a portion of these taxes are recoverable, the non-recovered portion will reduce the income received from the securities comprising the portfolio. THE FUND'S OTHER INVESTMENTS This prospectus describes the Fund's primary strategies, and the Fund will normally invest in the types of securities described in this prospectus. However, in addition to the investments and strategies described in this prospectus, the Fund also may invest in other securities, use other strategies and engage in other investment practices. These investments and strategies, as well as those described in this prospectus, are described in detail in the Statement of Additional Information (SAI). The investments and strategies described in this prospectus are those that the Fund uses under normal conditions. During unusual economic or market conditions, or for temporary defensive or liquidity purposes, the Fund may invest up to 100% of its assets in cash, money market instruments, repurchase agreements and short-term obligations that would not ordinarily be consistent with the Fund's objectives. The Fund will do so only if the Adviser believes that the risk of loss outweighs the opportunity for higher income. Of course, a Fund cannot guarantee that it will achieve its investment goal. INVESTMENT ADVISER The Investment Adviser makes investment decisions for the Fund and continuously reviews, supervises and administers the Fund's investment program. The Board of Trustees supervises the Adviser and establishes policies that the Adviser must follow in its management activities. Trusco Capital Management, Inc., (Trusco) 50 Hurt Plaza, Suite 1400, Atlanta, Georgia 30303, serves as the Adviser to the High Income Fund. As of December 31, 1999, Trusco had approximately $30.7 billion in assets under management. Prior to March 28, 2000, SunTrust Equitable Securities (STES) served as the Adviser to the High Income Fund. For the fiscal period ended March 31, 1999, STES received advisory fees of 1.00% of the average net assets from the predecessor of the High Income Fund. The Adviser may use its affiliates as brokers for Fund transactions. PORTFOLIO MANAGER Ms. Agnes G. Pampush, First Vice President, has served as a fixed income portfolio manager at Trusco since 1988. She has managed the High Income Fund since March 28, 2000. She is a Chartered Financial Analyst and has more than 16 years of investment experience. 7 - -------------------------------------------------------------------------------- PURCHASING, SELLING AND EXCHANGING FUND SHARES This section tells you how to buy, sell (sometimes called "redeem") or exchange shares of the Fund. How to Purchase Fund Shares A SunTrust Securities Investment Consultant can assist you in opening a brokerage account which will be used for all transactions regarding the purchase of STI Classic Funds. Once your account is established, you may buy shares of the Fund by: o Mail o Telephone (1-800-874-4770) o Wire o Automated Clearing House (ACH) You may also buy shares through investment representatives of certain correspondent banks of SunTrust Banks, Inc. (SunTrust) and other financial institutions that are authorized to place transactions in Fund shares for their customers. Please contact your financial institution directly and follow its procedures for Fund share transactions. Your institution may charge a fee for its services, in addition to the fees charged by the Fund. You will also generally have to address your correspondence or questions regarding the Fund to your institution. The Fund may reject any purchase order if it is determined that accepting the order would not be in the best interests of STI Classic Funds or its shareholders. When Can You Purchase Shares? You may purchase shares on any day that the New York Stock Exchange is open for business (a Business Day). The price per share (the offering price) will be the net asset value per share (NAV) next determined after the Fund receives your purchase order. The Fund calculates its NAV once each Business Day at the regularly scheduled close of normal trading on the New York Stock Exchange (normally, 4:00 p.m. Eastern time). So, for you to receive the current Business Day's NAV for the Fund, generally the Fund must receive your purchase order before 4:00 p.m. Eastern time. For Customers Of SunTrust, Its Affiliates And Other Financial Institutions You may have to transmit your purchase, sale and exchange requests to SunTrust or other financial institutions at an earlier time for your transaction to become effective that day. This allows the financial institution time to process your request and transmit it to the administrator or transfer agent in time to meet the above stated Fund cut-off times. For more information about how to purchase, sell or exchange Fund shares, including specific SunTrust or other financial institutions internal order entry cut-off times, please contact your financial institution directly. How the Fund Calculates NAV In calculating NAV, the Fund generally values its investment portfolio at market price. If market prices are unavailable or the Fund thinks that they are unreliable, fair value prices may be determined in good faith using methods approved by the Board of Trustees. Net Asset Value NAV for one Fund share is the value of that share's portion of the net assets in the Fund. Minimum Purchases To purchase shares for the first time, you must invest at least: Class Dollar Amount Flex Shares $5,000 ($2,000 for retirement plans) Your subsequent investment in the Fund must be made in amounts of at least $1,000 or, if you pay by a statement coupon, $100. The Fund may accept investments of smaller amounts at its discretion. 8 - -------------------------------------------------------------------------------- FUNDLINK FUNDLINK is a telephone activated service that allows you to transfer money quickly and easily between the STI Classic Funds and your SunTrust bank account(s). To use FUNDLINK, you must first contact your SunTrust Bank Investment Consultant and complete the FUNDLINK application and authorization agreements. Once you have signed up to use FUNDLINK, simply call SunTrust at 1-800-874-4770 to complete all of your purchase and redemption transactions. Systematic Investment Plan If you have a checking or savings account with a SunTrust affiliate bank, you may purchase Flex Shares automatically through regular deductions from your account. With a $500 minimum initial investment, you may begin regularly-scheduled investments from $50 to $100,000 once or twice a month. If you are buying Flex Shares, you should plan on investing at least $5,000 in the Fund during the first two years. The Distributor may close your account if you do not meet this minimum investment requirement at the end of two years. Sales Charges Contingent Deferred Sales Charges - Flex Shares You do not pay a sales charge when you purchase Flex Shares. The offering price of Flex Shares is simply the next calculated NAV. But if you sell your shares within the first year after your purchase, you will pay a contingent deferred sales charge equal to 2.00% for either (1) the NAV of the shares at the time of purchase, or (2) NAV of the shares next calculated after the Fund receives your sale request, whichever is less. The sales charge does not apply to shares you purchase through reinvestment of dividends or distributions. So, you never pay a deferred sales charge on any increase in your investment above the initial offering price. This sales charge does not apply to exchanges of Flex Shares of one Fund for Flex Shares of another Fund. The contingent deferred sales charge will be waived if you sell your Flex Shares for the following reasons: o to make certain withdrawals from a retirement plan (not including IRAs); o because of death or disability; or o for certain payments under the Systematic Withdrawal Plan (which is discussed later). Offering Price of Fund Shares The offering price of Flex Shares is simply the next calculated NAV. How to Sell Your Fund Shares If you own your shares through a brokerage account with SunTrust, you may sell (sometimes called "redeem") your shares on any Business Day by contacting SunTrust Securities directly by mail or telephone at 1-800-874-4770. The minimum amount for telephone redemptions is $1,000. If you own your shares through an account with a broker or other institution, contact that broker or institution to sell your shares. If you would like to sell $25,000 or more of your shares, please notify the Fund in writing and include a signature guarantee by a bank or other financial institution (a notarized signature is not sufficient). The sale price of each share will be the next NAV determined after the Fund receives your request less, any applicable deferred sales charge. Systematic Withdrawal Plan If you have at least $10,000 in your account, you may use the systematic withdrawal plan. Under the plan you may arrange monthly, quarterly, semi-annual or annual automatic withdrawals of at least $50 from the Fund. The proceeds of each withdrawal will be mailed to you by check or, if you have a checking or savings account with a SunTrust affiliates bank, electronically transferred to your account. 9 - -------------------------------------------------------------------------------- Receiving Your Money Normally, the Fund will send your sale proceeds within five Business Days after the Fund receives your request. Your proceeds can be wired to your bank account (subject to a $7.00 fee) or sent to you by check. If you recently purchased your shares by check or through ACH, redemption proceeds may not be available until your check has cleared (which may take up to 15 days). Redemptions in Kind The Fund generally pays sale (redemption) proceeds in cash. However, under unusual conditions that make the payment of cash unwise (and for the protection of the Fund's remaining shareholders) the Fund might pay all or part of your redemption proceeds in liquid securities with a market value equal to the redemption price (redemption in kind). It is highly unlikely that your shares would ever be redeemed in kind, but if they were you would probably have to pay transaction costs to sell the securities distributed to you, as well as taxes on any capital gains from the sale as with any redemption. Involuntary Sales of Your Shares If your account balance drops below the required minimum you may be required to sell your shares. The account balance minimum is: Class Dollar Amount Flex Shares $5,000 But, the Fund will always give you at least 60 days written notice to give you time to add to your account and avoid the sale of your shares. Suspension of Your Right to Sell Your Shares The Fund may suspend your right to sell your shares if the New York Stock Exchange restricts trading, the SEC declares an emergency or for other reasons. More information about this is in the SAI. How to Exchange Your Fund Shares You may exchange your shares on any Business Day by contacting SunTrust Securities or your financial institution by mail or telephone. Exchange requests must be for an amount of at least $1,000. You may exchange your shares up to four times during a calendar year. If you exchange your shares more than four times during a year, you may be charged a $10.00 fee for each additional exchange. You will be notified before any fee is charged. If you recently purchased shares by check or through ACH, you may not be able to exchange your shares until your check has cleared (which may take up to 15 days). This exchange privilege may be changed or canceled at any time upon 60 days notice. Exchanges When you exchange shares, you are really selling your shares and buying other Fund shares. So, your sale price and purchase price will be based on the NAV next calculated after the Fund receives your exchange request. Flex Shares You may exchange Flex Shares of the Fund for Flex Shares of any other Fund. Telephone Transactions Purchasing, selling and exchanging Fund shares over the telephone is extremely convenient, but not without risk. Although the Fund has certain safeguards and procedures to confirm the identity of callers and the authenticity of instructions, the Fund is not responsible for any losses or costs incurred by following telephone instructions the Fund reasonably believes to be genuine. If you or your financial institution transact with the Fund over the telephone, you will generally bear the risk of any loss. 10 - -------------------------------------------------------------------------------- Distribution of Fund Shares The Fund has adopted a distribution plan that allows the Fund to pay distribution and service fees for the sale and distribution of its shares, and for services provided to shareholders. Because these fees are paid out of the Fund's assets continuously, over time these fees will increase the cost of your investment and may cost you more than paying other types of sales charges. For Flex Shares, the maximum distribution fee is 1.00% of the average daily net assets of the Fund. The Distributor may, from time to time in its sole discretion, institute one or more promotional incentive programs for dealers, which will be paid for by the Distributor from any sales charge it receives or from any other source available to it. Under any such program, the Distributor may provide incentives, in the form of cash or other compensation, including merchandise, airline vouchers, trips and vacation packages, to dealers selling shares of the Fund. DIVIDENDS AND DISTRIBUTIONS The Fund declares its income dividends daily and pays these dividends monthly. The Fund makes distributions of capital gains, if any, at least annually. If you own Fund shares on the Fund's record date, you will be entitled to receive the distribution. You will receive dividends and distributions in the form of additional Fund shares unless you elect to receive payment in cash. To elect cash payment, you must notify the Fund in writing prior to the date of the distribution. Your election will be effective for dividends and distributions paid after the Fund receives your written notice. To cancel your election, simply send the Fund written notice. TAXES Please consult your tax adviser regarding your specific questions about federal, state and local income taxes. Below the Fund has summarized some important tax issues that affect the Fund and its shareholders. This summary is based on current tax laws, which may change. The Fund will distribute substantially all of its income and capital gains, if any. The dividends and distributions you receive may be subject to federal, state and local taxation, depending upon your tax situation. Distributions you receive from the Fund may be taxable whether or not you reinvest them. Income distributions are generally taxable at ordinary income tax rates. Capital gains distributions are generally taxable at the rates applicable to long-term capital gains. Each sale or exchange is a taxable event. More information about taxes is in the SAI. 11 - -------------------------------------------------------------------------------- Financial Highlights The table that follows presents performance information about the Fund. This information is intended to help you understand the Fund's financial performance for the past five years. Some of this information reflects financial information for a single Fund share. The total returns in the table represent the rate that you would have earned (or lost) on an investment in the Fund, assuming you reinvested all of your dividends and distributions. This information provided below for periods ending prior to and including March 31, 1999, has been audited by PricewaterhouseCoopers LLP, independent public accountants. Their report, along with the Fund's financial statements, appears in the annual report and is attached to the Statement of Additional Information. You can obtain the annual report, which contains more performance information, at no charge by calling 1-800-428-6970.
High Income Fund (Formerly ESC Strategic Income Fund) ------------------------------------------------------------ Flex Shares (Formerly Class A) ------------------------------------------------------------ Six Months Ended September 30, 1999 Year Ended Year Ended (unaudited) March 31, 1999 March 31, 1998 ----------- -------------- -------------- Net asset value per share, beginning of period ........................ $ 9.77 $ 9.99 $ 9.73 ------- ------- ------- Income from Investment Operations Net investment income ...................... 0.41 0.51(a) 0.34 Net realized and unrealized gains/(losses) on investments ........................... (0.71) 0.04 0.44 ------- ------- ------- Total from investment operations ............. (0.30) 0.55 0.78 ------- ------- ------- Less Dividends and Distributions: From net investment income ................... (0.41) (0.57) (0.52) From realized gains ........................ -- (0.15) -- From tax return of capital ................. -- (0.05) -- ------- ------- ------- Total Dividends and Distributions ............ (0.41) (0.77) (0.52) Net asset value per share, end of period .............................. $ 9.06 $ 9.77 $ 9.99 ======= ======= ======= Total return (excludes sales charge) ........ (3.21) 5.64% 8.18% Ratios/Supplemental Data: Net assets end of period (in thousands) ..... $ 6,558 $ 7,230 $24,413 Net investment income ....................... 8.46% 5.09% 5.27% Expenses net of waivers/reimbursements and expenses paid by third parties ............. 1.66% 1.91% 1.87% Expenses before waivers/reimbursements and expenses paid by third parties ............. 2.66% 2.22% 1.87% Portfolio Turnover Rate ..................... 13% 95% 130% May 4,1994 (commencement of operations) Year Ended Year Ended through March 31, 1997 March 31, 1996 March 31, 1995 -------------- -------------- -------------- Net asset value per share, beginning of period ....................... $ 9.89 $ 9.94 $ 10.00 ------- ------- ------- Income from Investment Operations Net investment income ..................... 0.60 0.59 0.55 Net realized and unrealized gains/(losses) on investments .......................... (0.16) 0.16 (0.05) ------- ------- ------- Total from investment operations ............ 0.44 0.75 0.50 ------- ------- ------- Less Dividends and Distributions: From net investment income .................. (0.60) (0.59) (0.55) From realized gains ....................... -- (0.21) (0.01) From tax return of capital ................ -- -- -- ------- ------- ------- Total Dividends and Distributions ........... (0.60) (0.80) (0.56) ------- ------- ------- Net asset value per share, end of period ............................. $ 9.73 $ 9.89 $ 9.94 ======= ======= ======= Total return (excludes sales charge) ....... 3.91% 7.67% 5.30% Ratios/Supplemental Data: Net assets end of period (in thousands) .... $32,506 $36,891 $32,373 Net investment income ...................... 5.49% 5.87% 6.29%** Expenses net of waivers/reimbursements and expenses paid by third parties ............ 1.65% 1.70% 1.85%** Expenses before waivers/reimbursements and expenses paid by third parties ............ 1.70% 1.75% 1.86%** Portfolio Turnover Rate .................... 123% 138% 92%
(a) Calculated using the average share method. ** Annualized 12 - --------------------------------------------------------------------------------
High Income Fund (Formerly ESC Strategic Income Fund) ------------------------------------------------------- Flex Shares (Formerly Class D) ------------------------------------------------------- Six Months Ended September 30, 1999 Year Ended Year Ended (unaudited) March 31, 1999 March 31, 1998 ----------- -------------- -------------- Net asset value per share, beginning of period .................................. $ 9.84 $ 9.99 $ 9.73 ---------- ---------- ---------- Income from Investment Operations: Net investment income ................................ 0.38 0.50(a) 0.28 Net realized and unrealized gains/(losses) on investments ..................................... (0.71) 0.01 0.45 ---------- ---------- ---------- Total from investment operations ....................... (0.33) 0.51 0.73 ---------- ---------- ---------- Less Dividends and Distributions: From net investment income ........................... (0.38) (0.46) (0.47) From realized gains .................................. -- (0.15) -- From tax return of capital ........................... -- (0.05) -- ---------- ---------- ---------- Total Dividends and Distributions ...................... (0.38) (0.66) (0.47) ---------- ---------- ---------- Net asset value per share, end of period ........................................ $ 9.13 $ 9.84 $ 9.99 ========== ========== ========== Total return (excludes sales charge) ................... (3.43) 5.23% 7.64% Ratios/Supplemental Data: Net assets end of period (in thousands) ............... $ 494 $ 548 $ 823 Net investment income .................................. 7.97% 5.03% 4.77% Expenses net of waivers/reimbursements and expenses paid by third parties ....................... 2.16% 2.44% 2.37% Expenses before waivers/reimbursements and expenses paid by third parties ....................... 3.16% 2.96% 2.37% Portfolio Turnover Rate ................................ 13% 95% 130% May 4, 1994 (commencement of operations) Year Ended Year Ended through March 31, 1997 March 31, 1996 March 31, 1995 -------------- -------------- -------------- Net asset value per share, beginning of period .................................. $ 9.89 $ 9.94 $ 10.00 ---------- ---------- ---------- Income from Investment Operations: Net investment income ................................ 0.50 0.54 0.50 Net realized and unrealized gains/(losses) on investments ..................................... (0.16) 0.16 (0.05) ---------- ---------- ---------- Total from investment operations ....................... 0.34 0.70 0.45 ---------- ---------- ---------- Less Dividends and Distributions: From net investment income ........................... (0.50) (0.54) (0.50) From realized gains .................................. -- (0.21) (0.01) From tax return of capital ........................... -- -- -- ---------- ---------- ---------- Total Dividends and Distributions ...................... (0.50) (0.75) (0.51) ---------- ---------- ---------- Net asset value per share, end of period ........................................ $ 9.73 $ 9.89 $ 9.94 ========== ========== ========== Total return (excludes sales charge) ................... 3.39% 7.11% 4.74% Ratios/Supplemental Data: Net assets end of period (in thousands) ............... $ 1,420 $ 1,446 $ 1,241 Net investment income ................................ 4.99% 5.37% 5.73%** Expenses net of waivers/reimbursements and expenses paid by third parties ..................... 2.15% 2.20% 2.29%** Expenses before waivers/reimbursements and expenses paid by third parties ..................... 2.21% 2.25% 2.31%** Portfolio Turnover Rate .............................. 123% 138% 92%
(a) Calculated using the average share method. ** Annualized On March 28, 2000, the Income Fund, a series of the ESC Strategic Funds, exchanged all of its assets and certain liabilities for shares of the STI Classic High Income Fund. Because the ESC Strategic Income Fund is the accounting survivor of that transaction, its basis of accounting for assets and liabilities and its operating results for the periods prior to March 28, 2000 have been carried forward in these financial highlights. - -------------------------------------------------------------------------------- NOTES STI CLASSIC FUNDS INVESTMENT ADVISER Trusco Capital Management, Inc. 50 Hurt Plaza Suite 1400 Atlanta, GA 30303 DISTRIBUTOR SEI Investments Distribution Co. One Freedom Valley Drive Oaks, PA 19456 LEGAL COUNSEL Morgan, Lewis & Bockius LLP More information about the Funds is available without charge through the following: Statement of Additional Information (SAI) The SAI dated March 28, 2000, includes detailed information about the STI Classic High Income Fund. The SAI is on file with the SEC and is incorporated by reference into this prospectus. This means that the SAI, for legal purposes, is a part of this prospectus. Annual and Semi-Annual Reports These reports list the Fund's holdings and contain information from the Fund's manager about strategies, and recent market conditions and trends. The reports also contain detailed financial information about the Fund. To Obtain More Information: By Telephone: Call 1-800-428-6970 By Mail: Write to the Fund c/o SEI Investments Distribution Co. Oaks, PA 19456 From the SEC: You can also obtain the SAI or the Annual and Semi-Annual reports, as well as other information about the STI Classic Funds, from the EDGAR Database on the SEC's website ("http://www.sec.gov"). You may review and copy documents at the SEC Public Reference Room in Washington, DC (for information on the operation of the Public Reference Room, call 1-202-942-8090). You may request documents by mail from the SEC, upon payment of a duplicating fee, by writing to: Securities and Exchange Commission, Public Reference Section, Washington, DC 20549-0102. You may also obtain this information, upon payment of a duplicating fee, by e-mailing the SEC at the following address: publicinfo@sec.gov. The STI Classic Funds' Investment Company Act registration number is 811-06557. STI CLASSIC FUNDS High Income Fund Investment Adviser: Trusco Capital Management, Inc. This Statement of Additional Information is not a prospectus. It is intended to provide additional information regarding the activities and operations of the STI Classic Funds (the "Trust") and should be read in conjunction with the Trust's High Income Fund (the "Fund") prospectus dated March 28, 2000. Prospectuses may be obtained through the Distributor, SEI Investments Distribution Co., One Freedom Valley Drive, Oaks, Pennsylvania 19456. TABLE OF CONTENTS
PAGE THE TRUST................................................................ B-2 ADDITIONAL INFORMATION ABOUT THE FUND.................................... B-2 DESCRIPTION OF PERMITTED INVESTMENTS..................................... B-2 INVESTMENT LIMITATIONS................................................... B-19 INVESTMENT ADVISER....................................................... B-21 THE ADMINISTRATOR........................................................ B-23 THE DISTRIBUTOR.......................................................... B-24 THE TRANSFER AGENT....................................................... B-25 THE CUSTODIAN............................................................ B-25 INDEPENDENT PUBLIC ACCOUNTANTS........................................... B-25 LEGAL COUNSEL............................................................ B-25 TRUSTEES AND OFFICERS OF THE TRUST....................................... B-26 PERFORMANCE INFORMATION.................................................. B-28 COMPUTATION OF YIELD..................................................... B-28 CALCULATION OF TOTAL RETURN.............................................. B-29 PURCHASING SHARES........................................................ B-29 REDEEMING SHARES......................................................... B-29 DETERMINATION OF NET ASSET VALUE......................................... B-30 TAXES.................................................................... B-30 FUND TRANSACTIONS........................................................ B-31 TRADING PRACTICES AND BROKERAGE.......................................... B-31 DESCRIPTION OF SHARES.................................................... B-33 SHAREHOLDER LIABILITY.................................................... B-33 YEAR 2000................................................................ B-34 5% AND 25% SHAREHOLDERS.................................................. B-34 EXPERTS.................................................................. B-34 APPENDIX A: FINANCIAL STATEMENTS......................................... A-1
March 28, 2000 THE TRUST STI Classic Funds (the "Trust") is a diversified, open-end management investment company established under Massachusetts law as a Massachusetts business trust under a Declaration of Trust dated January 15, 1992. The Declaration of Trust permits the Trust to offer separate series ("Funds") of units of beneficial interest ("shares") and different classes of shares of the Fund. This Statement of Additional Information relates to the Flex Shares of the STI High Income Fund (the "Fund"). See "Description of Shares." 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. ADDITIONAL INFORMATION ABOUT THE FUND The Fund's investment objective is a high level of current income, with a secondary objective of total return. The Fund invests primarily in corporate, government and other debt instruments of U.S. and non-U.S. issuers. Under normal market conditions, at least 65% of the Fund's total assets will be invested in income-producing debt securities. Investments in foreign securities will be limited to 35% of its total assets. Up to 100% of the Fund's assets may be invested in "junk bonds." Junk bonds are securities that are rated below investment grade - i.e., that are rated below BBB by Moody's or below Baa by S&P - or that, if unrated, are deemed of comparable quality. Junk bonds also include securities that are in default (rated D by S&P), although such holdings by the Fund are expected to be minimal. In choosing the Fund's investments in a value-oriented approach, the Adviser will seek out companies with good fundamentals and potentially strong future prospects that are currently out of favor with investors. The Adviser employs a bottom-up approach of research to identify investment opportunities that represent the most attractive value and that have strong prospects for consistent income and growth. Potential and current investments are also subject to continual research, which includes regular vigorous analysis to identify issues that are overvalued and those that should be sold to reinvest in better opportunities. The Adviser strives to preserve capital in attempting to achieve the Fund's investment objective. The Adviser's investing discipline focuses on total return over a full market/economic cycle. The Adviser prefers to invest in full-coupon, interest-paying securities for their cash flow advantage and usually lower volatility than deferred interest or zero coupon bonds. DESCRIPTION OF PERMITTED INVESTMENTS Asset-Backed Securities Asset-backed securities are securities backed by non-mortgage assets such as company receivables, truck and auto loans, leases and credit card receivables. Other asset-backed securities may be created in the future. These securities may be traded over-the-counter and typically have a short-intermediate maturity structure depending on the paydown characteristics of the underlying financial assets which are passed through to the security holder. These securities are generally issued as pass-through certificates, which represent undivided fractional ownership interests in the underlying pool of assets. Asset-backed securities may also be debt obligations, which are 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 these assets and issuing debt obligations. Asset-backed securities are not issued or guaranteed by the U.S. Government, its agencies or instrumentalities; however, the payment of principal and interest on such obligations may be guaranteed up to certain amounts and, B-2 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. Bank Obligations Bank obligations are short-term obligations issued by U.S. and foreign banks, including bankers' acceptances, certificates of deposit, custodial receipts, and time deposits. Eurodollar and Yankee Bank Obligations are U.S. dollar- denominated certificates of deposit or time deposits issued outside the U.S. by foreign branches of U.S. banks or by foreign banks. Brady Bonds In the event of a default on collateralized Brady Bonds for which obligations are accelerated, the collateral for the payment of principal will not be distributed to investors, nor will such obligations be sold and the proceeds distributed. The collateral will be held by the collateral agent to the scheduled maturity of the defaulted Brady Bonds, which will continue to be outstanding, at which time the face amount of the collateral will equal the principal payments which would have then been due on the Brady Bonds in the normal course. 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 securities issued by corporations that are exchangeable for a set number of another security at a prestated price. The market value of a convertible security tends to move with the market value of the underlying stock. The value of a convertible security is also affected by prevailing interest rates, the credit quality of the issuer, and any call option provisions. Custodial Receipts The custodian arranges for the issuance of the certificates or receipts evidencing ownership and maintains the register. Receipts include Treasury Receipts ("TRs"), Treasury Investment Growth Receipts ("TIGRs"), and Certificates of Accrual on Treasury Securities ("CATS"). TRs, TIGRs and CATS are sold as zero coupon securities. B-3 Debt Securities Debt securities represent money borrowed that obligates the issuer (e.g., a corporation, municipality, government, government agency) to repay the borrowed amount at maturity (when the obligation is due and payable) and usually to pay the holder interest at specific times (e.g., bonds, notes, debentures). The Euro On January 1, 1999, the European Economic and Monetary Union (EMU) implemented a new currency unit, the Euro, which is expected to reshape financial markets, banking systems and monetary policies in Europe and other parts of the world. The countries that converted or tied their currencies to the Euro include Austria, Belgium, France, Germany, Luxembourg, the Netherlands, Ireland, Finland, Italy, Portugal, and Spain. Financial transactions and market information, including share quotations and company accounts, in participating countries are denominated in Euros, although the bank notes used by participating countries remain legal tender. Approximately 46% of the stock exchange capitalization of the total European market may now be reflected in Euros, and participating governments will issue their bonds in Euros. Monetary policy for participating countries will be uniformly managed by a new central bank, the European Central Bank (ECB). Although it is not possible to predict the impact of the Euro implementation plan on the Fund, the transition to the Euro may change the economic environment and behavior of investors, particularly in European markets. For example, investors may begin to view those countries participating in the EMU as a single entity, and the Adviser may need to adapt investment strategies accordingly. The process of implementing the Euro also may adversely affect financial markets worldwide and may result in changes in the relative strength and value of the U.S. dollar or other major currencies, as well as possible adverse tax consequences. The transition to the Euro is likely to have a significant impact on fiscal and monetary policy in the participating countries and may produce unpredictable effects on trade and commerce generally. These resulting uncertainties could create increased volatility in financial markets world-wide. Eurodollar and Yankee Dollar 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 dollar obligations are U.S. dollar denominated obligations issued in the United States by foreign banks. Foreign Currency Options Currency options traded on U.S. or other exchanges may be subject to position limits which may limit the ability of the Fund to reduce foreign currency risk using such options. Over-the-counter options differ from traded options in that they are two-party contracts with price and other terms negotiated between buyer and seller and generally do not, have as much market liquidity as exchange- traded options. Employing hedging strategies with options on currencies does not eliminate fluctuations in the prices of portfolio securities or prevent losses if the prices of such securities decline. Furthermore, such hedging transactions reduce or preclude the opportunity for gain if the value of the hedged currency should change relative to the U.S. dollar. The Fund will not speculate in options on foreign currencies. There is no assurance that a liquid secondary market will exist for any particular foreign currency options, or at any particular time. In the event no liquid secondary market exists, it might not be possible to effect closing transactions in particular options. If the Fund cannot close out an option which it holds, it would have to exercise its option in order to realize any profit and would incur transactional costs on the sale of the underlying assets. B-4 Equity-Linked Securities The Fund may invest in equity-linked securities, including, among others, PERCS, ELKS or LYONs, which are securities that are convertible into, or the value of which is based upon the value of, equity securities upon certain terms and conditions. The amount received by an investor at maturity of such securities is not fixed but is based on the price of the underlying common stock. It is impossible to predict whether the price of the underlying common stock will rise or fall. Trading prices of the underlying common stock will be influenced by the issuer's operational results, by complex, interrelated political, economic, financial or other factors affecting the capital markets, the stock exchanges on which the underlying common stock is traded and the market segment of which the issuer is a part. In addition, it is not possible to predict how equity-linked securities will trade in the secondary market. The market for such securities may be shallow, and high volume trades may be possible only with discounting. In addition to the foregoing risks, the return on such securities depends on the creditworthiness of the issuer of the securities, which may be the issuer of the underlying securities or a third party investment banker or other lender. The creditworthiness of such third party issuer equity-linked securities may, and often does, exceed the creditworthiness of the issuer of the underlying securities. The advantage of using equity-linked securities over traditional equity and debt securities is that the former are income producing vehicles that may provide a higher income than the dividend income on the underlying equity securities while allowing some participation in the capital appreciation of the underlying equity securities. Another advantage of using equity-linked securities is that they may be used for hedging to reduce the risk of investing in the generally more volatile underlying equity securities. The following are three examples of equity-linked securities. The Fund may invest in the securities described below or other similar equity-linked securities. PERCS Preferred Equity Redemption Cumulative Stock ("PERCS") technically is preferred stock with some characteristics of common stock. PERCS are mandatorily convertible into common stock after a period of time, usually three years, during which the investors' capital gains are capped, usually at 30%. Commonly, PERCS may be redeemed by the issuer at any time or if the issuer's common stock is trading at a specified price level or better. The redemption price starts at the beginning of the PERCS duration period at a price that is above the cap by the amount of the extra dividends the PERCS holder is entitled to receive relative to the common stock over the duration of the PERCS and declines to the cap price shortly before maturity of the PERCS. In exchange for having the cap on capital gains and giving the issuer the option to redeem the PERCS at any time or at the specified common stock price level, the Fund may be compensated with a substantially higher dividend yield than that on the underlying common stock. ELKS Equity-Linked Securities ("ELKS") differ from ordinary debt securities, in that the principal amount received at maturity is not fixed but is based on the price of the issuer's common stock. ELKS are debt securities commonly issued in fully registered form for a term of three years under an indenture trust. At maturity, the holder of ELKS will be entitled to receive a principal amount equal to the lesser of a cap amount, commonly in the range of 30% to 55% greater than the current price of the issuer's common stock, or the average closing price per share of the issuer's common stock, subject to adjustment as a result of certain dilution events, for the 10 trading days immediately prior to maturity. Unlike PERCS, ELKS are commonly not subject to redemption prior to maturity. ELKS usually bear interest during the three-year term at a substantially higher rate than the dividend yield on the underlying common stock. In exchange for having the cap on the return that might have been received as capital gains on the B-5 underlying common stock, the Fund may be compensated with the higher yield, contingent on how well the underlying common stock does. LYONS Liquid Yield Option Notes ("LYONS") differ from ordinary debt securities, in that the amount received prior to maturity is not fixed but is based on the price of the issuer's common stock. LYONs are zero-coupon notes that sell at a large discount from face value. For an investment in LYONs, the Fund will not receive any interest payments until the notes mature, typically in 15 to 20 years, when the notes are redeemed at face, or par value. The yield on LYONs, typically, is lower-than-market rate for debt securities of the same maturity, due in part to the fact that the LYONs are convertible into common stock of the issuer at any time at the option of the holder of the LYONs. Commonly, the LYONs are redeemable by the issuer at any time after an initial period or if the issuer's common stock is trading at a specified price level or better, or, at the option of the holder, upon certain fixed dates. The redemption price typically is the purchase price of the LYONs plus accrued original issue discount to the date of redemption, which amounts to the lower-than-market yield. The Fund will receive only the lower-than-market yield unless the underlying common stock increases in value at a substantial rate. LYONs are attractive to investors, like the Fund, when it appears that they will increase in value due to the rise in value of the underlying common stock. Foreign Securities Foreign securities include equity securities of foreign entities, obligations of foreign branches of U.S. banks and of foreign banks, including, without limitation, European Certificates of Deposit, European Time Deposits, European Bankers' Acceptances, Canadian Time Deposits, Europaper and Yankee Certificates of Deposit, and investments in Canadian Commercial Paper and foreign securities. These instruments have investment risks that differ in some respects from those related to investments in obligations of U.S. domestic issuers. Such risks include future adverse political and economic developments, the possible imposition of withholding taxes on interest or other income, possible seizure, nationalization, or expropriation of foreign deposits, the possible establishment of exchange controls or taxation at the source, greater fluctuations in value due to changes in exchange rates, or the adoption of other foreign governmental restrictions which might adversely affect the payment of principal and interest on such obligations. Such investments may also entail higher custodial fees and sales commissions than domestic investments. Foreign issuers of securities or obligations are often subject to accounting treatment and engage in business practices different from those respecting domestic issuers of similar securities or obligations. Foreign branches of U.S. banks and foreign banks may be subject to less stringent reserve requirements than those applicable to domestic branches of U.S. banks. In making investment decisions for the Fund, the Adviser evaluates the risks associated with investing Fund assets in a particular country, including risks stemming from a country's financial infrastructure and settlement practices; the likelihood of expropriation, nationalization or confiscation of invested assets; prevailing or developing custodial practices in the country; the country's laws and regulations regarding the safekeeping, maintenance and recovery of invested assets, the likelihood of government-imposed exchange control restrictions which could impair the liquidity of Fund assets maintained with custodians in that country, as well as risks from political acts of foreign governments ("country risks"). Of course, the Adviser cannot assure that the Fund will not suffer losses resulting from investing in foreign countries. Holding Fund assets in foreign countries through specific foreign custodians presents additional risks, including but not limited to the risks that a particular foreign custodian or depository will not exercise proper care with respect to Fund assets or will not have the financial strength or adequate practices and procedures to properly safeguard Fund assets. B-6 By investing in foreign securities, the Fund attempts to take advantage of differences between both economic trends and the performance of securities markets in the various countries, regions and geographic areas as prescribed by the Fund's investment objective and policies. During certain periods the investment return on securities in some or all countries may exceed the return on similar investments in the United States, while at other times the investment return may be less than that on similar U.S. securities. Emerging countries are all countries that are considered to be developing or emerging countries by the World Bank or the International Finance Corporation, as well as countries classified by the United Nations or otherwise regarded by the international financial community as developing. Currently, the countries excluded from this category are Ireland, Spain, New Zealand, Australia, the United Kingdom, Italy, the Netherlands, Belgium, Austria, France, Canada, Germany, Denmark, the United States, Sweden, Finland, Norway, Japan, and Switzerland. Forward Foreign Currency Contracts Forward foreign currency contracts involve obligations to purchase or sell a specific currency amount at a future date, agreed upon by the parties, at a price set at the time of the contract. The Fund may also enter into a contract to sell, for a fixed amount of U.S. dollars or other appropriate currency, the amount of foreign currency approximating the value of some or all of the Fund's securities denominated in 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 purchase the right, in exchange for a premium, to assume a position in a futures contract at a specified exercise price during the term of the option. The Fund may use futures contracts, and related options for bona fide hedging purposes, to offset changes in the value of securities held or expected to be acquired. They may also be used to minimize fluctuations in foreign currencies or to gain exposure to a particular market or instrument. The Fund will minimize the risk that it will be unable to close out a futures contract by only entering into futures contracts which are traded on national futures exchanges and for which there appears to be a liquid secondary market. Index futures are futures contracts for various indices that are traded on registered securities exchanges. An 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 index at the close of the last trading day of the contract and the price at which the agreement is made. Although futures contracts by their terms call for actual delivery or acceptance of the underlying securities, in most cases the contracts are closed out before the settlement date without the making or taking of delivery. Closing out an open futures position is done by taking an opposite position ("buying" a contract which has previously been "sold" or "selling" a contract which has previously been "purchased") in an identical contract to terminate the position. Brokerage commissions are incurred when a futures contract is bought or sold. Futures traders are required to make a good faith margin deposit in cash or government securities with or for the account of a broker or custodian to initiate and maintain open secondary market will exist for any particular futures contract at any specific time. Thus, it may not be possible to close a futures position. In the event of adverse price movements, the Fund would continue to be required to make daily cash payments to maintain its required margin. In such situations, if the Fund has insufficient cash, it may have to sell portfolio securities to B-7 meet daily margin requirements at a time when it may be disadvantageous to do so. In addition, the Fund may be required to make delivery of the instruments underlying the futures contracts they hold. The inability to close options and futures positions also could have an adverse impact on the ability to effectively hedge the underlying securities. The risk of loss in trading futures contracts can be substantial, due both to the low margin deposits required and the extremely high degree of leverage involved in futures pricing. As a result, a relatively small price movement in a futures contract may result in immediate and substantial loss (or gain) to the Fund. For example, if at the time of purchase, 10% of the value of the futures contract is deposited as margin, a subsequent 10% decrease in the value of the futures contract would result in a total loss of the margin deposit, before any deduction for the transaction costs, if the account were then closed out. A 15% decrease would result in a loss equal to 150% of the original margin deposit if the contract were closed out. Thus, a purchase or sale of a futures contract may result in losses in excess of the amount invested in the contract. However, because the Fund will be engaged in futures transactions only for hedging purposes, the Adviser does not believe that the Fund will generally be subject to the risks of loss frequently associated with futures transactions. The Fund presumably would have sustained comparable losses if, instead of the futures contract, they had invested in the underlying financial instrument and sold it after the decline. The risk of loss from the purchase of options is less as compared with the purchase or sale of futures contracts because the maximum amount at risk is the premium paid for the option. Utilization of futures transactions by the Fund does involve the risk of imperfect or no correlation where the securities underlying futures contracts have different maturities than the fund securities being hedged. It is also possible that the Fund could both lose money on futures contracts and experience a decline in value of its fund securities. There is also the risk of loss by the Fund of margin deposits in the event of the bankruptcy of a broker with whom the Fund has an open position in a futures contract or related option. Most futures exchanges limit the amount of fluctuation permitted in futures contract prices during a single trading day. The daily limit establishes the maximum amount that the price of a futures contract may vary either up or down from the previous day's settlement price at the end of a trading session. Once the daily limit has been reached in a particular type of contract, no trades may be made on that day at a price beyond that limit. The daily limit governs only price movement during a particular trading day and therefore does not limit potential losses because the limit may prevent the liquidation of unfavorable positions. Futures contract prices have occasionally moved to the daily limit for several consecutive trading days with little or no trading, thereby preventing prompt liquidation of future positions and subjecting some futures traders to substantial losses. High Yield Securities High yield securities, commonly referred to as junk bonds, are debt obligations rated below investment grade, i.e., below BBB by S&P or Baa by Moody's, or their unrated equivalents. The risks associated with investing in high yield securities include: (1) High yield, lower rated bonds involve greater risk of default or price declines than investments in investment grade securities (e.g., securities rated BBB or higher by S&P or Baa or higher by Moody's) due to changes in the issuer's creditworthiness. (2) 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 these securities at their fair market values either to meet redemption requests, or in response to changes in the economy or the financial markets. (3) 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. B-8 (4) The market for high risk, high yield securities may be adversely affected by legislative and regulatory developments. Hedging Techniques Hedging in an investment strategy designed to offset investment risks. Hedging activities include, among other things, the use of options and futures. There are risks associated with hedging activities, including: (1) the success of a hedging strategy may depend on an ability to predict movements in the prices of individual securities, fluctuations in markets, and movements in interest rates; (2) there may be an imperfect or no correlation between the changes in market value of the securities held by the Fund and the prices of futures and option on futures; (3) there may not be a liquid secondary market for a futures contract or option; and (4) trading restrictions or limitations may be imposed by an exchange, and government regulations may restrict trading in futures contracts and options. High Yield Foreign Sovereign Debt Securities Investing in fixed and floating rate high yield foreign sovereign debt securities will expose the Fund to the direct or indirect consequences of political, social or economic changes in countries that issue the securities. The ability of a foreign sovereign obligor to make timely payments on its external debt obligations will also be strongly influenced by the obligor's balance of payments, including export performance, its access to international credits and investments, fluctuations in interest rates and the extent of its foreign reserves. A country whose exports are concentrated in a few commodities or whose economy depends on certain strategic imports could be vulnerable to fluctuations in international prices of these commodities or imports. To the extent that a country receives payment for its exports in currencies other than dollars, its ability to make debt payments denominated in dollars could be adversely affected. If a foreign sovereign obligor cannot generate sufficient earnings from foreign trade to service its external debt, it may need to depend on continuing loans and aid from foreign governments, commercial banks and multilateral organizations, and inflows of foreign investment. The commitment on the part of these foreign governments, multilateral organizations and others to make such disbursements may be conditioned on the government's implementation of economic reforms and/or economic performance and the timely service of its obligations. Failure to implement such reforms, achieve such levels of economic performance or repay principal or interest when due may result in the cancellation of such third parties' commitments to lend funds, which may further impair the obligor's ability or willingness to timely service its debts. Illiquid Securities Illiquid securities are securities that cannot be disposed of within seven days at approximately the price at which they are being carried on the Fund's books. Investment Company Shares The Fund may purchase shares of other mutual funds to the extent consistent with applicable law. Investment companies typically incur fees that are separate from those fees incurred directly by the Fund. The Fund's purchase of such investment company securities results in the layering of expenses, such that you would indirectly bear a proportionate share of investment company operating expenses, such as advisory fees. Investment Grade Obligations Investment grade obligations are debt obligations rated BBB by S&P or Baa by Moody's, or their unrated equivalents. These securities are deemed to have speculative characteristics. B-9 Loan Participations Loan participations are interest in loans to U.S. corporations which are administered by the lending bank or agent for a syndicate of lending banks. In a loan participation, the borrower corporation is the issuer of the participation interest except to the extent the Fund derives its rights from the intermediary bank. Because the intermediary bank does not guarantee a loan participation, a loan participation is subject to the credit risks associated with the underlying corporate borrower. In the event of bankruptcy or insolvency of the corporate borrower, a loan participation may be subject to certain defenses that can be asserted by the borrower as a result of improper conduct by the intermediary bank. In addition, in the event the underlying corporate borrower fails to pay principal and interest when due, the Fund may be subject to delays, expenses, and risks that are greater than those that would have been involved if the Fund had purchased a direct obligation of the borrower. Under the terms of a Loan Participation, the Fund may be regarded as a creditor of the intermediary bank (rather than of the underlying corporate borrower), so that the Fund may also be subject to the risk that the intermediary bank may become insolvent. The secondary market for loan participations is limited and any such participation purchased by the Fund may be regarded as illiquid. Leveraged Buyouts The Fund may invest in leveraged buyout limited partnerships and funds that, in turn, invest in leveraged buyout transactions ("LBOs"). An LBO, generally, is an acquisition of an existing business by a newly formed corporation financed largely with debt assumed by such newly formed corporation to be later repaid with funds generated from the acquired company. Since most LBOs are by nature highly leveraged (typically with debt to equity ratios of approximately 9 to 1), equity investments in LBOs may appreciate substantially in value given only modest growth in the earnings or cash flow of the acquired business. Investments in LBO partnerships and funds, however, present a number of risks. Investments in LBO limited partnerships and funds will normally lack liquidity and may be subject to intense competition from other LBO limited partnerships and funds. Additionally, if the cash flow of the acquired company is insufficient to service the debt assumed in the LBO, the LBO limited partnership or fund could lose all or part of its investment in such acquired company. 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, adjustable rate mortgages, and floating mortgages. 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 the Government National Mortgage Association ("GNMA"), Fannie Mae, and the Federal Home Loan Mortgage Corporation ("FHLMC"). Fannie Mae and FHLMC obligations are not backed by the full faith and credit of the U.S. Government as GNMA certificates are, but Fannie Mae and FHLMC securities are supported by the instrumentalities' right to borrow from the U.S. Treasury. GNMA, Fannie Mae, and FHLMC each guarantees timely distributions of interest to certificate holders. GNMA and Fannie Mae also guarantee timely distributions of scheduled principal. In the past, FHLMC has only guaranteed the ultimate collection of principal of the underlying mortgage loan; however, FHLMC now issues B-10 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. Obligations of GNMA are backed by the full faith and credit of the United States Government. Obligations of Fannie Mae and FHLMC are not backed by the full faith and credit of the United States Government but are considered to be of high quality since they are considered to be instrumentalities of the United States. The market value and interest yield of these mortgage-backed securities can vary due to market interest rate fluctuations and early prepayments of underlying mortgages. These securities represent ownership in a pool of federally insured mortgage loans with a maximum maturity of 30 years. However, due to scheduled and unscheduled principal payments on the underlying loans, these securities have a shorter average maturity and, therefore, less principal volatility than a comparable 30-year bond. Since prepayment rates vary widely, it is not possible to accurately predict the average maturity of a particular mortgage-backed security. The scheduled monthly interest and principal payments relating to mortgages in the pool will be "passed through" to investors. Government mortgage-backed securities differ from conventional bonds in that principal is paid back to the certificate holders over the life of the loan rather than at maturity. As a result, there will be monthly scheduled payments of principal and interest. In addition, there may be unscheduled principal payments representing prepayments on the underlying mortgages. Although these securities may offer yields higher than those available from other types of U.S. Government securities, mortgage-backed securities may be less effective than other types of securities as a means of "locking in" attractive long-term rates because of the prepayment feature. For instance, when interest rates decline, the value of these securities likely will not rise as much as comparable debt securities due to the prepayment feature. In addition, these prepayments can cause the price of a mortgage-backed security originally purchased at a premium to decline in price to its par value, which may result in a loss. Private Pass-Through Securities Private pass-through securities are mortgage-backed securities issued by a non-governmental agency, such as a trust. While they are generally structured with one or more types of credit enhancement, private pass- through securities generally lack a guarantee by an entity having the credit status of a governmental agency or instrumentality. The two principal types of private mortgage-backed securities are collateralized mortgage obligations ("CMOs") and real estate mortgage investment conduits ("REMICs"). CMOs CMOs are securities collateralized by mortgages, mortgage pass-throughs, mortgage pay-through bonds (bonds representing an interest in a pool of mortgages where the cash flow generated from the mortgage collateral pool is dedicated to bond repayment), and mortgage-backed bonds (general obligations of the issuers payable out of the issuers' general funds and additionally secured by a first lien on a pool of single family detached properties). CMOs are rated in one of the two highest categories by S&P or Moody's. Many CMOs are issued with a number of classes or series which have different expected maturities. Investors purchasing such CMOs are credited with their portion of the scheduled payments of interest and principal on the underlying mortgages plus all unscheduled prepayments of principal based on a predetermined priority schedule. Accordingly, the CMOs in the longer maturity series are less likely than other mortgage pass-throughs to be prepaid prior to their stated maturity. Although some of the mortgages underlying CMOs may be supported by various types of insurance, and some CMOs may be backed by GNMA certificates or other mortgage pass-throughs issued or guaranteed by U.S. Government agencies or instrumentalities, the CMOs themselves are not generally guaranteed. B-11 REMICs REMICs are private entities formed for the purpose of holding a fixed pool of mortgages secured by an interest in real property. REMICs are similar to CMOs in that they issue multiple classes of securities and are rated in one of the two highest categories by S&P or Moody's. Investors may purchase beneficial interests in REMICs, which are known as "regular" interests, or "residual" interests. Guaranteed REMIC pass- through certificates ("REMIC Certificates") issued by Fannie Mae or FHLMC represent beneficial ownership interests in a REMIC trust consisting principally of mortgage loans or Fannie Mae, FHLMC or GNMA-guaranteed mortgage pass-through certificates. For FHLMC REMIC Certificates, FHLMC guarantees the timely payment of interest. GNMA REMIC Certificates are backed by the full faith and credit of the U.S. Government. Stripped Mortgage-Backed Securities Stripped mortgage-backed securities are securities that are created when a U.S. Government agency or a financial institution separates the interest and principal components of a mortgage-backed security and sells them as individual securities. The holder of the "principal-only" security (PO) receives the Principal payments made by the underlying mortgage-backed security, while the holder of the "interest-only" security (IO) receives interest payments from the same underlying security. The prices of stripped mortgage-backed securities may be particularly affected by changes in interest rates. As interest rates fall, prepayment rates tend to increase, which tends to reduce prices of IOs and increase prices of POs. Rising interest rates can have the opposite effect. Determining Maturities of Mortgage-Backed Securities Due to prepayments of the underlying mortgage instruments, mortgage-backed securities do not have a known actual maturity. In the absence of a known maturity, market participants generally refer to an estimated average life. The Adviser believes that the estimated average life is the most appropriate measure of the maturity of a mortgage-backed security. Accordingly, in order to determine whether such security is a permissible investment for the Fund, it will be deemed to have a remaining maturity equal to its average life as estimated by the Fund's Adviser. An average life estimate is a function of an assumption regarding anticipated prepayment patterns. The assumption is based upon current interest rates, current conditions in the relevant housing markets and other factors. The assumption is necessarily subjective, and thus different market participants could produce somewhat different average life estimates with regard to the same security. There can be no assurance that the average life as estimated by the Adviser will be the actual average life. Mortgage-Backed Security Rolls The Fund may enter into "forward roll" transactions with respect to mortgage-backed securities issued by GNMA, FNMA or FHLMC. In a forward roll transaction, that is considered to be a borrowing by the Fund, the Fund will sell a mortgage security to a bank or other permitted entity and simultaneously agree to repurchase a similar security from the institution at a later date at an agreed upon price. The mortgage securities that are repurchased will bear the same interest rate as those sold, but generally will be collateralized by different pools of mortgages with different prepayment histories than those sold. Risks of mortgage-backed security rolls include: (i) the risk of prepayment prior to maturity, (ii) the possibility that the proceeds of the sale may have to be invested in money market instruments (typically repurchase agreements) maturing not later than the expiration of the and (iii) the possibility that the market value of B-12 the securities sold by the Fund may decline below the price at which the Fund is obligated to purchase the securities. Upon entering into a mortgage-backed security roll, the Fund will be required to place cash, U.S. Government Securities or other high-grade debt securities in a segregated account with its Custodian in an amount equal to its obligation under the roll. Assumptions generally accepted by the industry concerning the probability of early payment may be used in the calculation of maturities for debt securities that contain put or call provisions, sometimes resulting in a calculated maturity different from the stated maturity of the security. It is anticipated that governmental, government-related or private entities may create mortgage loan pools and other mortgage-related securities offering mortgage pass-through and mortgage-collateralized investments in addition to those described above. As new types of mortgage-related securities are developed and offered to investors, the manager will, consistent with the Fund's investment objectives, policies and quality standards, consider making investments in such new types of mortgage-related securities. Non-Publicly Traded Securities; Rule 144A Securities The Fund may purchase securities that are not registered under the Securities Act of 1933, as amended (the "1933 Act"), but that can be sold to "qualified institutional buyers" in accordance with Rule 144A under the 1933 Act ("Rule 144A Securities"). An investment in Rule 144A Securities will be considered illiquid and therefore subject to the Fund's limitation on the purchase of illiquid securities, unless the Fund's governing Board of Trustees determines on an ongoing basis that an adequate trading market exists for the security. In addition to an adequate trading market, the Board of Trustees will also consider factors such as trading activity, availability of reliable price information and other relevant information in determining whether a Rule 144A Security is liquid. This investment practice could have the effect of increasing the level of illiquidity in the Fund to the extent that qualified institutional buyers become uninterested for a time in purchasing Rule 144A Securities. The Board of Trustees will carefully monitor any investments by the Fund in Rule 144A Securities. The Board of Trustees may adopt guidelines and delegate to the Adviser the daily function of determining and monitoring the liquidity of Rule 144A Securities, although the Board of Trustees will retain ultimate responsibility for any determination regarding liquidity. Non-publicly traded securities (including Rule 144A Securities) may involve a high degree of business and financial risk and may result in substantial losses. These securities may be less liquid than publicly traded securities, and the Fund may take longer to liquidate these positions than would be the case for publicly traded securities. Although these securities may be resold in privately negotiated transactions, the prices realized on such sales could be less than those originally paid by the Fund. Further, companies whose securities are not publicly traded may not be subject to the disclosure and other investor protection requirements applicable to companies whose securities are publicly traded. The Fund's investments in illiquid securities are subject to the risk that should the Fund desire to sell any of these securities when a ready buyer is not available at a price that is deemed to be representative of their value, the value of the Fund's net assets could be adversely affected. Options The Fund may write call options on a covered basis only, and will not engage in option writing strategies for speculative purposes. A call option gives the purchaser of such option the right to buy, and the writer, in this case the Fund, the obligation to sell the underlying security at the exercise price during the option period. The advantage to the Fund of writing covered calls is that the Fund receives a premium which is additional income. However, if the security rises in value, the Fund may not fully participate in the market appreciation. B-13 During the option period, a covered call option writer may be assigned an exercise notice by the broker-dealer through whom such call option was sold requiring the writer to deliver the underlying security against payment of the exercise price. This obligation is terminated upon the expiration of the option period or at such earlier time in which the writer effects a closing purchase transaction. A closing purchase transaction is one in which the Fund, when obligated as a writer of an option, terminates its obligation by purchasing an option of the same series as the option previously written. A closing purchase transaction cannot be effected with respect to an option once the option writer has received an exercise notice for such option. Closing purchase transactions will ordinarily be effected to realize a profit on an outstanding call option, to prevent an underlying security from being called, to permit the sale of the underlying security or to enable the Fund to write another call option on the underlying security with either a different exercise price or expiration date or both. The Fund may realize a net gain or loss from a closing purchase transaction depending upon whether the net amount of the original premium received on the call option is more or less than the cost of effecting the closing purchase transaction. Any loss incurred in a closing purchase transaction may be partially or entirely offset by the premium received from a sale of a different call option on the same underlying security. Such a loss may also be wholly or partially offset by unrealized appreciation in the market value of the underlying security. If a call option expires unexercised, the Fund will realize a short-term capital gain in the amount of the premium on the option, less the commission paid. Such a gain, however, may be offset by depreciation in the market value of the underlying security during the option period. If a call option is exercised, the Fund will realize a gain or loss from the sale of the underlying security equal to the difference between the cost of the underlying security, and the proceeds of the sale of the security plus the amount of the premium on the option, less the commission paid. The market value of a call option generally reflects the market price of an underlying security. Other principal factors affecting market value include supply and demand, interest rates, the price volatility of the underlying security, and the time remaining until the expiration date. The Fund will write call options only on a covered basis, which means that the Fund will own the underlying security subject to a call option at all times during the option period. Unless a closing purchase transaction is effected, the Fund would be required to continue to hold a security which it might otherwise wish to sell, or deliver a security it would want to hold. Options written by the Fund will normally have expiration dates between one and nine months from the date written. The exercise price of a call option may be below, equal to, or above the current market value of the underlying security at the time the option is written. Other Investments The Fund is not prohibited from investing in bank obligations issued by clients of SEI Investments Company ("SEI Investments"), the parent company of the Administrator and the Distributor. The purchase of Fund shares by these banks or their customers will not be a consideration in deciding which bank obligations the Fund will purchase. The Fund will not purchase obligations issued by the Adviser. Pay-In-Kind Securities Pay-In-Kind securities are debt obligations or preferred stock, that pay interest or dividends in the form of additional debt obligations or preferred stock. B-14 Parallel Pay Securities; PAC Bonds Parallel pay CMOs and REMICs are structured to provide payments of principal on each payment date to more than one class. These simultaneous payments are taken into account in calculating the stated maturity date or final distribution date of each class, which must be retired by its stated maturity date or final distribution date, but may be retired earlier. Planned Amortization Class CMOs ("PAC Bonds") generally require payments of a specified amount of principal on each payment date. PAC Bonds are always parallel pay CMOs with the required principal payment on such securities having the highest priority after interest has been paid to all classes. Repurchase Agreements Repurchase agreements are agreements by which a person (e.g., the Fund) obtains a security and simultaneously commits to return the security to the seller (a primary securities dealer as recognized by the Federal Reserve Bank of New York or a national member bank as defined in Section 3(d)(1) of the Federal Deposit Insurance Act, as amended) at an agreed upon price (including principal and interest) on an agreed upon date within a number of days (usually not more than seven) from the date of purchase. The resale price reflects the purchase price plus an agreed upon market rate of interest which is unrelated to the coupon rate or maturity of the underlying security. A repurchase agreement involves the obligation of the seller to pay the agreed upon price, which obligation is, in effect, secured by the value of the underlying security. Repurchase agreements are considered to be loans by the Fund for purposes of its investment limitations. The repurchase agreements entered into by the Fund will provide that the underlying security at all times shall have a value at least equal to 102% of the resale price stated in the agreement (the Adviser monitors compliance with this requirement). Under all repurchase agreements entered into by the Fund, the appropriate Custodian or its agent must take possession of the underlying collateral. However, if the seller defaults, the Fund could realize a loss on the sale of the underlying security to the extent that the proceeds of the sale including accrued interest are less than the resale price provided in the agreement including interest. In addition, even though the Bankruptcy Code provides protection for most repurchase agreements, if the seller should be involved in bankruptcy or insolvency proceedings, the Fund may incur delay and costs in selling the underlying security or may suffer a loss of principal and interest if the Fund is treated as an unsecured creditor and required to return the underlying security to the seller's estate. Restricted Securities Restricted securities are securities that may not be sold to the public without registration under the Securities Act of 1933 (the "1933 Act") or an exemption from registration. Permitted investments for the Fund include restricted securities, and the Fund may invest up to 15% of its net assets in illiquid securities, subject to the Fund's investment limitations on the purchase of illiquid securities. Restricted securities, including securities eligible for re-sale under 1933 Act Rule 144A, that are determined to be liquid are not subject to this limitation. This determination is to be made by the Fund's Adviser pursuant to guidelines adopted by the Board of Trustees. Under these guidelines, the particular Adviser will consider the frequency of trades and quotes for the security, the number of dealers in, and potential purchasers for, the securities, dealer undertakings to make a market in the security, and the nature of the security and of the marketplace trades. In purchasing such Restricted Securities, each Adviser intends to purchase securities that are exempt from registration under Rule 144A under the 1933 Act. B-15 Securities Lending The Fund may lend securities pursuant to agreements which require that the loans be continuously secured by collateral at all times equal to 100% of the market value of the loaned securities which consists of: cash, securities of the U.S. Government or its agencies, or any combination of cash and such securities. Such loans will not be made if, as a result, the aggregate amount of all outstanding securities loans for the Fund exceed one-third of the value of the Fund's total assets taken at fair market value. The Fund will continue to receive interest on the securities lent while simultaneously earning interest on the investment of the cash collateral in U.S. Government securities. However, the Fund will normally pay lending fees to such broker-dealers and related expenses from the interest earned on invested collateral. There may be risks of delay in receiving additional collateral or risks of delay in recovery of the securities or even loss of rights in the collateral should the borrower of the securities fail financially. However, loans are made only to borrowers deemed by the appropriate Adviser to be of good standing and when, in the judgment of that Adviser, the consideration which can be earned currently from such securities loans justifies the attendant risk. Any loan may be terminated by either party upon reasonable notice to the other party. The Fund may use the Distributor or a broker-dealer affiliate of an Adviser as a broker in these transactions. Standby Commitments and Puts The Fund may purchase securities at a price which would result in a yield to maturity lower than that generally offered by the seller at the time of purchase when they can simultaneously acquire the right to sell the securities back to the seller, the issuer or a third party (the "writer") at an agreed-upon price at any time during a stated period or on a certain date. Such a right is generally denoted as a "standby commitment" or a "put." The purpose of engaging in transactions involving puts is to maintain flexibility and liquidity to permit the Fund to meet redemptions and remain as fully invested as possible in municipal securities. The Fund reserves the right to engage in put transactions. The right to put the securities depends on the writer's ability to pay for the securities at the time the put is exercised. The Fund would limit its put transactions to institutions which the Adviser believes present minimal credit risks, and the Adviser would use its best efforts to initially determine and continue to monitor the financial strength of the sellers of the options by evaluating their financial statements and such other information as is available in the marketplace. It may, however be difficult to monitor the financial strength of the writers because adequate current financial information may not be available. In the event that any writer is unable to honor a put for financial reasons, the Fund would be a general creditor (i.e., on a parity with all other unsecured creditors) of the writer. Furthermore, particular provisions of the contract between the Fund and the writer may excuse the writer from repurchasing the securities; for example, a change in the published rating of the underlying securities or any similar event that has an adverse effect on the issuer's credit or a provision in the contract that the put will not be exercised except in certain special cases, for example, to maintain portfolio liquidity. The Fund could, however, at any time sell the underlying portfolio security in the open market or wait until the portfolio security matures, at which time it should realize the full par value of the security. The securities purchased subject to a put may be sold to third persons at any time, even though the put is outstanding, but the put itself, unless it is an integral part of the security as originally issued, may not be marketable or otherwise assignable. Therefore, the put would have value only to the Fund. Sale of the securities to third parties or lapse of time with the put unexercised may terminate the right to put the securities. Prior to the expiration of any put option, the Fund could seek to negotiate terms for the extension of such an option. If such a renewal cannot be negotiated on terms satisfactory to the Fund, the Fund could, of course, sell the portfolio security. The maturity of the underlying security will generally be different from that of the put. There will be no limit to the percentage of portfolio securities that the Fund may purchase subject to a standby commitment or put, but the amount paid directly or indirectly for all standby commitments or puts which are not integral parts of the security as originally issued held in the Fund will not exceed 1/2 of 1% of the value of the total assets of such B-16 Fund calculated immediately after any such put is acquired. Structured Investments Structured Investments are derivatives in the form of a unit or units representing an undivided interest(s) in assets held in a trust that is not an investment company as defined in the Investment Company Act of 1940. A trust unit pays a return based on the total return of securities and other investments held by the trust and the trust may enter into one or more swaps to achieve its objective. For example, a trust may purchase a basket of securities and agree to exchange the return generated by those securities for the return generated by another basket or index of securities. The Fund will purchase structured investments in trusts that engage in such swaps only where the counterparties are approved by the Adviser in accordance with credit-risk guidelines established by the Board of Trustees. Structured Notes Notes are derivatives where the amount of principal repayment and or interest payments is based upon the movement of one or more factors. These factors include, but are not limited to, currency exchange rates, interest rates (such as the prime lending rate and LIBOR) and stock indices such as the S&P 500 Index. In some cases, the impact of the movements of these factors may increase or decrease through the use of multipliers or deflators. The use of structured notes allows the Fund to tailor its investments to the specific risks and returns the Adviser wishes to accept while avoiding or reducing certain other risks. Swaps, Caps, Floors, Collars Swaps, caps, floors and collars are hedging tools designed to permit the purchaser to preserve a return or spread on a particular investment or portion of its portfolio. They are also used 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." This is done 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. This is 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. Meanwhile, 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 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. Trade Claims The Fund may invest in trade claims. Trade claims are interest in amounts owed to suppliers of goods or services and are purchased from creditors of companies in financial difficulty. For purchasers such as the Fund, trade claims offer the potential for profits since they are often purchased at a significant discount from face value and B-17 consequently, may generate capital appreciation in the event that the market value of the claim increases as the debtor's financial position improves or the claim is paid. An investment in trade claims is speculative and carries a high degree of risk. Trade claims are illiquid securities which generally do not pay interest and there can be no guarantee that the debtor will ever be able to satisfy the obligation on the trade claim. The markets in trade claims are not regulated by federal securities laws or the SEC. Because trade claims are unsecured, holders of trade claims may have a lower priority in terms of payment than certain other creditors in a bankruptcy proceeding. Variable and Floating Rate Securities Variable and floating rate instruments involve certain obligations that 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 set 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. Variable Rate Master Demand Notes Variable rate master demand notes permit the investment of fluctuating amounts at varying market rates of interest pursuant to direct arrangements between the Fund, as lender, and a borrower. Such notes provide that the interest rate on the amount outstanding varies on a daily, weekly or monthly basis depending upon a stated short-term interest rate index. Both the lender and the borrower have the right to reduce the amount of outstanding indebtedness at any time. There is no secondary market for the notes and it is not generally contemplated that such instruments will be traded. The quality of the note or the underlying credit must, in the opinion of the appropriate Adviser, be equivalent to the ratings applicable to permitted investments for the particular Fund. The appropriate Advisor will monitor on an ongoing basis the earning power, cash flow and liquidity ratios of the issuers of such instruments and will similarly monitor the ability of an issuer of a demand instrument to pay principal and interest on demand. Variable rate master demand notes may or may not be backed by bank letters of credit. Venture Capital The Fund may invest in venture capital limited partnerships and venture capital funds that, in turn, invest principally in securities of early stage, developing companies. Investments in venture capital limited partnerships and venture capital funds present a number of risks not found in investing in established enterprises including the facts that such a partnership's or fund's portfolio will be composed almost entirely of early-stage companies that may lack depth of management and sufficient resources, that may be marketing a new product for which there is no established market, and that may be subject to intense competition from larger companies. Any investment in a venture capital limited partnership or venture capital fund will lack liquidity, will be difficult to value, and the Fund will not be entitled to participate in the management of the partnership or fund. If for any reason the services of the general partners of a venture capital limited partnership were to become unavailable, such limited partnership could be adversely affected. In addition to investing in venture capital limited partnerships and venture capital funds, the Fund may directly invest in early-stage, developing companies. The risks associated with investing in these securities are substantially similar to the risks set forth above. The Fund will typically purchase equity securities in these early-stage, developing companies; however from time to time, the Fund may purchase non-investment grade B-18 debt securities in the form of convertible notes. Such investments involve costs at the venture capital level which are in addition to those of the Fund. Warrants Warrants give holders the right, but not the obligation, to buy shares of a company at a given price, usually higher than the market price, during a specified period. When-Issued Securities and Municipal Forwards When-issued securities are securities that are delivered and paid for normally within 45 days after the date of commitment to purchase. Although the Fund will only make commitments to purchase when-issued securities with the intention of actually acquiring the securities, the Fund may sell them before the settlement date. When-issued securities are subject to market fluctuation, and accrue no interest to the purchaser during this pre-settlement period. The payment obligation and the interest rate that will be received on the securities are each fixed at the time the purchaser enters into the commitment. Purchasing when-issued securities entails leveraging and can involve a risk that the yields available in the market when the delivery takes place may actually be higher than those obtained in the transaction itself. In that case, there could be an unrealized loss at the time of delivery. Segregated accounts will be established with the appropriate custodian, and the Fund will maintain high quality, liquid assets in an amount at least equal in value to its commitments to purchase when-issued securities. If the value of these assets declines, the Fund will place additional liquid assets in the account on a daily basis so that the value of the assets in the account is equal to the amount of such commitments. Zero Coupon Obligations Zero coupon obligations are debt obligations that do not bear any interest, but instead are issued at a deep discount from face value or par. The value of a zero coupon obligation increases over time to reflect the interest accumulated. Such obligations will not result in the payment of interest until maturity, and will have greater price volatility than similar securities that are issued at face value or par and pay interest periodically. Investors will receive written notification at least thirty days prior to any change in the Fund's investment objective. The phrase "principally invests" as used in the prospectus means that the Fund invests at least 65% of its assets in the securities as described in the sentence. Each tax-exempt fund invests at least 80% of its total assets in securities with income exempt from federal income and alternative minimum taxes. INVESTMENT LIMITATIONS The following are fundamental policies of the Fund and cannot be changed with respect to the Fund without the consent of the holders of a majority of that Fund's outstanding shares. The term "majority of the outstanding shares" means the vote of (i) 67% or more of the Fund's shares present at a meeting, if more than 50% of the outstanding shares of the Fund are present or represented by proxy, or (ii) more than 50% of the Fund's outstanding shares, whichever is less. The Fund may not: 1. Acquire more than 10% of the voting securities of any one issuer. B-19 2. Invest in companies for the purpose of exercising control. 3. Borrow money except for temporary or emergency purposes and then only in an amount not exceeding one-third of the value of total assets. Any borrowing will be done from a bank and, to the extent that such borrowing exceeds 5% of the value of the Fund's assets, asset coverage of at least 300% is required. In the event that such asset coverage shall at any time fall below 300%, the Fund shall, within three days thereafter or such longer period as the Securities and Exchange Commission may prescribe by rules and regulations, reduce the amount of its borrowings to such an extent that the asset coverage of such borrowings shall be at least 300%. This borrowing provision is included solely to facilitate the orderly sale of portfolio securities to accommodate heavy redemption requests if they should occur and is not for investment purposes. All borrowings in excess of 5% of the value of the Fund's total assets will be repaid before making additional investments and any interest paid on such borrowings will reduce income. 4. Make loans, except that (a) the Fund may purchase or hold debt instruments in accordance with its investment objective and policies; (b) the Fund may enter into repurchase agreements, and (c) the Fund may engage in securities lending as described in the Prospectuses and in this Statement of Additional Information. 5. Pledge, mortgage or hypothecate assets except to secure temporary borrowings permitted by (3) above in aggregate amounts not to exceed 10% of the Fund's total assets, taken at current value at the time of the incurrence of such loan, except as permitted with respect to securities lending. 6. Purchase or sell real estate, real estate limited partnership interests, commodities or commodities contracts (except for financial futures contracts) and interests in a pool of securities that are secured by interests in real estate except that the Fund may purchase mortgage-backed and other mortgage-related securities, including collateralized mortgage obligations and REMICs). However, subject to their permitted investment spectrum, the Fund may invest in companies which invest in real estate, commodities or commodities contracts. 7. Make short sales of securities, maintain a short position or purchase securities on margin, except that the Trust may obtain short-term credits as necessary for the clearance of security transactions. 8. Act as an underwriter of securities of other issuers except as it may be deemed an underwriter in selling a security. 9. Purchase securities of other investment companies except for money market funds and CMOs and REMICs deemed to be investment companies and then only as permitted by the Investment Company Act of 1940 (the "1940 Act") and the rules and regulations thereunder. Under these rules and regulations, the Fund is prohibited from acquiring the securities of other investment companies if, as a result of such acquisition, the Fund owns more than 3% of the total voting stock of the company; securities issued by any one investment company represent more than 5% of the total assets of the Fund; or securities (other than treasury stock) issued by all investment companies represent more than 10% of the total assets of the Fund. 10. Issue senior securities (as defined in the 1940 Act) except in connection with permitted borrowings as described above or as permitted by rule, regulation or order of the SEC. 11. Purchase securities of any issuer (except securities issued or guaranteed by the United States, its agencies B-20 or instrumentalities and repurchase agreements involving such securities) if as a result more than 5% of the total assets of the Fund would be invested in the securities of such issuer; provided, however, that the Fund may invest up to 25% of its total assets without regard to this restriction as permitted by applicable law. 12. Purchase any securities which would cause more than 25% of the total assets of the Fund to be invested in the securities of one or more issuers conducting their principal business activities in the same industry, provided that this limitation does not apply to investments in obligations issued or guaranteed by the U.S. Government 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 to 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. 13. Purchase or sell real estate, unless acquired as a result of ownership of securities or other instruments (but this shall not prevent the Fund from investing in securities or other instruments either issued by companies that invest in real estate, backed by real estate or securities of companies engaged in the real estate business). 14. Purchase or sell physical commodities, unless acquired as a result of ownership of securities or other instruments. Non-Fundamental Policies The Fund may not purchase or hold illiquid securities (i.e., securities that cannot be disposed of for their approximate carrying value in seven days or less (which term includes repurchase agreements and time deposits maturing in more than seven days) if, in the aggregate, more than 15% of its net assets would be invested in illiquid securities. The Fund does not currently intend to purchase securities on margin, except that the Fund may obtain such short-term credits as are necessary for the clearance of transactions. The Fund does not currently intend to sell securities short. The Fund does not currently intend to purchase or sell futures contracts or put or call options. The Fund may not invest in shares of unaffiliated money market funds, except as permitted by the SEC. With the exception of the limitations on liquidity standards, the foregoing percentages will apply at the time of the purchase of a security and shall not be considered violated unless an excess occurs or exists immediately after and as a result of a purchase of such security. INVESTMENT ADVISER The Trust and Trusco Capital Management, Inc. (the "Adviser") have entered into an advisory agreement (the "Advisory Agreement"). The Adviser is an indirect wholly-owned subsidiary of SunTrust Banks, Inc. ("SunTrust"). SunTrust is a southeastern regional bank holding company with assets of $90.7 billion as of July 1, 1999. The Advisory Agreement provides that the Adviser shall not be protected against any liability to the B-21 Trust or its Shareholders by reason of willful misfeasance, bad faith or gross negligence on its part in the performance of its duties or from reckless disregard of its obligations or duties thereunder. The Advisory Agreement provides that if, for any fiscal year, the ratio of expenses of the Fund (including amounts payable to the Adviser but excluding interest, taxes, brokerage, litigation, and other extraordinary expenses) exceeds limitations established by certain states, the Adviser and/or the Administrator will bear the amount of such excess. The Adviser will not be required to bear expenses of the Trust to an extent which would result in the Fund's inability to qualify as a regulated investment company under provisions of the Internal Revenue Code. The continuance of the Advisory Agreement, after the first two years, must be specifically approved at least annually (i) by the vote of the Trustees, and (ii) by the vote of a majority of the Trustees who are not parties to each Agreement or "interested persons" of any party thereto, cast in person at a meeting called for the purpose of voting on such approval. The Advisory Agreement will terminate automatically in the event of its assignment, and is terminable at any time without penalty by the Trustees of the Trust or, with respect to the Fund, by a majority of the outstanding shares of the Fund, on not less than 30 days' nor more than 60 days' written notice to the Adviser, or by the Adviser on 90 days' written notice to the Trust. The Adviser has agreed to waive its fees or reimburse expenses in order to limit Fund expenses. For the periods prior to March 28, 2000, SunTrust Equitable Securities ("STES") served as the Adviser to the predecessor of the High Income Fund. For the fiscal years ended March 31, 1999, March 31, 1998 and March 31, 1997, the Fund paid the following advisory fees: - ------------------------------------------------------------------------------ Fees Paid Fees Waived or Reimbursed 1999 1998 1997 1999 1998 1997 - ------------------------------------------------------------------------------ $120,275 $285,164 $380,147 $53,473 $0 $0 - ------------------------------------------------------------------------------ Banking Laws Current interpretations of federal banking laws and regulations: . prohibit SunTrust and the Adviser from sponsoring, organizing, controlling, or distributing the Fund's shares; but . do not prohibit SunTrust or the Adviser generally from acting as an investment adviser, transfer agent, or custodian to the Fund or from purchasing Fund shares as agent for and upon the order of a customer. The Adviser believes that they may perform advisory and related services for the Trust without violating applicable banking laws or regulations. However, the legal requirements and interpretations about the permissible activities of banks and their affiliates may change in the future. These changes could prevent the Adviser from continuing to perform services for the Trust. If this happens, the Board of Trustees would consider selecting other qualified firms. Shareholders would approve any new investment advisory agreements would be subject to Shareholder approval. If current restrictions on bank activities with mutual funds were relaxed, the Adviser, or its affiliates, would B-22 consider performing additional services for the Trust. We cannot predict whether these changes will be enacted. We also cannot predict the terms that the Adviser, or its affiliates, might offer to provide additional services. THE ADMINISTRATOR The Trust and SEI Investments Mutual Funds Services (the "Administrator") are parties to the Administration Agreement. The Administration Agreement provides that the Administrator shall not be liable for any error of judgment or mistake of law or for any loss suffered by the Trust in connection with the matters to which the Administration Agreement relates, except a loss resulting from willful misfeasance, bad faith or gross negligence on the part of the Administrator in the performance of its duties or from reckless disregard by it of its duties and obligations thereunder. The Administration Agreement shall remain in effect for a period of five years after the date of the Agreement and shall continue in effect for successive periods of two years subject to review at least annually by the Trustees of the Trust unless terminated by either party on not less than ninety days' written notice to the other party. The Administrator, a Delaware business trust, has its principal business offices at Oaks, Pennsylvania 19456. SEI Investments Management Corporation ("SIMC"), a wholly-owned subsidiary of SEI Investments, is the owner of all beneficial interest in the Administrator. SEI Investments and its subsidiaries and affiliates, including the Administrator, are leading providers of funds evaluation services, trust accounting systems, and brokerage and information services to financial institutions, institutional investors, and money managers. The Administrator and its affiliates also serve as administrator or sub- administrator to the following other mutual funds: The Achievement Funds Trust, The Advisors' Inner Circle Fund, Alpha Select Funds, Amerindo Funds, Inc., The Arbor Fund, ARK Funds, Armada Funds, Bishop Street Funds, Boston 1784 Funds(R), CNI Charter Funds, CUFUND, The Expedition Funds, First American Funds, Inc., First American Investment Funds, Inc., First American Strategy Funds, Inc., Friends Ivory Funds, HighMark Funds, Huntington Funds, Huntington VA Fund, The Nevis Fund, Inc., Oak Associates Funds, The Parkstone Advantage Fund, The Parkstone Group of Funds, The PBHG Funds, Inc., PBHG Insurance Series Fund, Inc., The Pillar Funds, SEI Asset Allocation Trust, SEI Daily Income Trust, SEI Index Funds, SEI Institutional International Trust, SEI Institutional Investments Trust, SEI Institutional Managed Trust, SEI Liquid Asset Trust, SEI Tax Exempt Trust, STI Classic Variable Trust, TIP Funds, UAM Funds Trust, UAM Funds, Inc. II and UAM Funds, Inc. For its administrative services, the Administrator is entitled to a fee, which is calculated daily and paid monthly, at an annual rate of: .12% of the first $1 billion of average aggregate net assets, .09% on the next $4 billion of average aggregate net assets, .07% of the next $3 billion of average aggregate net assets, .065% of the next $2 billion of average aggregate net assets, and .06% thereafter. Prior to March 28, 2000, the predecessor of the Fund was subject to a separate Administration Agreement between the ESC Strategic Funds, Inc. ("ESC Strategic Funds") and the BISYS Fund Services Limited Partnership (the "Predecessor Administration Agreement"). Under the Predecessor Agreement, BISYS Fund Services Limited Partnership ("BISYS") was entitled to a fee, calculated daily and paid monthly, at an annual rate of 0.15% of average daily net assets of the Fund. BISYS provided administrative services necessary for the operation of the Fund, including among other things: (i) preparation of shareholder reports and communications; (ii) regulatory compliance, such as reports to and filings with the SEC and state securities commissions; and (iii) general supervision of the operation of the Fund, including coordination of the services performed by the Adviser, the Distributor, transfer agent, custodians, independent accountants, legal counsel and others. In addition, BISYS furnished office space and facilities required for the conducting the business of the Fund and paid the compensation of the Fund's officers, employees and Trustees affiliated with BISYS. For these services, BISYS received from the Fund a fee, payable monthly, at the annual rate of 0.15% of the Fund's average daily net assets. B-23 For the fiscal years ended March 31, 1999, 1998, and 1997, BISYS was compensated for its services under the Predecessor Administration Agreement as follows: - ------------------------------------------------- Fees Paid 1999 1998 1997* - ------------------------------------------------- $25,100 $42,775 $13,550 - ------------------------------------------------- * For a portion of the fiscal year ended March 31, 1997, Furman Selz LLC served as administrator for the predecessor of the Fund and received $43,472 as compensation for its services during that period. THE DISTRIBUTOR SEI Investments Distribution Co. (the "Distributor"), a wholly-owned subsidiary of SEI Investments, and the Trust have entered into a distribution agreement (the "Distribution Agreement") dated May 29, 1992. Under the Distribution Agreement, the Distributor must use all reasonable efforts, consistent with its other business, in connection with the continuous offering of Shares of the Trust. The Distributor will receive no compensation for distribution of Trust Shares. In addition, the Flex Shares of the Fund has a distribution and service plan (the "Flex Plan"). The Distribution Agreement is renewable annually and may be terminated by the Distributor, the disinterested Trustees, or by a majority vote of the outstanding securities of the Trust upon not more than 60 days' written notice by either party. Flex Shares Distribution Plans The Distribution Agreement and the Flex Plan adopted by the Trust provide that the Flex Shares of the Fund will pay the Distributor a fee of up to .75% of the average daily net assets of the Fund. The Distributor can use these fees to compensate broker-dealers and service providers, including SunTrust and its affiliates, which provide administrative and/or distribution services to Flex Shares Shareholders or their customers who beneficially own Flex Shares. In addition, Flex Shares are subject to a service fee of up to .25% of the average daily net assets of the Flex Shares of the Fund. This service fee will be used for services provided and expenses incurred in maintaining shareholder accounts, responding to shareholder inquiries and providing information on their investments. Services for which broker-dealers and service providers may be compensated include establishing and maintaining customer accounts and records; aggregating and processing purchase and redemption requests from customers; placing net purchase and redemption orders with the Distributor; automatically investing customer account cash balances; providing periodic statements to customers; arranging for wires; answering customer inquiries concerning their investments; assisting customers in changing dividend options, account designations, and addresses; performing sub-accounting functions; processing dividend payments from the Trust on behalf of customers; and forwarding Shareholder communications from the Trust (such as proxies, Shareholder reports, and dividend distribution and tax notices) to these customers with respect to investments in the Trust. Certain state securities laws may require those financial institutions providing such distribution services to register as dealers pursuant to state law. Although banking laws and regulations prohibit banks from distributing shares of open-end investment companies such as the Trust, according to an opinion issued to the staff of the SEC by the Office of the Comptroller of the Currency, financial institutions are not prohibited from acting in other capacities for investment companies, such as providing shareholder services. Should future legislative, judicial, or administrative action prohibit or restrict the activities of financial institutions in connection with providing B-24 shareholder services, the Trust may be required to alter materially or discontinue its arrangements with such financial institutions. The Trust has adopted the Flex Plan in accordance with the provisions of Rule 12b-1 under the 1940 Act, which Rule regulates circumstances under which an investment company may directly or indirectly bear expenses relating to the distribution of its shares. Continuance of the Flex Plan must be approved annually by a majority of the Trustees of the Trust and by a majority of the disinterested Trustees. The Flex Plan require that quarterly written reports of amounts spent under the Flex Plan, respectively, and the purposes of such expenditures be furnished to and reviewed by the Trustees. The Flex Plan may not be amended to increase materially the amount which may be spent thereunder without approval by a majority of the outstanding shares of the affected class of shares of the Trust. All material amendments of the Plans will require approval by a majority of the Trustees of the Trust and of the disinterested Trustees. There is no sales charge on purchases of Flex Shares, but Flex Shares are subject to a contingent deferred sales charge if they are redeemed within one year of purchase. Pursuant to the Distribution Agreement and the Flex Plan, Flex Shares are subject to an ongoing distribution and service fee calculated on each of the Fund's aggregate average daily net assets attributable to its Flex Shares. For periods prior to March 28, 2000, the predecessor of the Fund offered two classes of shares: Class A and Class D. Each of those classes had adopted a service and distribution plan. For the fiscal years ended March 31, 1999, 1998, and 1997, the predecessor distributors received the following amounts in accordance with each respective plan: Service and Distribution Fees - --------------------------------------------- Class 1999 1998 1997 ----- ---- ---- ---- - --------------------------------------------- Class A 40,024 69,082 42,069 - --------------------------------------------- Class D 5,428 6,626 10,963 - --------------------------------------------- THE TRANSFER AGENT Federated Services Company, 1001 Liberty Avenue, Federated Investors Tower, Pittsburgh, PA 15222-3779 serves as the Trust's transfer agent. THE CUSTODIAN SunTrust Bank, Atlanta, 303 Peachtree Street N.E., 14th Floor, Atlanta, GA 30308 serves as the custodian for the Fund. INDEPENDENT PUBLIC ACCOUNTANTS Arthur Andersen LLP serves as independent public accountants for the Trust. LEGAL COUNSEL Morgan, Lewis & Bockius LLP serves as legal counsel to the Trust. B-25 TRUSTEES AND OFFICERS OF THE TRUST The Trustees and Executive Officers of the Trust, their respective dates of birth, and their principal occupations for the last five years are set forth below. Each may have held other positions with the named companies during that period. Unless otherwise noted, the business address of each Trustee and each Executive Officer is SEI Investments Company, Oaks, Pennsylvania 19456. Certain officers of the Trust also serve as officers of some or all of the following: The Achievement Funds Trust, The Advisors' Inner Circle Fund, Alpha Select Funds, The Arbor Fund, ARK Funds, Armada Funds, Bishop Street Funds, Boston 1784 Funds(R), CNI Charter Funds, CUFUND, The Expedition Funds, First American Funds, Inc., First American Investment Funds, Inc., First American Strategy Funds, Inc., Friends Ivory Funds, HighMark Funds, Huntington Funds, Huntington VA Fund, The Nevis Fund, Inc., Oak Associates Funds, The Parkstone Advantage Fund, The Parkstone Group of Funds, The PBHG Funds, Inc., PBHG Insurance Series Fund, Inc., The Pillar Funds, SEI Asset Allocation Trust, SEI Daily Income Trust, SEI Index Funds, SEI Institutional International Trust, SEI Institutional Investments Trust, SEI Institutional Managed Trust, SEI Liquid Asset Trust, SEI Tax Exempt Trust, STI Classic Variable Trust, and TIP Funds, each of which is an open-end management investment company managed by SEI Investments Mutual Funds Services or its affiliates and distributed by SEI Investments Distribution Co. DANIEL S. GOODRUM (7/11/26) - Trustee* - Chairman & CEO, SunBank/South Florida, N.A., 1985-1991; Chairman Audit Committee and Director, Holy Cross Hospital; Executive Committee Member and Director, Honda Classic Foundation; Director, Broward Community College Foundation. WILTON LOONEY (4/18/19) - Trustee* - President of Genuine Parts Company, 1961- 1964; Chairman of the Board, 1964-1990; Honorary Chairman of the Board, 1990 to present. Director, Rollins, Inc.; Director, RPC Energy Services, Inc. CHAMPNEY A. MCNAIR (10/30/24) - Trustee* - Director and Chairman of Investment Committee and member of Executive Committee, Cotton States Life and Health Insurance Company; Director and Chairman of Investment Committee and member of Executive Committee, Cotton States Mutual Insurance Company; Chairman, Trust Company of Georgia Advisory Council. F. WENDELL GOOCH (12/3/32) - Trustee - Retired. President, Orange County Publishing Co., Inc., 1981-1997, publisher of the Paoli News and the Paoli Republican and Editor of the Paoli Republican, 1981-1997, President, H & W Distribution, Inc., 1984-1997. Current Trustee on the Board of Trustees for the SEI Family of Funds and The Capitol Mutual Funds. Executive Vice President, Trust Department, Harris Trust and Savings Bank and Chairman of the Board of Directors of The Harris Trust Company of Arizona before January 1981. T. GORDY GERMANY (11/28/25) -Trustee - Retired President, Chairman, and CEO of Crawford & Company; held these positions, 1973-1987. Member of the Board of Directors, 1970-1990, joined company in 1948; spent entire career at Crawford, currently serves on Boards of Norrell Corporation and Mercy Health Services, the latter being the holding company of St. Joseph's Hospitals. DR. BERNARD F. SLIGER (9/30/24) - Trustee - Director, Stavros Center for Economic Education, Florida State University, 1991-present. President of Florida State University, 1976-91; previous four years EVP and Chief Academic Officer. During educational career, taught at Florida State, Michigan State, Louisiana State and Southern University. Spent 19 years as faculty member and administrator at Louisiana State University and served as Head of Economics Department, member and Chairman of the Graduate Council, Dean of Academic Affairs and Vice Chancellor. Member of Board of Directors of Federal Reserve Bank of Atlanta, 1983-1988. JONATHAN T. WALTON (3/28/30) - Trustee - Retired. Executive Vice President, NBD Bank, N.A. and NBD Bancorp, October 1956 to March 1995. Trustee, W.K. Kellogg Trust. B-26 WILLIAM H. CAMMACK (11/24/29) - Trustee* - Chairman & Director, SunTrust Equitable Securities Corporation, January, 1998-present. Chairman and CEO, Equitable Asset Management, Inc., December 1993-present. Chairman & CEO, Equitable Trust Company, June 1991-present. Chairman, Equitable Securities Corporation, July 1972 - January 1998. MARK NAGLE (10/20/59) - President, Controller, Treasurer and Chief Financial Officer - President of the Administrator and Senior Vice President of SEI Investments Mutual Funds Services Operations Group since 1998. Vice President of the Administrator and Vice President of Fund Accounting and Administration of SEI Investments Mutual Funds Services, 1996-1998. Vice President of the Distributor since December 1997. Senior Vice President, Fund Administration, BISYS Fund Services, September 1995-November 1996. Senior Vice President and Site Manager, Fidelity Investments 1981- September 1995. JAMES R. FOGGO (DOB 02/14/66) - Vice President and Assistant Secretary - Vice President and Assistant Secretary of SEI Investments since 1998. Vice President and Assistant Secretary of the Administrator and the Distributor since May 1999. Associate, Paul Weiss, Rifkind, Wharton & Garrison (law firm), 1998. Associate, Baker & McKenzie (law firm), 1995-1998. Associate, Battle Fowler L.L.P. (law firm), 1993-1995. LYDIA A. GAVALIS (6/5/64) - Vice President and Assistant Secretary - Vice President and Assistant Secretary of the Administrator and the Distributor since 1998. Assistant General Counsel and Director of Arbitration, Philadelphia Stock Exchange, 1989-1998. EDWARD T. SEARLE (4/03/54) - Vice President and Assistant Secretary of the Administrator and Distributor since August 1999. Associate, Drinker Biddle & Reath LLP (law firm), June 1998 to August 1999. Associate, Ballard Spahr Andrews & Ingersoll LLP (law firm), September 1995 to June 1998. TIMOTHY D. BARTO (3/28/68) - Vice President and Assistant Secretary --Employed by SEI Investments since October 1999. Vice President and Assistant Secretary of the Administrator and Distributor since December 1999. Associate at Dechert Price & Rhoads (1997-1999). Associate, at Richter, Miller & Finn (1994-1997). LYNDA J. STRIEGEL (10/30/48) - Vice President and Assistant Secretary - Vice President and Assistant Secretary of the Administrator and the Distributor since 1998. Senior Asset Management Counsel, Barnett Banks, Inc., 1997-1998. Partner, Groom and Nordberg, Chartered, 1996-1997. Associate General Counsel, Riggs Bank, N.A., 1991-1995. KEVIN P. ROBINS (4/15/61) - Vice President, Assistant Secretary - Senior Vice President & General Counsel of SEI Investments, the Administrator and the Distributor since 1994. Vice President of SEI, the Administrator and the Distributor, 1992-1994. RICHARD W. GRANT (10/25/45) - Secretary - 1701 Market Street, Philadelphia, Pennsylvania 19103. Partner, Morgan, Lewis & Bockius LLP (law firm), counsel to the Trust, Administrator and Distributor, since 1989. JOHN H. GRADY, JR. (6/1/61) - Assistant Secretary -1701 Market Street, Philadelphia, Pennsylvania 19103. Partner, Morgan, Lewis & Bockius LLP (law firm), counsel to the Trust, Administrator and Distributor, since 1993. _______________ * Messrs. Looney, Goodrum, McNair, and Cammack may be deemed to be "interested persons" of the Trust as defined in the Investment Company Act of 1940. The Trustees and Officers of the Trust own, in the aggregate, less than 1% of the outstanding shares of the Trust. B-27 For the fiscal year end May 31, 1999, the Trust paid the following amounts to Trustees and Officers of the Trust:
========================================================================================================== Pension or Estimated Retirement Annual Total Compensation Aggregate Benefits Accrued Benefits from Fund and Fund Compensation as Part of Fund Upon Complex Paid to Name of Person, Position From Fund Expenses Retirement Trustees - ----------------------------------------------------------------------------------------------------------- Daniel S. Goodrum, Trustee $16,000 N/A N/A $18,000 for service on two boards - ----------------------------------------------------------------------------------------------------------- Wilton Looney, Trustee $18,000 N/A N/A $18,000 for service on two boards - ----------------------------------------------------------------------------------------------------------- Champney A. McNair, $16,000 N/A N/A $18,000 for service on Trustee two boards - ----------------------------------------------------------------------------------------------------------- F. Wendell Gooch, Trustee $16,000 N/A N/A $18,000 for service on two boards - ----------------------------------------------------------------------------------------------------------- T. Gordy Germany, $16,000 N/A N/A $18,000 for service on Trustee two boards - ----------------------------------------------------------------------------------------------------------- Dr. Bernard F. Sliger, $16,000 N/A N/A $18,000 for service on Trustee two boards - ----------------------------------------------------------------------------------------------------------- Jonathan T. Walton, Trustee $11,500 N/A N/A $13,000 for service on two boards - ----------------------------------------------------------------------------------------------------------- William H. Cammack, N/A N/A N/A $ 0 for service on Trustee* two boards ===========================================================================================================
* Messr. Cammack is an "interested person" of the Trust as defined in the Investment Company Act of 1940. The Board of Trustees of the Trust has adopted a Code of Ethics pursuant to Rule 17j-1 under the Investment Company Act of 1940. In addition, the Investment Adviser and Distributor have adopted Codes of Ethics pursuant to Rule 17j-1. These Codes of Ethics apply to the personal investing activities of trustees, officers and certain employees ("access persons"). Rule 17j-1 and the Codes are designed to prevent unlawful practices in connection with the purchase or sale of securities by access persons. Under each Code of Ethics, access persons are permitted to engage in personal securities transactions, but are required to report their personal securities transactions for monitoring purposes. In addition, certain access persons are required to obtain approval before investing in initial public offerings or private placements. Copies of these Codes of Ethics are on file with the Securities and Exchange Commission, and are available to the public. PERFORMANCE INFORMATION From time to time the Fund may advertise its performance. Performance figures are based on historical earnings and are not intended to indicate future performance. Performance Comparisons The Fund may periodically compare its performance to other mutual funds tracked by mutual fund rating services, to broad groups of comparable mutual funds, or to unmanaged indices. These comparisons may assume reinvestment of dividends but generally do not reflect deductions for administrative and management costs. COMPUTATION OF YIELD Thirty-Day Yield The High Income Fund may advertise a 30-day yield. In particular, yield will be calculated according to the following formula: Yield = (2 (a-b/cd + 1)/6/ - 1) where a = dividends and interest earned during the period; b = expenses accrued for B-28 the period (net of reimbursement); c = the average daily number of shares outstanding during the period that were entitled to receive dividends; and d = the maximum offering price per share on the last day of the period. CALCULATION OF TOTAL RETURN From time to time, the High Income Fund may advertise total return. In particular, total return will be calculated according to the following formula: P (1 + T)/n/ = ERV, where P = a hypothetical initial payment of $1,000; T = average annual total return; n = number of years; and ERV = ending redeemable value of a hypothetical $1,000 payment made at the beginning of the designated time period as of the end of such period. From time to time, the Trust may include the names of clients of the Adviser in advertisements and/or sales literature for the Trust. The SEI Funds Evaluation database tracks the total return of numerous tax-exempt pension accounts. The range of returns in these accounts determines the percentile rankings. SunTrust Bank's investment advisory affiliates, STI Capital Management, N.A. and Trusco Capital Management, have been in the top 1% of the SEI Funds Evaluation database for equity managers over the past ten years. SEI Investment's database includes research data on over 1,000 investment managers responsible for over $450 billion in assets. Based on the foregoing, the average annual total returns for the Fund from inception through March 1999 and for the one year period ended March 31, 1999 were as follows:
============================================================== Class 1 year Since Inception ----- ------ --------------- - -------------------------------------------------------------- Class A 5.64% 5.26* - -------------------------------------------------------------- Class D 5.23% 5.40* ==============================================================
* Since May 4, 1994. PURCHASING SHARES Purchases and redemptions of shares of the Fund may be made on any day the New York Stock Exchange ("NYSE") is open for business. Currently, the NYSE is closed on: New Year's Day, Martin Luther King, Jr. Day, Presidents' Day, Good Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving Day and Christmas Day. REDEEMING SHARES A Shareholder will at all times be entitled to aggregate cash redemptions from all Funds of the Trust during any 90-day period of up to the lesser of $250,000 or 1% of the Trust's net assets. The Trust reserves the right to suspend the right of redemption and/or to postpone the date of payment upon redemption for any period on which trading on the NYSE is restricted, or during the existence of an emergency (as determined by the Securities and Exchange Commission by rule or regulation) as a result of disposal or valuation of the Fund's securities is not reasonably practicable, or for such other periods as the Securities and Exchange Commission has by order permitted. The Trust also reserves the right to suspend sales of shares of the Fund for any period during which the NYSE, an Adviser, the Administrator and/or, the Custodian are not open for business. B-29 A number of Fund shareholders are institutions with significant share holdings that may be redeemed at any time. If a substantial number or amount of redemptions should occur within a relatively short period of time, the Fund may have to sell portfolio securities it would otherwise hold and incur the additional transaction costs. The sale of portfolio securities may result in the recognition of capital gains, which will be distributed annually and generally will be taxable to shareholders as ordinary income or capital gains. Shareholders are notified annually regarding the federal tax status of distributions they receive (see "Taxes"). DETERMINATION OF NET ASSET VALUE The securities of the High Income Fund are valued by the Administrator pursuant to valuations provided by an independent pricing service. The pricing service relies primarily on prices of actual market transactions as well as trader quotations. However, the service may also use a matrix system to determine valuations of fixed income securities, which system considers such factors as security prices, yields, maturities, call features, ratings and developments relating to specific securities in arriving at valuations. The procedures of the pricing service and its valuations are reviewed by the officers of the Trust under the general supervision of the Trustees. Although the methodology and procedures are identical, the net asset value per share of Flex Shares of the Fund may differ because of variations in the distribution and service fees and transfer agent fees charged to Investor Shares. TAXES The following is a summary of certain Federal income tax considerations generally affecting the Fund and its shareholders that are not described in the Fund's prospectus. No attempt is made to present a detailed explanation of the Federal tax treatment of the Fund or its Shareholders, and the discussion here and in the Fund's prospectus is not intended as a substitute for careful tax planning. This discussion of Federal income tax consequences is based on the Internal Revenue Code of 1986, as amended (the "Code"), and the regulations issued thereunder, in effect on the date of this Statement of Additional Information. New legislation, as well as administrative changes or court decisions, may change the conclusions expressed herein, and may have a retroactive effect with respect to the transactions contemplated herein. Federal Income Tax In order to qualify for treatment as a regulated investment company ("RIC") under the Internal Revenue Code of 1986, as amended ("Code"), the Fund must distribute annually to its Shareholders at least the sum of 90% of its net investment income excludable from gross income plus 90% of its investment company taxable income (generally, net investment income plus net short-term capital gain) ("Distribution Requirement") and also must meet several additional requirements. Among these requirements are the following: (i) at least 90% of the Fund's gross income each taxable year must be derived from dividends, interest, payments with respect to securities loans, and gains from the sale or other disposition of stock or securities, or certain other income; (ii) at the close of each quarter of the Fund's taxable year, at least 50% of the value of its total assets must be represented by cash and cash items, U.S. Government securities, securities of other RIC's and other securities, with such other securities limited, in respect of any one issuer, to an amount that does not exceed 5% of the value of the Fund's assets and that does not represent more than 10% of the outstanding voting securities of such issuer; and (iii) at the close of each quarter of the Fund's taxable year, not more than 25% of the value of its assets may be invested in securities (other than U.S. Government securities or the securities of other RIC's) of any one issuer, or of two or more issuers engaged in same or similar businesses if the Fund owns at least 20% of the voting power of such issuers. B-30 In addition, the Fund will distribute by the end of any calendar year 98% of its ordinary income for that year and 98% of its capital gain net income for the one-year period ending on October 31 of that calendar year, plus certain other amounts. The Fund intends to make sufficient distributions prior to the end of each calendar year to avoid liability for the federal excise tax applicable to regulated investment companies. Any gain or loss recognized on a sale or redemption of shares of the Fund by a Shareholder who is not a dealer in securities will generally be treated as long- term capital gain or loss if the shares have been held for more than eighteen months, and short-term if for a year or less. If shares held for six months or less are sold or redeemed for a loss, two special rules apply: First, if shares on which a net capital gain distribution has been received are subsequently sold or redeemed, and such shares have been held for six months or less, any loss recognized will be treated as long-term capital loss to the extent of the long- term capital gain distributions. The Fund will make annual reports to Shareholders of the Federal income tax status of all distributions. Foreign Taxes Dividends and interests received by the Fund may be subject to income, withholding or other taxes imposed by foreign countries and U.S. possessions that would reduce the yield on the Fund's stock or securities. Tax conventions between certain countries and the United States may reduce or eliminate these taxes. Foreign countries generally do not impose taxes on capital gains with respect to investments by foreign investors. FUND TRANSACTIONS The Trust has no obligation to deal with any dealer or group of dealers in the execution of transactions in portfolio securities. Subject to policies established by the Trustees, the Adviser is responsible for placing the orders to execute transactions for the Fund. In placing orders, it is the policy of the Trust to seek to obtain the best net results taking into account such factors as price (including the applicable dealer spread), the size, type and difficulty of the transaction involved, the firm's general execution and operational facilities, and the firm's risk in positioning the securities involved. While the Adviser generally seeks reasonably competitive spreads or commissions, the Trust will not necessarily be paying the lowest spread or commission available. The money market securities in which the Fund invests are traded primarily in the over-the-counter market. Bonds and debentures are usually traded over-the- counter, but may be traded on an exchange. Where possible, the Adviser will deal directly with the dealers who make a market in the securities involved except in those circumstances where better prices and execution are available elsewhere. Such dealers usually are acting as principal for their own account. On occasion, securities may be purchased directly from the issuer. Money market securities are generally traded on a net basis and do not normally involve either brokerage commissions or transfer taxes. The cost of executing portfolio securities transactions of the Trust will primarily consist of dealer spreads and underwriting commissions. TRADING PRACTICES AND BROKERAGE The Trust selects brokers or dealers to execute transactions for the purchase or sale of portfolio securities on the basis of its judgment of their professional capability to provide the service. The primary consideration is to have brokers or dealers provide transactions at best price and execution for the Trust. Best price and execution includes many factors, including the price paid or received for a security, the commission charged, the promptness and reliability of execution, the confidentiality and placement accorded the order and other factors affecting the overall benefit obtained by the account on the transaction. The Trust's determination of what are reasonably competitive rates is based upon the professional knowledge of its trading department as to rates paid and charged for similar transactions throughout the securities industry. In some instances, the Trust pays a B-31 minimal share transaction cost when the transaction presents no difficulty. Some trades are made on a net basis where the Trust either buys securities directly from the dealer or sells them to the dealer. In these instances, there is no direct commission charged but there is a spread (the difference between the buy and sell price) which is the equivalent of a commission. The Trust may allocate out of all commission business generated by all of the funds and accounts under management by the Adviser, brokerage business to brokers or dealers who provide brokerage and research services. These research services include advice, either directly or through publications or writings, as to the value of securities, the advisability of investing in, purchasing or selling securities, and the availability of securities or purchasers or sellers of securities; furnishing of analyses and reports concerning issuers, securities or industries; providing information on economic factors and trends, assisting in determining portfolio strategy, providing computer software used in security analyses, and providing portfolio performance evaluation and technical market analyses. Such services are used by the Adviser in connection with its investment decision-making process with respect to one or more funds and accounts managed by it, and may not be used exclusively with respect to the fund or account generating the brokerage. As provided in the Securities Exchange Act of 1934 (the "1934 Act") higher commissions may be paid to broker-dealers who provide brokerage and research services than to broker-dealers who do not provide such services if such higher commissions are deemed reasonable in relation to the value of the brokerage and research services provided. Although transactions are directed to broker- dealers who provide such brokerage and research services, the Trust believes that the commissions paid to such broker-dealers are not, in general, higher than commissions that would be paid to broker-dealers not providing such services and that such commissions are reasonable in relation to the value of the brokerage and research services provided. In addition, portfolio transactions which generate commissions or their equivalent are directed to broker-dealers who provide daily portfolio pricing services to the Trust. Subject to best price and execution, commissions used for pricing may or may not be generated by the funds receiving the pricing service. The Adviser may place a combined order for two or more accounts or funds engaged in the purchase or sale of the same security if, in its judgment, joint execution is in the best interest of each participant and will result in best price and execution. Transactions involving commingled orders are allocated in a manner deemed equitable to each account or fund. It is believed that the ability of the accounts to participate in volume transactions will generally be beneficial to the accounts and funds. Although it is recognized that, in some cases, the joint execution of orders could adversely affect the price or volume of the security that a particular account or Fund may obtain, it is the opinion of the Adviser and the Trust's Board of Trustees that the advantages of combined orders outweigh the possible disadvantages of separate transactions. Consistent with the Conduct Rules of the National Association of Securities Dealers, Inc., and subject to seeking best price and execution, the Fund, at the request of the Distributor, gives consideration to sales of shares of the Trust as a factor in the selection of brokers and dealers to execute Trust portfolio transactions. It is expected that the Trust may execute brokerage or other agency transactions through the Distributor or an affiliate of the Adviser, both of which are registered broker-dealers, for a commission in conformity with the 1940 Act, the 1934 Act and rules promulgated by the SEC. Under these provisions, the Distributor or an affiliate of the Adviser is permitted to receive and retain compensation for effecting portfolio transactions for the Trust on an exchange if a written contract is in effect between the Distributor and the Trust expressly permitting the Distributor or an affiliate of an Adviser to receive and retain such compensation. These rules further require that commissions paid to the Distributor by the Trust for exchange transactions not exceed "usual and customary" brokerage commissions. The rules define "usual and customary" commissions to include amounts which are "reasonable and fair compared to the commission, fee or other renumeration received or to be received by other brokers in connection with comparable transactions involving similar securities being purchased or sold on a B-32 securities exchange during a comparable period of time." In addition, the Trust may direct commission business to one or more designated broker-dealers in connection with such broker/dealer's provision of services to the Trust or payment of certain Trust expenses (e.g., custody, pricing and professional fees). The Trustees, including those who are not "interested persons" of the Trust, have adopted procedures for evaluating the reasonableness of commissions paid to the Distributor, and will review these procedures periodically. Brokerage commissions paid by the Fund to Equitable Securities Corporation for the fiscal years ended March 31, 1999, 1998 and 1997 are as follows:
===================================================== 1999 1998 1997 - ----------------------------------------------------- $ 0 $ 309 $ 0 =====================================================
DESCRIPTION OF SHARES The Declaration of Trust authorizes the issuance of an unlimited number of shares and classes of shares of the Fund each of which represents an equal proportionate interest in that Fund with each other share. Shares are entitled upon liquidation to a pro rata share in the net assets of the Fund. Shareholders --- ---- have no preemptive rights. The Declaration of Trust provides that the Trustees of the Trust may create additional series of shares or classes of series. All consideration received by the Trust for shares of any additional series and all assets in which such consideration is invested would belong to that series and would be subject to the liabilities related thereto. Share certificates representing shares will not be issued. SHAREHOLDER LIABILITY The Trust is an entity of the type commonly known as a "Massachusetts business trust." Under Massachusetts law, shareholders of such a trust could, under certain circumstances, be held personally liable as partners for the obligations of the trust. Even if, however, the Trust were held to be a partnership, the possibility of the Shareholders' incurring financial loss for that reason appears remote because the Trust's Declaration of Trust contains an express disclaimer of Shareholder liability for obligations of the Trust and requires that notice of such disclaimer be given in each agreement, obligation or instrument entered into or executed by or on behalf of the Trust or the Trustees, and because the Declaration of Trust provides for indemnification out of the Trust property for any Shareholder held personally liable for the obligations of the Trust. LIMITATION OF TRUSTEES' LIABILITY The Declaration of Trust provides that a Trustee shall be liable only for his own willful defaults and, if reasonable care has been exercised in the selection of officers, agents, employees or investment advisers, shall not be liable for any neglect or wrongdoing of any such person. The Declaration of Trust also provides that the Trust will indemnify its Trustees and officers against liabilities and expenses incurred in connection with actual or threatened litigation in which they may be involved because of their offices with the Trust unless it is determined in the manner provided in the Declaration of Trust that they have not acted in good faith in the reasonable belief that their actions were in the best interests of the Trust. However, nothing in the Declaration of Trust shall protect or indemnify a Trustee against any liability for his willful misfeasance, bad faith, gross negligence or reckless disregard of his duties. B-33 YEAR 2000 The Trust depends on the smooth functioning of computer systems in almost every aspect of its business. Like other mutual funds, businesses and individuals around the world, the Trust could be adversely affected if the computer systems used by its mission critical service providers do not properly process dates on and after January 1, 2000 and distinguish between the year 2000 and the year 1900. The Trust has asked its service providers whether they expect to have their computer systems adjusted for the year 2000 transition, and has sought and received assurances from each from each that its system is expected to accommodate the year 2000 without material adverse consequences to the Trust. While such assurances have been received, the Trust and its shareholders may experience losses if these assurances prove to be incorrect or as a result of year 2000 computer difficulties experienced by issuers of portfolio securities or third parties, such as custodians, banks, broker-dealers or others with which the Trust does business. As of March 9, 2000, the following persons were the only persons who were record owners (or to the knowledge of the Trust, beneficial owners) of 5% and 25% or more of the shares of the Fund. Persons who owned of record or beneficially more than 25% of a Fund's outstanding shares may be deemed to control the Fund within the meaning of the Act.
Account Number Name and Address Share Balance % - -------------- ---------------- ------------- --- 000000106308 HOUVIS CO 14,385.017 5.57% C O FIRST AMERICAN BANK 300 UNION STREET NASHVILLE, TN 37237- 004094000008 DB ALEX BROWN LLC 15,022.449 5.82% FBO 495-17167-13 PO BOX 1346 BALTIMORE, MD 21203- 004094000010 HOMESURE OF AMERICA INC 154,112.990 59.68% PO BOX 551510 FT LAUDERDALE, FL 33355-1510 004094000035 DB ALEX BROWN LLC 16,599.186 6.43% FBO 495-22883-16 PO BOX 1346 BALTIMORE, MD 21203- 000000044141 DB ALEX BROWN LLC 3,366.081 7.69% FBO 495-17376-10 PO BOX 1346 BALTIMORE, MD 21203- 000000066744 DB ALEX BROWN LLC 10,332.350 23.60% FBO 495-25434-13 PO BOX 1346 BALTIMORE, MD 21203- 000000121828 PAINEWEBBER FOR THE 2,577.952 5.89% BENEFIT OF MARY E MOORE 935 DAVIS DRIVE NW ATLANTA, GA 30327-4533 004084000010 DB ALEX BROWN LLC 3,081.729 7.04% FBO 495-17506-13 PO BOX 1346 BALTIMORE, MD 21203- 004084000011 DB ALEX BROWN LLC 3,808.677 8.70% FBO 495-17667-18 PO BOX 1346 BALTIMORE, MD 21203- 004084000017 DB ALEX BROWN LLC 7,158.801 16.35% FBO 495-18067-12 PO BOX 1346 BALTIMORE, MD 21203- 004084000020 DB ALEX BROWN LLC 3,654.407 8.35% FBO 495-07153-10 PO BOX 1346 BALTIMORE, MD 21203-
B-34 EXPERTS The financial statements as of March 31, 1999 have been audited by PricewaterhouseCoopers LLP, Independent Public Accountants, as indicated in their report dated May 14, 1999 with respect thereto, and are included herein in reliance upon the authority of said firm as experts in giving said report. APPENDIX A: FINANCIAL STATEMENTS B-35 APPENDIX A - FINANCIAL STATEMENTS ESC STRATEGIC FUNDS, INC. ESC STRATEGIC INCOME FUND Portfolio of Investments -- March 31, 1999 CREDIT PRINCIPAL RATING # AMOUNT/ MARKET (UNAUDITED) SHARES VALUE - ----------- --------- ------ CORPORATE OBLIGATIONS -- 83.7% BEVERAGES -- 1.7% B1/B+ Canandaigua Brands, Inc., 8.50%, 3/1/2009.......... $132,000 $ 134,640 ----------- CABLE -- 2.8% B1/B+ Adelphia Communications, 9.88%, 3/1/2007... 200,000 218,000 ----------- CONSUMER GOODS & SERVICES -- 2.5% Ba3/B+ Finlay Fine Jewelry Corp., 8.38%, 5/1/2008.......... 200,000 196,000 ----------- ENTERTAINMENT -- 3.7% B2/B President Casinos, Inc., 13.00%, 9/15/2001, Callable 9/15/1999 @ 102............. 220,000 193,600 B3/B Regal Cinemas, Inc., 9.50%, 6/1/2008, Callable 6/1/2003 @ 104.75.......... 93,000 95,093 ----------- 288,693 ----------- FOOD PRODUCTS -- 7.6% B1/B+ Chiquita Brands, 9.63%, 1/15/2004......... 250,000 257,812 B3/B+ Fleming Co., 10.68%, 7/31/2007, Callable 7/31/2002 @ 105.31.......... 200,000 184,500 B3/B Packaged Ice, Inc., 9.75%, 2/1/2005, Callable 2/1/2002 @ 104.875......... 148,000 148,000 ----------- 590,312 ----------- GAMING -- 2.6% B2/B Hollywood Park, Inc., 9.50%, 8/1/2007.......... 200,000 205,000 ----------- CREDIT PRINCIPAL RATING # AMOUNT/ MARKET (UNAUDITED) SHARES VALUE - ----------- --------- ------ GENERAL INDUSTRIES & MANUFACTURING -- 9.9% B3/B Envirosource, Inc., 9.75%, 6/15/2003......... $260,000 $ 208,000 B3/B- International Wire Group, 11.75%, 6/1/2005.......... 250,000 264,375 B1/B+ Nortek, Inc., 9.13%, 9/1/2007, Callable 9/1/2002 @ 104.56.......... 290,000 300,874 ----------- 773,249 ----------- HEALTH CARE -- 2.4% B1/B+ NBTY, Inc., 8.63%, 9/15/2007, Callable 9/15/2002 @ 104.313......... 200,000 187,000 ----------- INDUSTRIAL GOODS & SERVICES -- 2.1% Nr/Nr Premiere Technologies, 5.75%, 7/1/2004... 250,000 164,375 ----------- MANUFACTURING -- CONSUMER GOODS -- 3.8% B2/B Applied Extrusion Tech., 11.50%, 4/1/2002.......... 200,000 204,000 B2/B Polymer Group, Inc., 9.00%, 7/1/2007... 91,000 92,138 ----------- 296,138 ----------- MEDIA -- CABLE -- 7.0% B1/B Helicon Group, Inc., 11.00%, 11/1/2003......... 250,000 263,438 B2/B Intermedia Capital Partners, 11.25%, 8/1/2006.......... 250,000 281,250 ----------- 544,688 ----------- See accompanying notes to financial statements. 1 ESC STRATEGIC FUNDS, INC. ESC STRATEGIC INCOME FUND Portfolio of Investments (continued) -- March 31, 1999 CREDIT PRINCIPAL RATING # AMOUNT/ MARKET (UNAUDITED) SHARES VALUE - ----------- --------- ------ CORPORATE OBLIGATIONS (CONTINUED) MEDIA -- NON CABLE -- 5.3% B3/B- Allbritton Communications, 9.75%, 11/30/2007........ $185,000 $ 196,794 B3/B- Gray Communications Systems, 10.63%, 10/1/2006, Callable 10/1/2001 @ 105.31.......... 200,000 212,000 ----------- 408,794 ----------- OIL & GAS -- 5.0% B1/BB- Cliffs Drilling Co., 10.25%, 5/15/2003......... 200,000 192,000 B2/B- Plains Resources, Inc., 10.25%, 3/15/2006......... 200,000 198,000 ----------- 390,000 ----------- PAPER PRODUCTS -- 2.5% B2/B- Repap New Brunswick, 9.00%, 6/1/2004, Callable 6/1/2002 @ 104.5........... 200,000 193,500 ----------- RETAIL -- 2.7% B3/B- Tropical Sportswear International, 11.00%, 6/15/2008......... 200,000 209,500 ----------- STEEL/IRON -- 2.5% B2/B Weirton Steel Corp., 11.38%, 7/1/2004, Callable 7/1/2002 @ 105.69.......... 200,000 192,000 ----------- CREDIT PRINCIPAL RATING # AMOUNT/ MARKET (UNAUDITED) SHARES VALUE - ----------- --------- ------ TELECOMMUNICATIONS -- 9.3% B2/B Paging Network, 10.00%, 10/15/2008, Callable 10/15/2001 @ 105.. $200,000 $ 170,000 Nr/Nr Pathnet, Inc., 12.25%, 4/15/2008, Callable 4/15/2003 @ 106.125......... 250,000 135,000 B3/B- Rural Cellular Corp., 9.63%, 5/15/2008, Callable 5/15/2003 @ 104.813......... 200,000 208,500 B3/B- USA Mobile Communication, 9.50%, 2/1/2004, Callable 2/1/1999 @ 104.75.......... 250,000 209,999 ----------- 723,499 ----------- TEXTILES -- 6.0% B3/B Hartmarx Corp., 10.88%, 1/15/2002......... 250,000 257,500 B2/B+ Pillowtex Corp., 10.00%, 11/15/2006........ 200,000 209,500 ----------- 467,000 ----------- TRANSPORTATION -- 4.3% Ba3/BBB Greyhound Lines, 11.50%, 4/15/2007......... 290,000 333,500 ----------- TOTAL CORPORATE OBLIGATIONS....... 6,515,888 ----------- PREFERRED STOCKS -- 2.7% PUBLISHING & PRINTING -- 2.7% B2/B Primedia Corp.,..... 200,000 208,000 ----------- TOTAL PREFERRED STOCKS............ 208,000 ----------- See accompanying notes to financial statements. 2 ESC STRATEGIC FUNDS, INC. ESC STRATEGIC INCOME FUND Portfolio of Investments (continued) -- March 31, 1999 PRINCIPAL AMOUNT/ MARKET SHARES VALUE --------- ------ COMMON STOCKS -- 0.0% OIL & GAS TRANSMISSION -- 0.0% Star Gas Partner, L.P. ............. 107 $ 856 ----------- TOTAL COMMON STOCKS............ 856 ----------- RIGHTS & WARRANTS -- 0.0% WARRANT -- 0.0% Pathnet Warrants.... 250 3 ----------- TOTAL RIGHTS & WARRANTS.......... 3 ----------- SHORT-TERM INVESTMENTS -- 12.1% CASH SWEEP ACCOUNT -- 12.1% Union Bank of California........ $940,355 940,355 ----------- TOTAL SHORT-TERM INVESTMENTS....... 940,355 ----------- TOTAL INVESTMENTS -- 98.5% (COST $7,666,404)(1)........... 7,665,102 OTHER ASSETS AND LIABILITIES (NET) -- 1.5%................ 113,344 ----------- NET ASSETS -- 100.0%.......... $ 7,778,446 =========== Percentages indicated are based on net assets of $7,778,446. (1) Cost for book and federal income tax purposes were substantially the same as of March 31, 1999. Gross unrealized appreciation and depreciation on investment securities, based on cost for Federal income tax purposes is as follows: Unrealized appreciation................. $ 145,712 Unrealized depreciation................. (147,014) --------- Net unrealized depreciation............. $ (1,302) ========= # See page 17 for Credit Ratings. See accompanying notes to financial statements. 3 ESC STRATEGIC FUNDS, INC. Statements of Assets and Liabilities March 31, 1999
INTERNATIONAL INCOME EQUITY SMALL CAP APPRECIATION SMALL CAP II FUND FUND FUND FUND FUND ---------- ------------- ------------ ------------ ------------ ASSETS Investments, at value (cost $7,666,404; $7,791,483; $103,802,828; $21,614,113; and $32,316,880 respectively)...................... $7,665,102 $9,236,750 $100,313,282 $23,643,498 $27,891,585 Repurchase Agreements, at cost................... -- -- 9,967,809 1,586,100 3,770,800 ---------- ---------- ------------ ----------- ----------- Total Investments.......................... 7,665,102 9,236,750 110,281,091 25,229,598 31,662,385 ---------- ---------- ------------ ----------- ----------- Foreign Currency (cost $0; $7,094; $0; $0; and $0 respectively).................................. -- 7,092 -- -- -- Interest and dividends receivable................ 191,515 22,986 33,484 40,325 8,036 Receivable for securities sold................... -- 622,767 205,343 245,618 -- Witholding tax reclaim receivable................ -- 17,293 -- -- -- Receivable for fund shares sold.................. -- -- 13,000 -- -- Unamortized organizational expense............... 739 934 657 2,093 -- Prepaid expenses................................. 5,459 6,445 144 4,356 8,643 ---------- ---------- ------------ ----------- ----------- Total Assets............................... 7,862,815 9,914,267 110,533,719 25,521,990 31,679,064 ---------- ---------- ------------ ----------- ----------- LIABILITIES Payable for return of collateral received........ -- -- 12,467,809 1,586,100 3,770,800 Income distribution payable...................... 52,883 -- -- -- -- Payable for fund shares repurchased.............. -- -- 347,225 36,040 75,161 Payable for securities purchased................. -- 176,197 727,030 528,455 263,377 Payable for currency contract.................... -- 7 -- -- -- Advisory fee payable............................. 2,549 6,233 85,758 18,371 19,318 Administration fee payable....................... 161 194 1,992 475 564 12b-1 Distribution fee payable................... 1,890 2,761 31,024 6,956 9,167 Professional fees payable........................ 19,643 19,022 39,928 21,041 20,866 Other accrued expenses........................... 7,243 14,010 18,032 8,159 7,257 ---------- ---------- ------------ ----------- ----------- Total Liabilities.......................... 84,369 218,424 13,718,798 2,205,597 4,166,510 ---------- ---------- ------------ ----------- ----------- NET ASSETS................................. $7,778,446 $9,695,843 $ 96,814,921 $23,316,393 $27,512,554 ========== ========== ============ =========== ===========
See accompanying notes to financial statements. 18 ESC STRATEGIC FUNDS, INC. Statements of Assets and Liabilities -- (Continued) March 31, 1999
INTERNATIONAL INCOME EQUITY SMALL CAP APPRECIATION SMALL CAP II FUND FUND FUND FUND FUND ---------- ------------- ------------ ------------ ------------ Net Assets Consist of: Shares, at par ($0.001).......................... $ 796 $ 907 $ 5,862 $ 2,183 $ 2,872 Additional paid-in capital....................... 7,831,835 7,450,154 97,789,821 20,167,910 35,194,801 Undistributed (distributions in excess of) net investment income.............................. (52,883) (26,128) -- -- -- Accumulated net realized gain/(loss) on investments and foreign currency transactions................................... -- 822,727 2,508,784 1,116,915 (3,259,824) Net unrealized appreciation/(depreciation) on investments and foreign currency translations................................... (1,302) 1,448,183 (3,489,546) 2,029,385 (4,425,295) ---------- ---------- ------------ ----------- ----------- NET ASSETS....................................... $7,778,446 $9,695,843 $ 96,814,921 $23,316,393 $27,512,554 ========== ========== ============ =========== =========== Class A.......................................... $7,230,434 $7,815,990 $ 74,739,484 $18,916,483 $20,077,441 Class D.......................................... $ 548,012 $1,879,853 $ 22,075,437 $ 4,399,910 $ 7,435,113 ---------- ---------- ------------ ----------- ----------- $7,778,446 $9,695,843 $ 96,814,921 $23,316,393 $27,512,554 ========== ========== ============ =========== =========== SHARES OF BENEFICIAL INTEREST Class A Shares of beneficial interest issued and outstanding.................................. 740,072 727,019 4,504,805 1,762,710 2,090,287 ========== ========== ============ =========== =========== Net Asset Value and redemption price per share outstanding.................................. $ 9.77 $ 10.75 $ 16.59 $ 10.73 $ 9.61 ========== ========== ============ =========== =========== Maximum Offering Price per share ($9.77/.955, $10.75/.955, $16.59/.955, $10.73/.955, $9.61/.955 respectively)..................... $ 10.23 $ 11.26 $ 17.37 $ 11.24 $ 10.06 ========== ========== ============ =========== =========== Class D Shares of beneficial interest issued and outstanding.................................. 55,694 179,858 1,357,437 420,184 781,351 ========== ========== ============ =========== =========== Net Asset Value and redemption price per share outstanding.................................. $ 9.84 $ 10.45 $ 16.26 $ 10.47 $ 9.52 ========== ========== ============ =========== =========== Maximum Offering Price per share ($9.84/.985, $10.45/.985, $16.26/.985, $10.47/.985, $9.52/.985 respectively)..................... $ 9.99 $ 10.61 $ 16.51 $ 10.63 $ 9.66 ========== ========== ============ =========== ===========
See accompanying notes to financial statements. 19 ESC STRATEGIC FUNDS, INC. Statements of Operations For the Year Ended March 31, 1999
INCOME INTERNATIONAL SMALL CAP APPRECIATION SMALL CAP II FUND EQUITY FUND FUND FUND FUND ---------- ------------- ------------ ------------ ------------ Investment Income Interest............................... $1,149,476 $ 35,505 $ 763,213 $ 80,019 $ 220,516 Dividend (net of withholding tax of $0; $13,441; $0; $4,748 and $0, respectively)........................ 25,010 216,458 741,330 388,643 113,811 Income from Securities Lending Activities........................... -- -- 63,322 10,606 13,279 ---------- ----------- ------------ ----------- ------------ Total income........................... 1,174,486 251,963 1,567,865 479,268 347,606 ---------- ----------- ------------ ----------- ------------ Expenses Advisory............................... 167,336 125,548 1,252,991 318,584 382,702 Administration......................... 25,100 18,832 187,949 47,788 45,924 Fund accounting........................ 36,948 39,734 34,549 35,894 33,144 Professional fees...................... 21,824 16,107 57,254 25,149 21,886 Custodian.............................. 6,147 32,746 17,166 6,135 5,780 Transfer agent fees and expenses....... 24,911 26,408 197,205 41,052 81,518 12b-1 Distribution fees--Class A....... 40,024 25,557 241,928 64,288 54,274 12b-1 Distribution fees--Class D....... 5,428 17,490 213,957 46,073 66,798 Directors fees......................... 1,809 592 21,858 3,187 3,180 Amortization of organizational costs... 8,528 8,414 11,470 8,414 -- Miscellaneous.......................... 38,145 19,860 149,438 57,311 44,868 ---------- ----------- ------------ ----------- ------------ Total expenses before waivers.......... 376,200 331,288 2,385,765 653,875 740,074 Less: expenses waived/reimbursed....... (53,473) (12,791) -- (2,255) (82,843) ---------- ----------- ------------ ----------- ------------ Net expenses........................... 322,727 318,497 2,385,765 651,620 657,231 ---------- ----------- ------------ ----------- ------------ Net investment income/(loss)............. 851,759 (66,534) (817,900) (172,352) (309,625) ---------- ----------- ------------ ----------- ------------ Net realized gain/(loss) on investments and foreign currency transactions...... 57,784 1,024,996 2,508,888 1,116,912 (2,810,903) Net change unrealized appreciation/(depreciation) of investments and foreign currency translations........................... (193,923) (1,842,011) (42,488,775) (9,813,011) (8,261,391) ---------- ----------- ------------ ----------- ------------ Net realized and unrealized gain/(loss)............................ (136,139) (817,015) (39,979,887) (8,696,099) (11,072,294) ---------- ----------- ------------ ----------- ------------ Net increase/(decrease) in net assets resulting from operations.............. $ 715,620 $ (883,549) $(40,797,787) $(8,868,451) $(11,381,919) ========== =========== ============ =========== ============
See accompanying notes to financial statements. 20 ESC STRATEGIC FUNDS, INC. Statements of Changes in Net Assets
INCOME FUND INTERNATIONAL EQUITY FUND -------------------------------- -------------------------------- YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED MARCH 31, 1999 MARCH 31, 1998 MARCH 31, 1999 MARCH 31, 1998 -------------- -------------- -------------- -------------- Operations: Net investment income/(loss)......... $ 851,759 $ 1,494,331 $ (66,534) $ (115,193) Net realized gain/(loss) on investments and foreign currency transactions....................... 57,784 315,559 1,024,996 2,620,302 Net change unrealized appreciation/ (depreciation) of investments and foreign currency translations...... (193,923) 506,910 (1,842,011) 1,602,799 ------------ ------------ ----------- ------------ Net increase in net assets resulting from operations...................... 715,620 2,316,800 (883,549) 4,107,908 ------------ ------------ ----------- ------------ Dividends and Distributions to Shareholders: From net investment income Class A............................ (759,547) (1,452,325) -- -- Class D............................ (32,600) (42,035) -- -- ------------ ------------ ----------- ------------ (792,147) (1,494,360) -- -- ------------ ------------ ----------- ------------ From tax return of capital Class A............................ (76,574) -- -- -- Class D............................ (3,289) -- -- -- ------------ ------------ ----------- ------------ (79,863) -- -- -- ------------ ------------ ----------- ------------ From net realized gains Class A............................ (104,773) -- (712,147) (1,988,043) Class D............................ (9,574) -- (192,848) (658,846) ------------ ------------ ----------- ------------ (114,347) -- (904,995) (2,646,889) ------------ ------------ ----------- ------------ Change in net assets resulting from dividends and distributions to shareholders....................... (986,357) (1,494,360) (904,995) (2,646,889) ------------ ------------ ----------- ------------ Capital Share Transactions: Proceeds from sales of shares Class A............................ 926,359 1,530,230 1,144,165 1,271,346 Class D............................ 155,831 172,805 124,302 162,830 ------------ ------------ ----------- ------------ 1,082,190 1,703,035 1,268,467 1,434,176 ------------ ------------ ----------- ------------ Net asset value of shares issued to shareholders in reinvestment of dividends and distributions: Class A............................ 894,208 1,298,541 582,876 1,337,906 Class D............................ 40,551 36,502 192,848 658,846 ------------ ------------ ----------- ------------ 934,759 1,335,043 775,724 1,996,752 ------------ ------------ ----------- ------------ Net asset value of shares redeemed: Class A............................ (18,743,090) (11,722,261) (5,735,950) (8,953,584) Class D............................ (460,910) (827,987) (885,822) (2,362,618) ------------ ------------ ----------- ------------ (19,204,000) (12,550,248) (6,621,772) (11,316,202) ------------ ------------ ----------- ------------ Change in net assets from capital share transactions................. (17,187,051) (9,512,170) (4,577,581) (7,885,274) ------------ ------------ ----------- ------------ Total change in net assets............. (17,457,788) (8,689,730) (6,366,125) (6,424,255) Net Assets: Beginning of Period.................. 25,236,234 33,925,964 16,061,968 22,486,223 ------------ ------------ ----------- ------------ End of Period........................ $ 7,778,446 $ 25,236,234 $ 9,695,843 $ 16,061,968 ============ ============ =========== ============
See accompanying notes to financial statements. 21 ESC STRATEGIC FUNDS, INC. Statements of Changes in Net Assets (continued)
SMALL CAP FUND APPRECIATION FUND -------------------------------- -------------------------------- YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED MARCH 31, 1999 MARCH 31, 1998 MARCH 31, 1999 MARCH 31, 1998 -------------- -------------- -------------- -------------- Operations: Net investment income/(loss)......... $ (817,900) $ (409,168) $ (172,352) $ (219,043) Net realized gain/(loss) on investments and foreign currency transactions....................... 2,508,888 13,586,328 1,116,912 12,458,936 Net change unrealized appreciation/ (depreciation) of investments and foreign currency translations...... (42,488,775) 30,415,943 (9,813,011) 6,933,791 ------------ ------------ ------------ ------------ Net increase in net assets resulting from operations...................... (40,797,787) 43,593,103 (8,868,451) 19,173,684 ------------ ------------ ------------ ------------ Dividends and Distributions to Shareholders: From net realized gains Class A............................ (2,603,327) (8,972,632) (2,762,177) (9,402,699) Class D............................ (765,335) (2,767,599) (692,033) (1,466,362) ------------ ------------ ------------ ------------ (3,368,662) (11,740,231) (3,454,210) (10,869,061) ------------ ------------ ------------ ------------ Capital Share Transactions: Proceeds from sales of shares Class A............................ 8,371,667 35,090,045 2,982,123 6,480,292 Class D............................ 1,473,645 8,450,667 1,227,616 2,468,392 ------------ ------------ ------------ ------------ 9,845,312 43,540,712 4,209,739 8,948,684 ------------ ------------ ------------ ------------ Net asset value of shares issued to shareholders in reinvestment of dividends and distributions: Class A............................ 2,359,265 8,110,200 2,596,704 8,381,574 Class D............................ 764,367 2,759,244 691,921 1,440,941 ------------ ------------ ------------ ------------ 3,123,632 10,869,444 3,288,625 9,822,515 ------------ ------------ ------------ ------------ Net asset value of shares redeemed: Class A............................ (28,936,985) (12,927,511) (10,175,152) (34,006,037) Class D............................ (8,181,883) (3,084,106) (2,462,053) (1,113,196) ------------ ------------ ------------ ------------ (37,118,868) (16,011,617) (12,637,205) (35,119,233) ------------ ------------ ------------ ------------ Change in net assets from capital share transactions................. (24,149,924) 38,398,539 (5,138,841) (16,348,034) ------------ ------------ ------------ ------------ Total change in net assets............. (68,316,373) 70,251,411 (17,461,502) (8,043,411) Net Assets: Beginning of Period.................. 165,131,294 94,879,883 40,777,895 48,821,306 ------------ ------------ ------------ ------------ End of Period........................ $ 96,814,921 $165,131,294 $ 23,316,393 $ 40,777,895 ============ ============ ============ ============
See accompanying notes to financial statements. 22 ESC STRATEGIC FUNDS, INC. Statements of Changes in Net Assets (continued)
SMALL CAP II FUND -------------------------------- YEAR ENDED YEAR ENDED MARCH 31, 1999 MARCH 31, 1998 -------------- -------------- Operations: Net investment income/(loss).............................. $ (309,625) $ (83,519) Net realized gain/(loss) on investments................... (2,810,903) 601,246 Net change unrealized appreciation/(depreciation) of investments............................................. (8,261,391) 3,963,507 ------------ ----------- Net increase/(decrease) in net assets resulting from operations................................................ (11,381,919) 4,481,234 ------------ ----------- Dividends and Distributions to Shareholders: Distributions from net realized gains Class A................................................. -- (388,459) Class D................................................. -- (187,036) ------------ ----------- -- (575,495) ------------ ----------- Distributions in excess of realized gains Class A................................................. -- (271,796) Class D................................................. -- (130,865) ------------ ----------- -- (402,661) ------------ ----------- Change in net assets resulting from dividends and distributions to shareholders........................... -- (978,156) ------------ ----------- Capital Share Transactions: Proceeds from sales of shares Class A................................................. 14,824,338 14,983,054 Class D................................................. 4,282,060 7,349,742 ------------ ----------- 19,106,398 22,332,796 ------------ ----------- Net asset value of shares issued to shareholders in reinvestment of dividends and distributions: Class A................................................. -- 610,656 Class D................................................. -- 312,261 ------------ ----------- -- 922,917 ------------ ----------- Net asset value of shares redeemed: Class A................................................. (6,663,800) (934,557) Class D................................................. (3,179,324) (348,585) ------------ ----------- (9,843,124) (1,283,142) ------------ ----------- Change in net assets from capital share transactions...... 9,263,274 21,972,571 ------------ ----------- Total change in net assets.................................. (2,118,645) 25,475,649 Net Assets: Beginning of Period....................................... 29,631,199 4,155,550 ------------ ----------- End of Period............................................. $ 27,512,554 $29,631,199 ============ ===========
See accompanying notes to financial statements. 23 ESC STRATEGIC FUNDS, INC. Financial Highlights
INCOME FUND ---------------------------------------------------------------------------------- CLASS A ---------------------------------------------------------------------------------- MAY 4, 1994 (COMMENCEMENT OF OPERATIONS) YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED THROUGH MARCH 31, 1999 MARCH 31, 1998 MARCH 31, 1997 MARCH 31, 1996 MARCH 31, 1995 -------------- -------------- -------------- -------------- -------------- Net asset value per share, beginning of period.......... $ 9.99 $ 9.73 $ 9.89 $ 9.94 $ 10.00 ------ ------- ------- ------- ------- Income from Investment Operations Net investment income/(loss).............. 0.51(a) 0.34 0.60 0.59 0.55 Net realized and unrealized gains/ (losses) on investments................ 0.04 0.44 (0.16) 0.16 (0.05) ------ ------- ------- ------- ------- Total from investment operations................... 0.55 0.78 0.44 0.75 0.50 ------ ------- ------- ------- ------- Less Dividends and Distributions: From net investment income... (0.57) (0.52) (0.60) (0.59) (0.01) From tax return of capital... (0.05) -- -- -- -- From realized gains.......... (0.15) -- -- (0.21) (0.55) ------ ------- ------- ------- ------- Total Dividends and Distributions................ (0.77) (0.52) (0.60) (0.80) (0.56) ------ ------- ------- ------- ------- Net asset value per share, end of period.............. $ 9.77 $ 9.99 $ 9.73 $ 9.89 $ 9.94 ====== ======= ======= ======= ======= Total Return (excludes sales charge).................... 5.64% 8.18% 3.91% 7.67% 5.30% Ratios/Supplemental Data: Net Assets End of Period (in thousands)................. $7,230 $24,413 $32,506 $36,891 $32,373 Ratios to Average Net Assets of: Net investment income/(loss)............ 5.09% 5.27% 5.49% 5.87% 6.29%* Expenses net of waivers/ reimbursements and expenses paid by third parties.................. 1.91% 1.87% 1.65% 1.70% 1.85%* Expenses before waivers/ reimbursements and expenses paid by third parties.................. 2.22% 1.87% 1.70% 1.75% 1.86%* Portfolio Turnover Rate.... 95% 130% 123% 138% 92%
(a) Calculated using the average share method. * Annualized. 24 ESC STRATEGIC FUNDS, INC. Financial Highlights (continued)
INCOME FUND ---------------------------------------------------------------------------------- CLASS D ---------------------------------------------------------------------------------- MAY 4, 1994 (COMMENCEMENT OF OPERATIONS) YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED THROUGH MARCH 31, 1999 MARCH 31, 1998 MARCH 31, 1997 MARCH 31, 1996 MARCH 31, 1995 -------------- -------------- -------------- -------------- -------------- Net asset value per share, beginning of period.......... $ 9.99 $ 9.73 $ 9.89 $ 9.94 $10.00 ------ ------ ------ ------ ------ Income from Investment Operations Net investment income/(loss).............. 0.50(a) 0.28 0.50 0.54 0.50 Net realized and unrealized gains/ (losses) on investments................ 0.01 0.45 (0.16) 0.16 (0.05) ------ ------ ------ ------ ------ Total from investment operations................... 0.51 0.73 0.34 0.70 0.45 ------ ------ ------ ------ ------ Less Dividends and Distributions: From net investment income... (0.46) (0.47) (0.50) (0.54) (0.01) From tax return of capital... (0.05) -- -- -- -- From realized gains.......... (0.15) -- -- (0.21) (0.50) ------ ------ ------ ------ ------ Total Dividends and Distributions................ (0.66) (0.47) (0.50) (0.75) (0.51) ------ ------ ------ ------ ------ Net asset value per share, end of period.............. $ 9.84 $ 9.99 $ 9.73 $ 9.89 $ 9.94 ====== ====== ====== ====== ====== Total Return (excludes sales charge).................... 5.23% 7.64% 3.39% 7.11% 4.74% Ratios/Supplemental Data: Net Assets End of Period (in thousands)................. $ 548 $ 823 $1,420 $1,446 $1,241 Ratios to Average Net Assets of: Net investment income/(loss)............ 5.03% 4.77% 4.99% 5.37% 5.73%* Expenses net of waivers/ reimbursements and expenses paid by third parties.................. 2.44% 2.37% 2.15% 2.20% 2.29%* Expenses before waivers/ reimbursements and expenses paid by third parties.................. 2.96% 2.37% 2.21% 2.25% 2.31%* Portfolio Turnover Rate.... 95% 130% 123% 138% 92%
(a) Calculated using the average share method. * Annualized. 25 ESC STRATEGIC FUNDS, INC. Financial Highlights (continued)
INTERNATIONAL EQUITY FUND ---------------------------------------------------------------------------------- CLASS A ---------------------------------------------------------------------------------- MAY 12, 1994 (COMMENCEMENT) OF OPERATIONS) YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED THROUGH MARCH 31, 1999 MARCH 31, 1998 MARCH 31, 1997 MARCH 31, 1996 MARCH 31, 1995 -------------- -------------- -------------- -------------- -------------- Net asset value per share, beginning of period.......... $12.06 $ 11.66 $ 11.08 $ 9.90 $10.00 ------ ------- ------- ------- ------ Income from Investment Operations Net investment income/(loss).............. (0.06) -- (0.04) (0.04) (0.05) Net realized and unrealized gains/(losses) on investments................ (0.31) 2.37 0.97 1.46 (0.03) ------ ------- ------- ------- ------ Total from investment operations................... (0.37) 2.37 0.93 1.42 (0.08) ------ ------- ------- ------- ------ Less Dividends and Distributions: From realized gains.......... (0.94) (1.97) (0.35) (0.24) (0.02)(a) ------ ------- ------- ------- ------ Net asset value per share, end of period.............. $10.75 $ 12.06 $ 11.66 $ 11.08 $ 9.90 ====== ======= ======= ======= ====== Total Return (excludes sales charge).................... (2.22%) 22.24% 8.44% 14.41% (0.84%) Ratios/Supplemental Data: Net Assets End of Period (in thousands)................. $7,816 $13,286 $18,282 $14,597 $9,213 Ratios to Average Net Assets of: Net investment income/(loss)............ (0.44%) (0.50%) (0.40%) (0.36%) (0.65%)* Expenses net of waivers/ reimbursements and expenses paid by third parties.................. 2.45% 2.48% 2.25% 2.37% 2.50%* Expenses before waivers/ reimbursements and expenses paid by third parties.................. 2.55% 2.48% 2.25% 2.43% 3.22%* Portfolio Turnover Rate.... 123% 79% 94% 92% 76%
(a) Represents distribution in excess of net investment income. * Annualized. 26 ESC STRATEGIC FUNDS, INC. Financial Highlights (continued)
INTERNATIONAL EQUITY FUND ---------------------------------------------------------------------------------- CLASS D ---------------------------------------------------------------------------------- MAY 12, 1994 (COMMENCEMENT) OF OPERATIONS) YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED THROUGH MARCH 31, 1999 MARCH 31, 1998 MARCH 31, 1997 MARCH 31, 1996 MARCH 31, 1995 -------------- -------------- -------------- -------------- -------------- Net asset value per share, beginning of period.......... $11.81 $11.47 $10.95 $ 9.82 $10.00 ------ ------ ------ ------ ------ Income from Investment Operations Net investment income/(loss).............. (0.16) (0.13) (0.10) (0.09) (0.07) Net realized and unrealized gains/(losses) on investments................ (0.26) 2.44 0.97 1.46 (0.10) ------ ------ ------ ------ ------ Total from investment operations................... (0.42) 2.31 0.87 1.37 (0.17) ------ ------ ------ ------ ------ Less Dividends and Distributions: From realized gains.......... (0.94) (1.97) (0.35) (0.24) (0.01)(a) ------ ------ ------ ------ ------ Net asset value per share, end of period.............. $10.45 $11.81 $11.47 $10.95 $ 9.82 ====== ====== ====== ====== ====== Total Return (excludes sales charge).................... (2.73%) 22.09% 7.99% 14.01% (1.72%) Ratios/Supplemental Data: Net Assets End of Period (in thousands)................. $1,880 $2,776 $4,204 $3,725 $3,322 Ratios to Average Net Assets of: Net investment income/(loss)............ (0.94%) (1.00%) (0.90%) (0.83%) (1.51%)* Expenses net of waivers/ reimbursements and expenses paid by third parties.................. 2.95% 2.98% 2.78% 2.87% 2.98%* Expenses before waivers/ reimbursements and expenses paid by third parties.................. 3.05% 2.98% 2.79% 2.96% 3.69%* Portfolio Turnover Rate.... 123% 79% 94% 92% 76%
(a) Represents distribution in excess of net investment income. * Annualized. 27 ESC STRATEGIC FUNDS, INC. Financial Highlights (continued)
SMALL CAP FUND ---------------------------------------------------------------------------------- CLASS A ---------------------------------------------------------------------------------- JUNE 8, 1994 (COMMENCEMENT OF OPERATIONS) YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED THROUGH MARCH 31, 1999 MARCH 31, 1998 MARCH 31, 1997 MARCH 31, 1996 MARCH 31, 1995 -------------- -------------- -------------- -------------- -------------- Net asset value per share, beginning of period.......... $ 22.81 $ 17.55 $ 15.88 $ 11.25 $10.00 ------- -------- ------- ------- ------ Income from Investment Operations Net investment income/(loss).............. (0.12) 0.02 (0.05) (0.08) (0.03) Net realized and unrealized gains/ (losses) on investments................ (5.59) 6.97 2.46 5.19 1.52 ------- -------- ------- ------- ------ Total from investment operations................... (5.71) 6.99 2.41 5.11 1.49 ------- -------- ------- ------- ------ Less Dividends and Distributions: From net investment income... -- -- -- -- (0.24) From realized gains.......... (0.51) (1.73) (0.74) (0.48) -- ------- -------- ------- ------- ------ Total Dividends and Distributions................ (0.51) (1.73) (0.74) (0.48) (0.24) ------- -------- ------- ------- ------ Net asset value per share, end of period.............. $ 16.59 $ 22.81 $ 17.55 $ 15.88 $11.25 ======= ======== ======= ======= ====== Total Return (excludes sales charge).................... (24.97%) 40.64% 14.99% 45.88% 15.03% Ratios/Supplemental Data: Net Assets End of Period (in thousands)................. $74,740 $126,857 $72,488 $28,840 $8,785 Ratios to Average Net Assets of: Net investment income/(loss)............ (0.54%) (0.18%) (0.44%) (0.80%) (0.43%)* Expenses net of waivers/ reimbursements and expenses paid by third parties.................. 1.79% 1.65% 1.66% 2.00% 2.00%* Expenses before waivers/ reimbursements and expenses paid by third parties**................ 1.79% 1.68% 1.74% 2.18% 3.28%* Portfolio Turnover Rate.... 57% 67% 65% 102% 151%
* Annualized. ** For the year ended March 31, 1999, there were no waivers or reimbursements. 28 ESC STRATEGIC FUNDS, INC. Financial Highlights (continued)
SMALL CAP FUND ---------------------------------------------------------------------------------- CLASS D ---------------------------------------------------------------------------------- JUNE 8, 1994 (COMMENCEMENT OF OPERATIONS) YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED THROUGH MARCH 31, 1999 MARCH 31, 1998 MARCH 31, 1997 MARCH 31, 1996 MARCH 31, 1995 -------------- -------------- -------------- -------------- -------------- Net asset value per share, beginning of period.......... $ 22.50 $ 17.35 $ 15.76 $11.22 $10.00 ------- ------- ------- ------ ------ Income from Investment Operations Net investment income/(loss).............. (0.22) (0.07) (0.11) (0.16) (0.05) Net realized and unrealized gains/ (losses) on investments................ (5.51) 6.95 2.44 5.18 1.51 ------- ------- ------- ------ ------ Total from investment operations................... (5.73) 6.88 2.33 5.02 1.46 ------- ------- ------- ------ ------ Less Dividends and Distributions: From net investment income... -- -- -- -- (0.24) From realized gains.......... (0.51) (1.73) (0.74) (0.48) -- ------- ------- ------- ------ ------ Total Dividends and Distributions................ (0.51) (1.73) (0.74) (0.48) (0.24) ------- ------- ------- ------ ------ Net asset value per share, end of period.............. $ 16.26 $ 22.50 $ 17.35 $15.76 $11.22 ======= ======= ======= ====== ====== Total Return (excludes sales charge).................... (25.40%) 40.47% 14.59% 45.19% 14.72% Ratios/Supplemental Data: Net Assets End of Period (in thousands)................. $22,075 $38,274 $22,392 $8,897 $3,367 Ratios to Average Net Assets of: Net investment income/(loss)............ (1.04%) (0.68%) (0.96%) (1.30%) (0.93%)* Expenses net of waivers/ reimbursements and expenses paid by third parties.................. 2.29% 2.15% 2.19% 2.50% 2.50%* Expenses before waivers/ reimbursements and expenses paid by third parties**................ 2.29% 2.18% 2.29% 2.74% 3.68%* Portfolio Turnover Rate.... 57% 67% 65% 102% 151%
* Annualized. ** For the year ended March 31, 1999, there were no waivers or reimbursements. 29 ESC STRATEGIC FUNDS, INC. Financial Highlights (continued)
APPRECIATION FUND ---------------------------------------------------------------------------------- CLASS A ---------------------------------------------------------------------------------- JULY 6, 1994 (COMMENCEMENT) OF OPERATIONS) YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED THROUGH MARCH 31, 1999 MARCH 31, 1998 MARCH 31, 1997 MARCH 31, 1996 MARCH 31, 1995 -------------- -------------- -------------- -------------- -------------- Net asset value per share, beginning of period.......... $ 15.80 $ 14.03 $ 13.02 $ 10.67 $ 10.00 ------- ------- ------- ------- ------- Income from Investment Operations Net investment income/(loss).............. (0.06) 0.02 (0.04) (0.05) -- Net realized and unrealized gains/ (losses) on investments................ (3.50) 6.02 1.92 2.71 0.73 ------- ------- ------- ------- ------- Total from investment operations................... (3.56) 6.04 1.88 2.66 0.73 ------- ------- ------- ------- ------- Less Dividends and Distributions: From realized gains.......... (1.51) (4.27) (0.87) (0.31) (0.06) ------- ------- ------- ------- ------- Net asset value per share, end of period.............. $ 10.73 $ 15.80 $ 14.03 $ 13.02 $ 10.67 ======= ======= ======= ======= ======= Total Return (excludes sales charge).................... (22.43%) 46.73% 14.25% 25.07% 7.32% Ratios/Supplemental Data: Net Assets End of Period (in thousands)................. $18,916 $33,394 $44,767 $25,561 $15,126 Ratios to Average Net Assets of: Net investment income/(loss).............. (0.44%) (0.40%) (0.30%) (0.39%) (0.04%)* Expenses net of waivers/ reimbursements and expenses paid by third parties.................. 1.95% 1.80% 1.82% 2.00% 2.00%* Expenses before waivers/ reimbursements and expenses paid by third parties.................. 1.97% 1.80% 1.84% 2.10% 2.88%* Portfolio turnover rate.... 96% 67% 71% 78% 58%
* Annualized. 30 ESC STRATEGIC FUNDS, INC. Financial Highlights (continued)
APPRECIATION FUND ---------------------------------------------------------------------------------- CLASS D ---------------------------------------------------------------------------------- JULY 6, 1994 (COMMENCEMENT) OF OPERATIONS) YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED THROUGH MARCH 31, 1999 MARCH 31, 1998 MARCH 31, 1997 MARCH 31, 1996 MARCH 31, 1995 -------------- -------------- -------------- -------------- -------------- Net asset value per share, beginning of period.......... $ 15.54 $13.85 $12.91 $10.63 $10.00 ------- ------ ------ ------ ------ Income from Investment Operations Net investment income/(loss).............. (0.15) (0.08) (0.08) (0.09) (0.03) Net realized and unrealized gains/(losses) on investments................ (3.41) 6.04 1.89 2.68 0.72 ------- ------ ------ ------ ------ Total from investment operations................... (3.56) 5.96 1.81 2.59 0.69 ------- ------ ------ ------ ------ Less Dividends and Distributions: From realized gains.......... (1.51) (4.27) (0.87) (0.31) (0.06) ------- ------ ------ ------ ------ Net asset value per share, end of period.............. $ 10.47 $15.54 $13.85 $12.91 $10.63 ======= ====== ====== ====== ====== Total Return (excludes sales charge).................... (22.82%) 46.76% 13.81% 24.50% 6.92% Ratios/Supplemental Data: Net Assets End of Period (in thousands)................. $ 4,400 $7,384 $4,054 $2,482 $1,693 Ratios to Average Net Assets of: Net investment income/(loss).............. (0.94%) (0.90%) (0.78%) (0.86%) (0.56%)* Expenses net of waivers/ reimbursements and expenses paid by third parties.................. 2.45% 2.30% 2.34% 2.50% 2.50%* Expenses before waivers/ reimbursements and expenses paid by third parties.................. 2.47% 2.30% 2.36% 2.64% 3.40%* Portfolio turnover rate.... 96% 67% 71% 78% 58%
* Annualized. 31 ESC STRATEGIC FUNDS, INC. Financial Highlights (continued)
SMALL CAP II FUND ------------------------------------------------------------------------------- CLASS A CLASS D -------------------------------------- -------------------------------------- JANUARY 28, JANUARY 28, 1997 1997 YEAR YEAR (COMMENCEMENT) YEAR YEAR (COMMENCEMENT) ENDED ENDED OF OPERATIONS) ENDED ENDED OF OPERATIONS) MARCH 31, MARCH 31, THROUGH MARCH 31, MARCH 31, THROUGH 1999 1998 MARCH 31, 1997 1999 1998 MARCH 31, 1997 --------- --------- -------------- --------- --------- -------------- Net asset value per share, beginning of period.......... $ 13.68 $ 9.64 $10.00 $13.61 $ 9.63 $10.00 ------- ------- ------ ------ ------ ------ Income from Investment Operations Net investment income/(loss).............. (0.09) 0.01 -- (0.16) (0.03) -- Net realized and unrealized gains/(losses) on investments................ (3.98) 4.65 (0.36) (3.93) 4.63 (0.37) ------- ------- ------ ------ ------ ------ Total from investment operations................... (4.07) 4.66 (0.36) (4.09) 4.60 (0.37) ------- ------- ------ ------ ------ ------ Less Dividends and Distributions: From net investment income... -- (0.36) -- -- (0.36) -- From realized gains.......... -- (0.26) -- -- (0.26) -- ------- ------- ------ ------ ------ ------ Total Dividends and Distributions................ -- (0.62) -- -- (0.62) -- ------- ------- ------ ------ ------ ------ Net asset value per share, end of period.............. $ 9.61 $ 13.68 $ 9.64 $ 9.52 $13.61 $ 9.63 ======= ======= ====== ====== ====== ====== Total Return (excludes sales charge).................... (29.75%) 48.92% (3.60%) (30.05%) 48.33% (3.70%) Ratios/Supplemental Data: Net Assets End of Period (in thousands)................. $20,077 $19,942 $2,852 $7,435 $9,689 $1,304 Ratios to Average Net Assets of: Net investment income/(loss)............ (0.87%) (0.36%) 0.25%* (1.37%) (0.86%) (0.23%)* Expenses net of waivers/ reimbursements and expenses paid by third parties.................. 2.00% 1.62% 2.00%* 2.50% 2.12% 2.50%* Expenses before waivers/ reimbursements and expenses paid by third parties.................. 2.27% 2.45% 5.51%* 2.77% 2.95% 6.91%* Portfolio turnover rate.... 58% 86% 14% 58% 86% 14%
* Annualized. 32 ESC STRATEGIC FUNDS, INC. Notes to Financial Statements -- March 31, 1999 1. DESCRIPTION. ESC Strategic Funds, Inc. (the "Company") was incorporated in Maryland on November 24, 1993. The Company currently comprises five portfolios: ESC Strategic Income Fund, ESC Strategic International Equity Fund (formerly ESC Strategic Global Equity Fund), ESC Strategic Small Cap Fund, ESC Strategic Appreciation Fund, and ESC Strategic Small Cap II Fund (formerly ESC Strategic Growth Fund), (individually a "Fund"; collectively the "Funds"). The Company is registered under the Investment Company Act of 1940, as amended (the "1940 Act"), as an open-end management investment company. Each Fund, with the exception of ESC Strategic Small Cap Fund, operates as a diversified fund. ESC Strategic Small Cap Fund operates as a non-diversified fund. The Company's Articles of Incorporation authorize the issuance of two classes of common stock designated as Class A and Class D for each Fund. Class A shares are offered with a maximum front-end sales charge of 4.50% which may be reduced or waived in certain cases. Class A shares are also subject to a Service and Distribution Fee calculated at an annual rate of up to 0.25% of the average daily net asset value of Class A shares. Class D shares are offered with a front-end sales charge of 1.50% and are subject to a Service and Distribution Fee at an annual rate of up to 0.75% based on the average daily net asset value of Class D shares. The Company's Board of Directors may, in the future, authorize the issuance of additional classes of capital stock for the Funds. The Funds' investment objectives are as follows: ESC Strategic Income Fund -- To seek a high level of current income, with a secondary objective of total return. The Fund seeks to achieve its investment objective by investing primarily in high yield debt instruments of U.S. and foreign issuers that are rated below investment grade. (Prior to September 30, 1998, this Fund primarily invested in a diversified portfolio of corporate, government and other debt instruments of U.S. issuers.) ESC Strategic International Equity Fund -- To seek long-term capital appreciation. The Fund seeks to achieve its investment objective by primarily investing in a diversified portfolio of publicly traded common stocks and securities convertible into or exchangeable for common stock of non-U.S. issuers. (Prior to July 17, 1998, this Fund's investments were diversified across both domestic and international markets.) ESC Strategic Small Cap Fund -- To seek a high level of capital appreciation. The Fund pursues its objective by investing primarily in equity securities of domestic and foreign issuers. ESC Strategic Appreciation Fund -- To seek long-term capital appreciation. The Fund seeks to achieve its investment objective by primarily investing in a diversified portfolio of U.S. based companies publicly traded common stocks and securities convertible into or exchangeable for common stock. ESC Strategic Small Cap II Fund -- To seek a high level of capital appreciation. The Fund pursues its objective by investing primarily in equity securities of domestic and foreign issuers believed to offer superior opportunities for growth. 2. SIGNIFICANT ACCOUNTING POLICIES. The following is a summary of the significant accounting policies followed by the Funds in the preparation of their financial statements. The policies are in conformity with generally accepted accounting principles. The preparation of financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts and disclosures. Actual results could differ from those estimates. A. PORTFOLIO VALUATION. Investments in securities are valued at the last sales price on the securities exchange or the NASDAQ National Market System on which such securities are primarily traded or, if there are no 33 ESC STRATEGIC FUNDS, INC. Notes to Financial Statements (continued) -- March 31, 1999 trades, at the current bid price, as of 4:00 p.m. eastern time. Over-the-counter securities, or securities for which there were no transactions, are valued at the closing bid price. Bid price is used when no asked price is available. Bonds and other fixed income securities are valued by using market quotations, and may be valued on the basis of prices provided by a pricing service. Securities for which market quotations are not readily available are valued at fair value as determined in good faith by or at the direction of the Board of Directors. Short-term securities which mature in 60 days or less are valued at amortized cost, if their terms to maturity at purchase were 60 days or less, or by amortizing their value on the 61st day prior to maturity, if their original term to maturity at purchase exceeded 60 days. B. SECURITIES TRANSACTIONS AND INVESTMENT INCOME. Securities transactions are recorded on a trade date basis. Realized gains and losses from securities transactions are recorded on the identified cost basis. Dividend income is recognized on the ex-dividend date and interest income, including amortization of premium and accretion of discount on investments, is accrued daily as earned. C. DIVIDEND AND CAPITAL GAIN DISTRIBUTIONS TO SHAREHOLDERS. Distributions to shareholders are recorded on the ex-dividend date. The amount of dividends and distributions are determined in accordance with federal income tax regulations, which may differ from generally accepted accounting principles. These "book/tax" differences are considered either temporary or permanent in nature. To the extent these differences are permanent in nature, such amounts are reclassified within the capital accounts based on their federal tax basis treatment; temporary differences do not require reclassification. Dividends and distributions which exceed net investment income and net realized capital gains for financial reporting purposes but not for tax purposes are reported as dividends in excess of net investment income or distributions in excess of net realized capital gains. For the year ended March 31, 1999, the reclassification arising from permanent book/tax differences resulted in increases (decreases) to the components of net assets as follows:
INTERNATIONAL SMALL INCOME EQUITY CAP -------- ------------- -------- Undistributed net investment income/(loss) on investments......................................... $142,222 $ 68,577 $817,900 Accumulated net realized gain/(loss) on investments... (57,616) (63,848) -- Additional paid-in capital............................ (84,606) (4,729) (817,900)
SMALL APPRECIATION CAP II ------------ -------- Undistributed net investment income/(loss) on investments... $ 172,580 $309,625 Accumulated net realized gain/(loss) on investments......... (228) -- Additional paid-in capital.................................. (172,352) (309,625)
Permanent book/tax differences are primarily attributable to non-deductible organization costs, foreign exchange gains/losses, realized gains on passive foreign investment companies and net operating losses. D. REPURCHASE AGREEMENTS. The Funds may purchase instruments from financial institutions, such as banks and broker-dealers, subject to the seller's agreement to repurchase them at an agreed upon time and price ("repurchase agreements"). The seller under a repurchase agreement is required to maintain the value of the securities subject to the agreement at not less than the repurchase price. Default by the seller would, however, expose 34 ESC STRATEGIC FUNDS, INC. Notes to Financial Statements (continued) -- March 31, 1999 the relevant Funds to possible loss because of adverse market action or delay in connection with the disposition of the underlying obligations. Risks may arise from the potential inability of counterparties to honor the terms of the repurchase agreements. Accordingly, the Funds could receive less than the repurchase price upon the sale of collateral securities. E. FEDERAL INCOME TAXES. It is the policy of each of the Funds to continue to qualify as a Regulated Investment Company under Subchapter M of the Internal Revenue Code of 1986, as amended. By so qualifying, the Funds will not be subject to Federal income taxes to the extent that they distribute all of their taxable and tax-exempt income for the fiscal year. The Funds also intend to meet the distribution requirements to avoid the payment of an excise tax. Accordingly, no provision for taxes is recorded. F. ORGANIZATIONAL COSTS. Costs incurred in connection with the organization and initial registration of the Funds, with the exception of the Small Cap II Fund, have been deferred and are being amortized on a straight-line basis over sixty months beginning with each Fund's commencement of operations. In the event any of the initial shares of the Funds are redeemed during the amortization period, the redemption proceeds will be reduced by a pro rata portion of any unamortized organization expenses in the proportion as the number of shares being redeemed bears to the number of initial shares outstanding at the time of redemption. G. DETERMINATION OF NET ASSET VALUE AND CALCULATION OF EXPENSES. Expenses directly attributable to a Fund are charged to that Fund. Other expenses of the Company are allocated proportionately among the Funds in relation to the net assets of each Fund or on another reasonable basis. In calculating net asset value per share of each class, investment income, realized and unrealized gains and losses, and expenses other than class specific expenses are allocated daily to each class of shares based upon the proportion of net assets of each class at the beginning of each day. Distribution expenses are solely borne by the class incurring the expense. H. FOREIGN EXCHANGE TRANSACTIONS. The books and records of the Funds are maintained in U.S. dollars; non-U.S. dollar denominated amounts are translated into U.S. dollars as follows with the resultant exchange gains and losses recorded in the Statement of Operations: (i) market value of investment securities and other assets and liabilities: at the exchange rate on the valuation date, (ii) purchases and sales of investment securities, income and expenses, at the exchange rate prevailing on the respective date of such transactions. The Funds do not isolate that portion of the results of operations resulting from changes in foreign exchange rates on investments from the fluctuations arising from changes in market prices of securities at period end. Such fluctuations are included with the net realized and unrealized gain or loss from investments. However, the Funds do isolate the effect of fluctuations in foreign exchange rates when determining the gain or loss upon the sale or maturity of foreign currency denominated debt obligations pursuant to U.S. Federal income tax regulations. Such amounts are categorized as foreign exchange gain or loss for financial reporting purposes and ordinary gain or loss for income tax reporting purposes. Reported net realized foreign exchange gains or losses arise from sales and maturities of short-term securities, currency gains and losses realized between the trade and settlement dates on securities transactions, the difference between the amounts of dividends, interest and foreign withholding taxes recorded on the Funds' books, and the 35 ESC STRATEGIC FUNDS, INC. Notes to Financial Statements (continued) -- March 31, 1999 U.S. dollar equivalent of the amounts actually received or paid. Net unrealized foreign exchange gains and losses arise from changes in the value of the assets and liabilities, other than investments in securities at period end, resulting from changes in the foreign exchange rate. I. FORWARD FOREIGN EXCHANGE CONTRACTS. A forward foreign exchange contract is a commitment to buy or sell a foreign currency at a future date at a negotiated exchange rate. The Funds bear the market risk which arises from possible changes in foreign exchange values. Risks may arise from the potential inability of counterparties to meet the terms of their contracts and from unanticipated movements in the value of the foreign currency relative to the U.S. dollar. The gain or loss from the difference between the cost of original contracts and the amount realized upon the closing of such contracts is included in net realized gains on foreign exchange transactions. J. OFF-BALANCE SHEET RISK. The Funds may invest in various financial instruments with off-balance sheet risk. These financial instruments include taking positions in forward foreign exchange contracts. During the period the forward contract is open, changes in the value of the contract are recognized as unrealized gains or losses by "marking to market" such contract on a daily basis to reflect the market value of the contract at the end of the day's trading. When the forward contract is closed, the Fund records a realized gain or loss between the proceeds from (or cost of) the closing transaction and the Fund's basis in the contract. The Funds enter into such contracts for the purpose of hedging exposure to change in foreign currency exchange rates on their portfolio holdings. A lack of correlation between the price of the security and the underlying contract could result in a loss to the Funds. The amount of such loss could exceed related amounts in the statements of assets and liabilities. At March 31, 1999, the International Equity Fund had the following open forward foreign exchange contract: LONG CONTRACT:
SETTLEMENT MARKET UNREALIZED AMOUNT/CURRENCY DATE COST VALUE GAIN - --------------- ---------- ---- ------ ---------- 45,223/Japanese Yen............................... 4/1/99 $375 $382 $7
K. CREDIT AND MARKET RISK. Funds that invest in high yield instruments are subject to certain credit and market risks. The yields of high yield debt obligations reflect, among other things, perceived credit risk. The Funds' investment in securities rated below investment grade typically involve risks not associated with higher rated securities including, among others, greater risk of timely and ultimate payment of interest and principal, greater market price volatility and less liquid secondary market trading. L. SECURITIES LENDING. To increase current income, each Fund may lend its portfolio securities worth up to one-third of that Fund's total assets to brokers, dealers and financial institutions, provided: (1) the loan is secured continuously by collateral consisting of U.S. Government securities or cash or letters of credit maintained on a daily mark-to-market basis in an amount at least equal to the current market value of the securities loaned; (2) the Funds may at any time call the loan and obtain the return of the securities loaned within five business days, therefore not considered to be illiquid investments; and (3) the Funds will receive any interest or dividends paid on the loaned securities while simultaneously seeking to earn interest on the investment of collateral. The Funds will earn income for lending their securities because cash collateral pursuant to these loans will be invested in short-term money market instruments. The cash or subsequent short-term investments are recorded as assets of the Funds, offset by a corresponding liability to repay the cash at the termination of the loan. In addition, 36 ESC STRATEGIC FUNDS, INC. Notes to Financial Statements (continued) -- March 31, 1999 the short-term securities purchased with the cash collateral are included in the accompanying schedules of portfolio investments. In connection with lending securities, the Funds may pay reasonable finders, administrative and custodial fees. Loans of securities involve risk that the borrower may fail to return the securities or may fail to provide additional collateral. As of March 31, 1999, the following Funds had securities with the following market values on loan: MARKET VALUE MARKET VALUE OF COLLATERAL OF LOANED SECURITIES ------------- -------------------- Small Cap....................... $12,467,809 $11,976,699 Appreciation.................... $ 1,586,100 $ 1,545,928 Small Cap II.................... $ 3,770,800 $ 3,687,688 The loaned securities were fully collateralized by cash which was invested in floating rate securities and repurchase agreements at March 31, 1999. As disclosed in the schedules of portfolio investments, the Small Cap, Appreciation and Small Cap II Funds collectively invested cash collateral in a Lehman Brothers Repurchase Agreement with an interest rate of 5.25% and a maturity of 4/1/1999 which was collateralized by $15,855,000 Commercial Mortgage Asset Trust, Series 99-C1, Class A3, due 4/17/2003 with a market value of $16,088,633. 3. RELATED PARTY TRANSACTIONS. The Company has entered into an investment advisory agreement (the "Investment Advisory Agreement") with SunTrust Equitable Securities Corporation ("STES" or the "Adviser"). The Investment Advisory Agreement provides for the Adviser to be paid a fee calculated and accrued daily and paid monthly at the annual rate of 1.25% of average daily net assets for ESC Strategic Small Cap II Fund and 1.00% of such net assets for each of the other Funds. The Adviser provides portfolio management supervision and certain administrative, clerical and bookkeeping services for the Company. The Adviser has entered into agreements with various portfolio managers (the "Managers") to provide portfolio management services for the Funds. Equitable Asset Management, a wholly-owned subsidiary of the Adviser, provides portfolio management services for Small Cap and Small Cap II Funds and approximately one-third of the assets of the Appreciation Fund. The Adviser has retained various other Managers to advise the International Equity Fund, Income Fund and the remaining assets of the Appreciation Fund. The Adviser pays any fees payable under these agreements with the Managers. For the year ended March 31, 1999, the Adviser voluntarily waived fees of $47,061, $12,791, $2,255, and $82,843, for the Income Fund, International Equity Fund, Appreciation Fund and Small Cap II Fund, respectively. The Adviser did not waive any fee for the Small Cap Fund. BISYS Fund Services Limited Partnership d/b/a/ BISYS Fund Services ("BISYS") and BISYS Fund Services, Inc ("BFSI") are each a wholly-owned subsidiary of the BISYS Group, Inc. BISYS serves as Administrator subject to the supervision of the Company's Board of Directors and officers pursuant to the administration agreement (the "Administration Agreement"). The services under the Administration Agreement include day-to-day administration of matters related to the corporate existence of the Company, maintenance of its records, preparation of reports, supervision of the Funds' arrangement with their custodian and assistance in the preparation of the Company's Registration Statement under federal and state laws. Pursuant to the Administration Agreement, BISYS is entitled to a fee calculated and accrued daily and paid monthly at the annual rate of 0.15% of the average daily net assets of each Fund. 37 ESC STRATEGIC FUNDS, INC. Notes to Financial Statements (continued) -- March 31, 1999 BFSI serves as transfer agent and fund accountant for the Company. Pursuant to a Transfer Agent Agreement between the Company and BFSI, BFSI provides the Company with transfer and dividend disbursing agent services, for which it receives a fee of $15.00 per account per year subject to a required minimum fee of $15,000 for each Fund, plus out-of-pocket expenses. Pursuant to the Fund Accounting Agreement between the Company and BFSI, BFSI assists the Company in calculating net asset values and provides certain other accounting services for each Fund for an annual fee of $30,000 per Fund plus out-of-pocket expenses. STES has voluntarily agreed to reimburse the Funds to the extent that their ratios of expenses to average net assets exceed certain percentages as follows: Income -- 2.00% (Class A), 2.50% (Class D); International Equity -- 2.50% (Class A), 3.00% (Class D); Small Cap -- 2.00% (Class A), 2.50% (Class D); Appreciation -- 2.00% (Class A), 2.50% (Class D), and Small Cap II -- 2.00% (Class A), 2.50% (Class D). Accordingly, STES has reimbursed expenses of the Income Fund in the amount of $6,412, under this voluntary agreement. No reimbursements were necessary for the International Equity, Small Cap, Appreciation or Small Cap II Funds. BISYS acts as Distributor for the Funds pursuant to a Distribution Contract. Each Fund has adopted a service and distribution plan ("Plan") with respect to each class of its shares. The Plans provide that Class A shares will pay the Distributor a fee up to an annual rate of 0.25% of the value of average daily net assets of Class A shares in return for financing certain distribution and shareholder service activities related to Class A shares. The Plans provide that Class D shares will pay the Distributor amounts up to an annual rate of 0.75% of the average daily net assets of Class D shares to finance certain distribution and shareholder services activities related to Class D shares. For the year ended March 31, 1999 for the Small Cap Fund, Small Cap II Fund, Appreciation Fund, Income Fund, International Equity Fund, BISYS received $12,037, $21,039, $82,075, $83,309 and $351,653 respectively, in commissions from sales of shares of the Funds of which $12,037, $21,039, $82,075, $83,300 and $335,688 respectively, was reallowed to other brokers and dealers. During the year ended March 31, 1999, the International Equity, Small Cap, Appreciation and Small Cap II Funds paid brokerage commissions of $1,185, $13,662, $39,262, and $6,564 to the Adviser's subsidiary, SunTrust Equitable Securities Corporation. 4. SECURITIES TRANSACTIONS. A. PURCHASE AND SALE TRANSACTIONS. The aggregate amount of purchases and sales of investment securities, other than short-term securities, for the year ended March 31, 1999 were as follows: PURCHASES SALES ----------- ----------- Income.................................... $12,433,508 $26,262,194 International Equity...................... $14,517,293 $19,576,274 Small Cap................................. $61,805,758 $68,684,662 Appreciation.............................. $28,968,161 $35,689,782 Small Cap II.............................. $26,210,433 $15,159,160 38 ESC STRATEGIC FUNDS, INC. Notes to Financial Statements (continued) -- March 31, 1999 5. CAPITAL SHARE TRANSACTIONS. The Company is authorized to issue 650 million shares of capital stock with a par value $0.001 each. Transactions in each class of shares of the Funds for the year ended March 31, 1999, and the year ended March 31, 1998, were as follows:
YEAR ENDED MARCH 31, 1999 --------------------------------------- INTERNATIONAL INCOME EQUITY SMALL CAP ---------- ------------- ---------- CLASS A Beginning Balance.......................................... 2,443,891 1,101,884 5,561,203 ---------- --------- ---------- Shares Sold................................................ 93,649 105,770 460,985 Shares issued in reinvestment of net dividends and distributions............................................ 90,228 59,843 145,457 Shares redeemed............................................ (1,887,696) (540,478) (1,662,840) ---------- --------- ---------- Net increase/(decrease) in shares.......................... (1,703,819) (374,865) (1,056,398) ---------- --------- ---------- Ending Balance............................................. 740,072 727,019 4,504,805 ========== ========= ========== CLASS D Beginning Balance.......................................... 82,351 234,924 1,701,274 ---------- --------- ---------- Shares Sold................................................ 15,648 11,007 80,387 Shares issued in reinvestment of net dividends and distributions............................................ 4,096 20,321 47,983 Shares redeemed............................................ (46,401) (86,394) (472,207) ---------- --------- ---------- Net increase/(decrease) in shares.......................... (26,657) (55,066) (343,837) ---------- --------- ---------- Ending Balance............................................. 55,694 179,858 1,357,437 ========== ========= ========== YEAR ENDED MARCH 31, 1999 --------------------------- APPRECIATION SMALL CAP II ------------ ------------ CLASS A Beginning Balance........................................... 2,114,008 1,458,113 --------- --------- Shares Sold................................................. 232,330 1,267,171 Shares issued in reinvestment of net dividends and distributions............................................. 243,822 0 Shares redeemed............................................. (827,450) (634,997) --------- --------- Net increase/(decrease) in shares........................... (351,298) 632,174 --------- --------- Ending Balance.............................................. 1,762,710 2,090,287 ========= ========= CLASS D Beginning Balance........................................... 475,250 711,840 --------- --------- Shares Sold................................................. 86,439 374,754 Shares issued in reinvestment of net dividends and distributions............................................. 66,467 0 Shares redeemed............................................. (207,972) (305,243) --------- --------- Net increase/(decrease) in shares........................... (55,066) 69,511 --------- --------- Ending Balance.............................................. 420,184 781,351 ========= =========
39 ESC STRATEGIC FUNDS, INC. Notes to Financial Statements (continued) -- March 31, 1999
YEAR ENDED MARCH 31, 1998 -------------------------------------- INTERNATIONAL INCOME EQUITY SMALL CAP ---------- ------------- --------- CLASS A Beginning Balance........................................... 3,339,466 1,568,551 4,129,592 ---------- --------- --------- Shares Sold................................................. 155,058 102,868 1,661,014 Shares issued in reinvestment of net dividends and distributions............................................. 131,084 122,744 384,551 Shares redeemed............................................. (1,181,717) (692,279) (613,954) ---------- --------- --------- Net increase/(decrease) in shares........................... (895,575) (466,667) 1,431,611 ---------- --------- --------- Ending Balance.............................................. 2,443,891 1,101,884 5,561,203 ========== ========= ========= CLASS D Beginning Balance........................................... 145,898 366,560 1,290,948 ---------- --------- --------- Shares Sold................................................. 17,012 13,339 428,750 Shares issued in reinvestment of net dividends and distributions............................................. 3,690 61,747 132,655 Shares redeemed............................................. (84,249) (206,722) (151,079) ---------- --------- --------- Net increase/(decrease) in shares........................... (63,547) (131,636) 410,326 ---------- --------- --------- Ending Balance.............................................. 82,351 234,924 1,701,274 ========== ========= ========= YEAR ENDED MARCH 31, 1998 ---------------------------- APPRECIATION SMALL CAP II ------------ ------------ CLASS A Beginning Balance........................................... 3,190,643 295,961 ---------- --------- Shares Sold................................................. 402,557 1,186,062 Shares issued in reinvestment of net dividends and distributions............................................. 595,282 48,311 Shares redeemed............................................. (2,074,474) (72,221) ---------- --------- Net increase/(decrease) in shares........................... (1,076,635) 1,162,152 ---------- --------- Ending Balance.............................................. 2,114,008 1,458,113 ========== ========= CLASS D Beginning Balance........................................... 292,678 135,392 ---------- --------- Shares Sold................................................. 154,004 579,982 Shares issued in reinvestment of net dividends and distributions............................................. 104,039 24,782 Shares redeemed............................................. (75,471) (28,316) ---------- --------- Net increase/(decrease) in shares........................... 182,572 576,448 ---------- --------- Ending Balance.............................................. 475,250 711,840 ========== =========
6. MULTIPLE MANAGER STRATEGY. The Adviser uses the Multiple Manager Strategy for certain of the Funds from time to time. Under this strategy, the Adviser allocates portions of a Fund's assets among multiple specialist Managers with dissimilar investment styles and security selection disciplines. The Adviser monitors the performance of both the total Fund portfolio and of each Manager. The Adviser will reallocate Fund assets among individual managers or 40 ESC STRATEGIC FUNDS, INC. Notes to Financial Statements (continued) -- March 31, 1999 recommend to the Company that it employ or terminate particular managers to the extent the Adviser deems appropriate to achieve the overall objectives of the particular Fund. Effective September 30, 1998, the Income Fund's sole Manager is Cincinnati Asset Management, Inc. Llama Asset Management Company, L.P. and Murray Johnstone International Limited are no longer Managers for the Income Fund. Effective July 17, 1998, the International Equity Fund's sole Manager is Murray Johnstone International Limited; Globeflex Capital, L.P. is no longer a Manager for the International Equity Fund. As of March 31, 1999, the Managers are as follows: ESC Strategic Income Fund -- Cincinnati Asset Management, Inc. ESC Strategic International Equity Fund -- Murray Johnstone International Limited. ESC Strategic Small Cap Fund -- Equitable Asset Management, Inc. ESC Strategic Appreciation Fund -- GlobeFlex Capital, L.P.; Brandes Investment Partners, L.P., and Atlantic Capital Management, LLC. ESC Strategic Small Cap II Fund -- Equitable Asset Management, Inc. Equitable Asset Management, Inc. is an affiliate of the Adviser. Effective May 24, 1999, Westcap Investors, LLC has been appointed as a Manager of the ESC Strategic Appreciation Fund and GlobeFlex Capital L.P. is no longer a Manager. 7. FEDERAL INCOME TAXES (Unaudited). Capital losses and foreign currency losses incurred after October 31, 1998 through March 31, 1999, are deemed to arise on the first business day of the following fiscal year. Such losses may be deferred and treated as occurring on the first day of the following fiscal year. The Small Cap II Fund incurred and will elect to defer post October capital losses of approximately $1,890,515. The International Fund incurred foreign currency losses and will elect to defer these post October losses of approximately $26,128. For the taxable year ended March 31, 1999, 7.36% of the income dividend paid by the Appreciation Fund qualifies for the dividends received deduction available for corporations. As of March 31, 1999, for federal income tax purposes, the following Fund had a capital loss carry forward available to offset future capital gains, if any: AMOUNT EXPIRES ---------- ------- Small Cap II.......................................... $1,359,180 3/31/07 The carry forward will reduce the Fund's taxable income arising from future net realized gain on investments, if any, to the extent permitted by the Code, and thus will reduce the amount of the distributions to shareholders which would otherwise be necessary to relieve the Fund of any liability for federal tax. The following table presents capital gain dividend distributions from long-term capital gains for the following Funds for the year ended March 31, 1999: FUND AMOUNT - ---- ---------- Income...................................................... $ 139,189 International Equity........................................ 904,995 Small Capital............................................... 3,368,662 Appreciation................................................ 2,386,021 41 REPORT OF INDENPENDENT ACCOUNTANTS To the Shareholders and Directors ESC Strategic Funds, Inc. In our opinion, the accompanying statements of assets and liabilities, including the portfolios of investments, and the related statements of operations and changes in net assets and the financial highlights present fairly, in all material respects, the financial position of SEC Strategic Income Fund, ESC Strategic International Equity Fund, ESC Strategic Small Cap Fund, ESC Strategic Appreciation Fund and ESC Strategic Small Cap II Fund (separate portfolios constituting the ESC Strategic Funds, Inc., hereafter referred to as the "Funds") at March 31, 1999, the results of each of their operations for the year then ended, the changes in each of their net assets for each of the two years in the period then ended, and the financial highlights for each of the periods presents, in conformity with generally accepted accounting principles. These financial statements and financial highlights (hereafter referred to as "financial statements") are the responsibility of the Funds' management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of theses financial statements in accordance with generally accepted auditing standards which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits, which include correspondence with the custodian, provide a reasonable basis for the opinion expressed above. PricewaterhouseCoopers LLP May 14, 1999 ESC STRATEGIC FUNDS, INC. ESC STRATEGIC INCOME FUND Portfolio of Investments -- September 30, 1999 (Unaudited) SHARES OR MOODY'S/S&P PRINCIPAL MARKET RATINGS # AMOUNT VALUE - ----------- --------- ------ CORPORATE OBLIGATIONS -- 89.2% BEVERAGES -- 1.7% B1/B+ Canandaigua Brands, Inc., 8.50%, 3/1/2009.......... $132,000 $ 122,760 ----------- CABLE -- 2.9% B1/B+ Adelphia Communications, 9.88%, 3/1/2007... 200,000 203,500 ----------- CHEMICALS -- 2.9% B1/B NL Industries, 11.75%, 10/15/2003........ 200,000 207,500 ----------- CONSUMER GOODS & SERVICES -- 2.7% Ba3/B+ Finlay Fine Jewelry Corp., 8.38%, 5/1/2008.......... 200,000 187,500 ----------- ENTERTAINMENT -- 5.1% Ba2/Bb+ Park Place Entertainment, 7.875%, 12/15/2005........ 105,000 99,225 B2/B President Casinos, Inc., 13.00%, 9/15/2001......... 220,000 198,000 B3/B Regal Cinemas, Inc., 9.50%, 6/1/2008, Callable 6/1/2003 @ 104.75.......... 95,000 64,600 ----------- 361,825 ----------- FINANCIAL SERVICES -- 2.7% B2/B Polymer Group, Inc., 9.00%, 7/1/2007... 200,000 190,000 ----------- SHARES OR MOODY'S/S&P PRINCIPAL MARKET RATINGS # AMOUNT VALUE - ----------- --------- ------ FOOD PRODUCTS (7.6%) B1/B+ Chiquita Brands, 9.63%, 1/15/2004......... $250,000 $ 219,375 B3/B+ Fleming Co., 10.68%, 7/31/2007, Callable 7/31/2002 @ 105.31.......... 200,000 185,000 B3/B Packaged Ice, Inc., 9.75%, 2/1/2005, Callable 2/1/2002 @ 104.875......... 148,000 133,940 ----------- 538,315 ----------- FOREST PRODUCTS & PAPERS -- 1.9% B1/B+ Doman Industries Ltd., 8.75%, 3/15/2004......... 186,000 133,920 ----------- GAMING -- 2.8% B2/B Hollywood Park, Inc., 9.50%, 8/1/2007.......... 200,000 195,000 ----------- GENERAL INDUSTRIES & MANUFACTURING -- 7.6% B3/B- International Wire Group, 11.75%, 6/1/2005.......... 250,000 256,875 B1/B+ Nortek, Inc., 9.13%, 9/1/2007, Callable 9/1/2002 @ 104.56............ 290,000 278,400 ----------- 535,275 ----------- HEALTH CARE -- 2.4% B1/B+ NBTY, Inc., 8.63%, 9/15/2007, Callable 9/15/2002 @ 104.313......... 200,000 167,000 ----------- MANUFACTURING - CONSUMER GOODS -- 2.9% B2/B Applied Extrusion Tech., 11.50%, 4/1/2002.......... 200,000 205,500 ----------- See accompanying notes to financial statements. 1 ESC STRATEGIC FUNDS, INC. ESC STRATEGIC INCOME FUND Portfolio of Investments (continued) -- September 30, 1999 (Unaudited) SHARES OR MOODY'S/S&P PRINCIPAL MARKET RATINGS # AMOUNT VALUE - ----------- --------- ------ CORPORATE OBLIGATIONS (CONTINUED) MEDIA - CABLE -- 6.4% B1/B Helicon Group, Inc., 11.00%, 11/1/2003......... $250,000 $ 257,813 B2/B Intermedia Capital Partners, 11.25%, 8/1/2006.......... 174,000 194,880 ----------- 452,693 ----------- MEDIA - NON CABLE -- 8.5% B3/B- Allbritton Communications, 9.75%, 11/30/2007........ 188,000 188,000 B3/B- Citadel Broadcasting Corp., 10.25%, 7/1/2007.......... 200,000 205,000 B3/B- Gray Communications Systems, 10.63%, 10/1/2006, Callable 10/1/2001 @ 105.31.......... 200,000 207,499 ----------- 600,499 ----------- OIL & GAS -- 5.7% B1/BB- Cliffs Drilling Co., 10.25%, 5/15/2003......... 200,000 199,000 B2/B- Plains Resources, Inc., 10.25%, 3/15/2006......... 200,000 202,000 ----------- 401,000 ----------- RETAIL -- 2.7% B3/B- Tropical Sportswear Int'l, 11.00%, 6/15/2008......... 200,000 189,000 ----------- SOFTWARE -- 1.7% B3/B- Psinet, Inc., 10.00%, 2/15/05... 126,000 120,488 ----------- STEEL/IRON -- 2.7% B2/B Weirton Steel Corp., 11.38%, 7/1/2004, Callable 7/1/2002 @ 105.69.......... 200,000 192,000 ----------- SHARES OR MOODY'S/S&P PRINCIPAL MARKET RATINGS # AMOUNT VALUE - ----------- --------- ------ TELECOMMUNICATIONS -- 6.4% B2/B Paging Network, 10.00%, 10/15/2008, Callable 10/15/2001 @ 105.. $200,000 $ 56,000 B3/B- Rural Cellular Corp., 9.63%, 5/15/2008, Callable 5/15/2003 @ 104.813......... 200,000 205,000 B3/B- USA Mobile Communication, 9.50%, 2/1/2004... 250,000 187,500 ----------- 448,500 ----------- TEXTILES -- 7.3% B3/B+ Delta Mills, Inc., 9.63%, 9/1/2007... 200,000 156,000 B3/B Hartmarx Corp., 10.88%, 1/15/2002......... 250,000 253,125 B2/B+ Pillowtex Corp., 10.00%, 11/15/2006........ 151,000 103,435 ----------- 512,560 ----------- TRANSPORTATION -- 4.6% Ba3/BBB Greyhound Lines, 11.50%, 4/15/2007......... 290,000 326,513 ----------- TOTAL CORPORATE OBLIGATIONS (COST $6,772,192)....... 6,291,348 ----------- PREFERRED STOCKS -- 2.8% PUBLISHING & PRINTING -- 2.8% Primedia Corp....... 2,000 197,000 ----------- TOTAL PREFERRED STOCKS (COST $208,000)......... 197,000 ----------- See accompanying notes to financial statements. 2 ESC STRATEGIC FUNDS, INC. ESC STRATEGIC INCOME FUND Portfolio of Investments (continued) -- September 30, 1999 (Unaudited) SHARES OR MOODY'S/S&P PRINCIPAL MARKET RATINGS # AMOUNT VALUE - ----------- --------- ------ SHORT-TERM INVESTMENTS -- 6.4% CASH SWEEP ACCOUNT -- 6.4% Union Bank of California........ $448,919 $ 448,919 ----------- TOTAL SHORT-TERM INVESTMENTS (COST $448,919)... 448,919 ----------- TOTAL INVESTMENTS (COST $7,429,112) (a) -- 98.4%...... 6,937,267 OTHER ASSETS IN EXCESS OF LIABILITIES -- 1.6%.............. 115,537 ----------- TOTAL NET ASSETS -- 100.0%............ $ 7,052,804 =========== (a) Represents cost for federal income tax and financial reporting purposes and differs from value by net unrealized depreciation of securities as follows: Unrealized appreciation.................. $ 45,209 Unrealized depreciation.................. (537,054) ----------- Net unrealized depreciation.............. $ (491,845) =========== # See page 18 for Credit Ratings. See accompanying notes to financial statements. 3 ESC STRATEGIC FUNDS, INC. Statements of Assets and Liabilities September 30, 1999 (unaudited)
INTERNATIONAL INCOME EQUITY SMALL CAP APPRECIATION SMALL CAP II FUND FUND FUND FUND FUND ---------- ------------- ------------ ------------ ------------ ASSETS Investments, at value (cost $7,429,112; $7,547,092; $84,348,597; $14,905,351; and $19,863,901 respectively)...................... $6,937,267 $8,406,229 $ 85,326,211 $16,798,825 $20,614,752 Repurchase agreements, at cost................... -- -- 6,421,600 1,069,268 2,641,100 ---------- ---------- ------------ ----------- ----------- Total Investments.......................... 6,937,267 8,406,229 91,747,811 17,868,093 23,255,852 Foreign Currency (cost $0; $13,795; $0; $0; $0)............................................ -- 13,951 -- -- -- Interest and dividends receivable................ 180,600 7,394 24,467 29,755 1,158 Receivable for securities sold................... -- 689,960 -- -- -- Prepaid expenses................................. 13,019 22,103 14,899 13,459 11,621 ---------- ---------- ------------ ----------- ----------- Total Assets............................... 7,130,886 9,139,637 91,787,177 17,911,307 23,268,631 ---------- ---------- ------------ ----------- ----------- LIABILITIES Payable to custodian............................. -- -- -- -- 1,162,119 Payable for return of collateral received........ -- -- 13,421,600 1,069,268 2,641,100 Income distribution payable...................... 48,783 -- -- -- -- Payable for securities purchased................. -- 778,321 -- -- -- Payable for fund shares repurchased.............. -- -- 258,359 418 107,089 Advisory fee payable............................. -- 3,722 68,937 12,534 13,156 Administration fee payable....................... 117 135 1,280 273 320 12b-1 Distribution fee payable................... 1,666 2,355 24,522 5,093 6,987 Other accrued expenses........................... 27,516 24,975 109,615 29,294 30,742 ---------- ---------- ------------ ----------- ----------- Total Liabilities.......................... 78,082 809,508 13,884,313 1,116,880 3,961,513 ---------- ---------- ------------ ----------- ----------- NET ASSETS................................. $7,052,804 $8,330,129 $ 77,902,864 $16,794,427 $19,307,118 ========== ========== ============ =========== ===========
See accompanying notes to financial statements. 19 ESC STRATEGIC FUNDS, INC. Statements of Assets and Liabilities September 30, 1999 -- (Continued) (unaudited)
INTERNATIONAL INCOME EQUITY SMALL CAP APPRECIATION SMALL CAP II FUND FUND FUND FUND FUND ---------- ------------- ------------ ------------ ------------ Net Assets Consist of: Shares, at par ($0.001).......................... 778 740 4,496 1,458 1,906 Additional paid-in capital....................... 7,657,679 5,603,511 73,350,931 11,645,602 25,262,012 Distributions in excess of net investment income......................................... (51,225) (50,894) (622,095) (59,754) (212,493) Accumulated net realized gain/(loss) on investments and foreign currency transactions................................... (62,583) 1,916,980 4,191,918 3,313,647 (6,495,158) Net unrealized appreciation/(depreciation) on investments and foreign currency translations................................... (491,845) 859,792 977,614 1,893,474 750,851 ---------- ---------- ------------ ----------- ----------- NET ASSETS....................................... $7,052,804 $8,330,129 $ 77,902,864 $16,794,427 $19,307,118 ========== ========== ============ =========== =========== Class A.......................................... $6,558,386 $6,788,232 $ 61,122,475 $13,143,084 $13,468,215 Class D.......................................... $ 494,418 $1,541,897 $ 16,780,389 $ 3,651,343 $ 5,838,903 ---------- ---------- ------------ ----------- ----------- $7,052,804 $8,330,129 $ 77,902,864 $16,794,427 $19,307,118 ========== ========== ============ =========== =========== SHARES OF BENEFICIAL INTEREST Class A Shares of beneficial interest issued and outstanding.................................. 723,744 599,553 3,511,544 1,134,349 1,325,016 ========== ========== ============ =========== =========== Net Asset Value and redemption price per share outstanding.................................. $ 9.06 $ 11.32 $ 17.41 $ 11.59 $ 10.16 ========== ========== ============ =========== =========== Maximum Offering Price per share ($9.06/.955, $11.32/.955, $17.41/.955, $11.59/.955, $10.16/.955 respectively).................... $ 9.49 $ 11.85 $ 18.23 $ 12.14 $ 10.64 ========== ========== ============ =========== =========== Class D Shares of beneficial interest issued and outstanding.................................. 54,157 140,441 984,860 323,796 581,210 ========== ========== ============ =========== =========== Net Asset Value and redemption price per share outstanding.................................. $ 9.13 $ 10.98 $ 17.04 $ 11.28 $ 10.05 ========== ========== ============ =========== =========== Maximum Offering Price per share ($9.13/.985, $10.98/.985, $17.04/.985, $11.28/.985, $10.05/.985 respectively).................... $ 9.27 $ 11.15 $ 17.30 $ 11.45 $ 10.20 ========== ========== ============ =========== ===========
See accompanying notes to financial statements. 20 ESC STRATEGIC FUNDS, INC. Statements of Operations For the Six Months Ended September 30, 1999 (unaudited)
INTERNATIONAL INCOME EQUITY SMALL CAP APPRECIATION SMALL CAP II FUND FUND FUND FUND FUND --------- ------------- ---------- ------------ ------------ Investment Income Interest................................... $ 366,705 $ 3,728 $ 104,424 $ 12,715 $ 4,044 Dividend (net of withholding tax of $0; $7,777; $0; $50 and $0, respectively).... 10,124 89,113 149,478 140,245 35,068 Income from Securities Lending Activities............................... -- -- 34,466 4,729 5,949 Total Income........................ 376,829 92,841 288,368 157,689 45,061 --------- --------- ---------- ---------- ------------ Expenses Advisory............................ 37,211 45,236 467,732 103,600 161,142 Administration............................. 5,582 6,785 70,160 15,540 19,337 12b-1 Distribution fees -- Class A......... 8,654 9,138 91,094 20,641 23,463 12b-1 Distribution fees -- Class D......... 1,948 6,513 77,515 15,778 26,295 Audit fees................................. 8,101 8,283 8,796 7,281 7,281 Custodian.................................. 48 14,571 12,045 1,213 723 Fund accounting............................ 15,327 15,752 16,793 18,553 16,721 Amortization of organizational costs....... 1,047 1,069 -- 2,073 -- Registration and filing fees............... 7,496 7,451 8,817 8,189 8,587 Transfer agent fees and expenses........... 10,806 11,520 88,220 18,159 42,483 Directors fees............................. 318 611 6,586 1,398 1,830 Miscellaneous.............................. 3,844 4,557 62,705 12,807 14,290 --------- --------- ---------- ---------- ------------ Total expenses before waivers....... 100,382 131,486 910,463 225,232 322,152 Less: expenses waived/ reimbursed.......... (37,216) (13,879) -- (7,789) (64,598) Net expenses............................... 63,166 117,607 910,463 217,443 257,554 --------- --------- ---------- ---------- ------------ Net investment income/ (loss)................ 313,663 (24,766) (622,095) (59,754) (212,493) --------- --------- ---------- ---------- ------------ Net realized gain/ (loss) on investments and foreign currency transactions.............. (62,583) 1,094,253 1,682,809 2,196,732 (3,235,334) Net change unrealized appreciation/ (depreciation) of investments and foreign currency transactions...................... (490,543) (588,391) 4,467,160 (135,911) 5,176,146 --------- --------- ---------- ---------- ------------ Net realized and unrealized gain/ (loss)..... (553,126) 505,862 6,149,969 2,060,821 1,940,812 Net increase/ (decrease) in net assets resulting from operations.................. $(239,463) $ 481,096 $5,527,874 $2,001,067 $ 1,728,319 ========= ========= ========== ========== ============
See accompanying notes to financial statements. 21 ESC STRATEGIC FUNDS, INC. Statements of Changes in Net Assets
INCOME FUND INTERNATIONAL EQUITY FUND ----------------------------------- ----------------------------------- SIX MONTHS ENDED YEAR ENDED SIX MONTHS ENDED YEAR ENDED SEPTEMBER 30, 1999 MARCH 31, 1999 SEPTEMBER 30, 1999 MARCH 31, 1999 ------------------ -------------- ------------------ -------------- (UNAUDITED) (UNAUDITED) Operations: Net investment income/(loss)....... $ 313,663 $ 851,759 $ (24,766) $ (66,534) Net realized gain/(loss) on investments and foreign currency transactions..................... (62,583) 57,784 1,094,253 1,024,996 Net change unrealized depreciation of investments and foreign currency translations............ (490,543) (193,923) (588,391) (1,842,011) ------------ ------------ ----------- ------------ Net change in net assets resulting from operations.................... (239,463) 715,620 481,096 (883,549) ------------ ------------ ----------- ------------ Dividends and Distributions to Shareholders: From net investment income Class A.......................... (291,487) (759,547) -- -- Class D.......................... (20,518) (32,600) -- -- ------------ ------------ ----------- ------------ (312,005) (792,147) -- -- ------------ ------------ ----------- ------------ From net realized gains Class A.......................... -- (104,773) -- (712,147) Class D.......................... -- (9,574) -- (192,848) ------------ ------------ ----------- ------------ -- (114,347) -- (904,995) ------------ ------------ ----------- ------------ From tax return of capital Class A.......................... -- (76,574) -- -- Class D.......................... -- (3,289) -- -- ------------ ------------ ----------- ------------ -- (79,863) -- -- ------------ ------------ ----------- ------------ Change in net assets resulting from dividends and distributions to shareholders..................... (312,005) (986,357) -- (904,995) ------------ ------------ ----------- ------------ Capital Share Transactions: Proceeds from sales of shares: Class A.......................... 153,064 926,359 209,909 1,144,165 Class D.......................... 3,588 155,831 (6,839) 124,302 ------------ ------------ ----------- ------------ 156,652 1,082,190 203,070 1,268,467 ------------ ------------ ----------- ------------ Net asset value of shares issued to shareholders in reinvestment of dividends and distributions: Class A.......................... 260,711 894,208 -- 582,876 Class D.......................... 20,420 40,551 -- 192,848 ------------ ------------ ----------- ------------ 281,131 934,759 -- 775,724 ------------ ------------ ----------- ------------ Net asset value of shares redeemed: Class A.......................... (572,756) (18,743,090) (1,625,217) (5,735,950) Class D.......................... (39,201) (460,910) (424,663) (885,822) ------------ ------------ ----------- ------------ (611,957) (19,204,000) (2,049,880) (6,621,772) ------------ ------------ ----------- ------------ Change in net assets from capital share transactions............... (174,174) (17,187,051) (1,846,810) (4,577,581) ------------ ------------ ----------- ------------ Total change in net assets........... (725,642) (17,457,788) (1,365,714) (6,366,125) Net Assets: Beginning of period................ 7,778,446 25,236,234 9,695,843 16,061,968 ------------ ------------ ----------- ------------ End of period...................... $ 7,052,804 $ 7,778,446 $ 8,330,129 $ 9,695,843 ============ ============ =========== ============
See accompanying notes to financial statements. 22 ESC STRATEGIC FUNDS, INC. Statements of Changes in Net Assets (continued)
SMALL CAP FUND APPRECIATION FUND ------------------------------------ ------------------------------------ SIX MONTHS ENDED YEAR ENDED SIX MONTHS ENDED YEAR ENDED SEPTEMBER 30, 1999 MARCH 31, 1999 SEPTEMBER 30, 1999 MARCH 31, 1999 ------------------ -------------- ------------------ -------------- (UNAUDITED) (UNAUDITED) Operations: Net investment loss............ $ (622,095) $ (817,900) $ (59,754) $ (172,352) Net realized gain on investments.................. 1,682,809 2,508,888 2,196,732 1,116,912 Net change unrealized appreciation/ (depreciation) of investments............... 4,467,160 (42,488,775) (135,911) (9,813,011) ------------ ------------ ------------ ------------ Net change in net assets resulting from operations...... 5,527,874 (40,797,787) 2,001,067 (8,868,451) ------------ ------------ ------------ ------------ Dividends and Distributions to Shareholders: From net realized gains Class A...................... 325 (2,603,327) -- (2,762,177) Class D...................... -- (765,335) -- (692,033) ------------ ------------ ------------ ------------ 325 (3,368,662) -- (3,454,210) ------------ ------------ ------------ ------------ Change in net assets resulting from dividends and distributions to shareholders................... 325 (3,368,662) -- (3,454,210) ------------ ------------ ------------ ------------ Capital Share Transactions: Proceeds from sales of shares: Class A...................... 2,107,780 8,371,667 299,555 2,982,123 Class D...................... 982,474 1,473,645 114,220 1,227,616 ------------ ------------ ------------ ------------ 3,090,254 9,845,312 413,775 4,209,739 ------------ ------------ ------------ ------------ Net asset value of shares issued to shareholders in reinvestment of dividends and distributions: Class A...................... (325) 2,359,265 -- 2,596,704 Class D...................... -- 764,367 -- 691,921 ------------ ------------ ------------ ------------ (325) 3,123,632 -- 3,288,625 ------------ ------------ ------------ ------------ Net asset value of shares redeemed: Class A...................... (19,885,160) (28,936,985) (7,715,313) (10,175,152) Class D...................... (7,645,025) (8,181,883) (1,221,495) (2,462,053) ------------ ------------ ------------ ------------ (27,530,185) (37,118,868) (8,936,808) (12,637,205) ------------ ------------ ------------ ------------ Change in net assets from capital share transactions... (24,440,256) (24,149,924) (8,523,033) (5,138,841) ------------ ------------ ------------ ------------ Total change in net assets................ (18,912,057) (68,316,373) (6,521,966) (17,461,502) Net Assets: Beginning of period............ 96,814,921 165,131,294 23,316,393 40,777,895 ------------ ------------ ------------ ------------ End of period.................. $ 77,902,864 $ 96,814,921 $ 16,794,427 $ 23,316,393 ============ ============ ============ ============
See accompanying notes to financial statements. 23 ESC STRATEGIC FUNDS, INC. Statements of Changes in Net Assets (continued)
SMALL CAP II FUND ------------------------------------ SIX MONTHS ENDED YEAR ENDED SEPTEMBER 30, 1999 MARCH 31, 1999 ------------------ -------------- (UNAUDITED) Operations: Net investment loss....................................... $ (212,493) $ (309,625) Net realized loss on investments.......................... (3,235,334) (2,810,903) Net change unrealized appreciation/ (depreciation) of investments............................................. 5,176,146 (8,261,391) ----------- ------------ Net change in net assets resulting from operations.......... 1,728,319 (11,381,919) ----------- ------------ Capital Share Transactions: Proceeds from sales of shares: Class A................................................. 1,298,963 14,824,338 Class D................................................. 734,309 4,282,060 ----------- ------------ 2,033,272 19,106,398 ----------- ------------ Net asset value of shares redeemed: Class A................................................. (9,177,910) (6,663,800) Class D................................................. (2,789,117) (3,179,324) ----------- ------------ (11,967,027) (9,843,124) ----------- ------------ Change in net assets from capital share transactions...... (9,933,755) 9,263,274 ----------- ------------ Total change in net assets......................... (8,205,436) (2,118,645) Net Assets: Beginning of period....................................... 27,512,554 29,631,199 ----------- ------------ End of period............................................. $19,307,118 $ 27,512,554 =========== ============
See accompanying notes to financial statements. 24 ESC STRATEGIC FUNDS, INC. Statements of Cash Flows September 30, 1999 (unaudited)
SMALL CAP SMALL CAP II ------------ ------------ Cash Flows from Operating Activities: Total investment income................................... $ 288,368 $ 45,061 Net expenses.............................................. (910,463) (257,554) ------------ ----------- Net investment income (loss).......................... (622,095) (212,493) ------------ ----------- Adjustments to reconcile net investment income to cash flows from operating activities Changes in receivables Interest................................................ (9,017) (6,878) Change in payables Expenses................................................ (13,521) 8,946 ------------ ----------- Total adjustments..................................... (22,538) 2,068 ------------ ----------- Net cash provided (used) by operating activities... (599,556) (214,561) CASH FLOWS FROM INVESTING ACTIVITIES: Proceeds from sales of investments........................ 69,735,243 19,638,969 Purchases of investments.................................. (44,619,889) (10,684,700) Net purchases of short-term investments with cash received as collateral from securities lending................... (953,791) 1,129,700 ------------ ----------- Net cash provided (used) by investing activities... 24,161,563 10,083,969 CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from shares issued............................... 3,103,254 2,033,272 Cost of shares redeemed................................... (27,619,051) (11,935,099) Distributions paid to shareholders........................ 325 -- Dividends reinvested...................................... (325) -- Net collateral received from securities lending........... 953,791 (1,129,700) ------------ ----------- Net cash provided (used) by financing activities... (23,562,006) (11,031,527) Net increase (decrease) in cash............................. 0 (1,162,119) Cash at beginning of period................................. -- -- ------------ ----------- Cash at end of period....................................... $ 0 $(1,162,119) ============ ===========
See accompanying notes to financial statements. 25 ESC STRATEGIC FUNDS, INC. Financial Highlights
INCOME FUND ---------------------------------------------------------------------------------- CLASS A ---------------------------------------------------------------------------------- MAY 4, 1994 (COMMENCEMENT SIX MONTHS OF OPERATIONS) ENDED YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED THROUGH SEPTEMBER 30, MARCH 31, MARCH 31, MARCH 31, MARCH 31, MARCH 31, 1999 1999 1998 1997 1996 1995 ------------- ---------- ---------- ---------- ---------- -------------- (UNAUDITED) Net asset value per share, beginning of period........... $ 9.77 $ 9.99 $ 9.73 $ 9.89 $ 9.94 $ 10.00 ------ ------ ------- ------- ------- ------- Income from Investment Operations Net investment income....... 0.41 0.51(a) 0.34 0.60 0.59 0.55 Net realized and unrealized gains/ (losses) on investments............... (0.71) 0.04 0.44 (0.16) 0.16 (0.05) ------ ------ ------- ------- ------- ------- Total from investment operations.................. (0.30) 0.55 0.78 0.44 0.75 0.50 ------ ------ ------- ------- ------- ------- Less Dividends and Distributions:.............. -- -- -- -- -- -- From net investment income.................... (0.41) (0.57) (0.52) (0.60) (0.59) (0.01) From realized gains......... -- (0.15) -- -- (0.21) (0.55) From tax return of capital................... -- (0.05) -- -- -- -- ------ ------ ------- ------- ------- ------- Total Dividends and Distributions............... (0.41) (0.77) (0.52) (0.60) (0.80) (0.56) ------ ------ ------- ------- ------- ------- Net asset value per share, end of period............. $ 9.06 $ 9.77 $ 9.99 $ 9.73 $ 9.89 $ 9.94 ====== ====== ======= ======= ======= ======= Total Return (excludes sales charge)..................... (3.21%) 5.64% 8.18% 3.91% 7.67% 5.30% Ratios/Supplemental Data: Net Assets End of Period (in thousands)................ $6,558 $7,230 $24,413 $32,506 $36,891 $32,373 Ratios to Average Net Assets of: Net investment income..... 8.46% 5.09% 5.27% 5.49% 5.87% 6.29%** Expenses net of waivers/reimbursements and expenses paid by third parties........... 1.66% 1.91% 1.87% 1.65% 1.70% 1.85%** Expenses before waivers/reimbursements and expenses paid by third parties........... 2.66% 2.22% 1.87% 1.70% 1.75% 1.86%** Portfolio Turnover Rate... 13% 95% 130% 123% 138% 92%
(a) Calculated using the average share method. ** Annualized. 26 ESC STRATEGIC FUNDS, INC. Financial Highlights
INCOME FUND ------------------------------------------------------------------------------ CLASS D ------------------------------------------------------------------------------ MAY 4, 1994 (COMMENCEMENT SIX MONTHS YEAR YEAR YEAR YEAR OF OPERATIONS) ENDED ENDED ENDED ENDED ENDED THROUGH SEPTEMBER 30, MARCH 31, MARCH 31, MARCH 31, MARCH 31, MARCH 31, 1999 1999 1998 1997 1996 1995 ------------- --------- --------- --------- --------- -------------- (UNAUDITED) Net asset value per share, beginning of period........................... $ 9.84 $ 9.99 $ 9.73 $ 9.89 $ 9.94 $ 10.00 ------- ------- ------- ------- ------- ------- Income from Investment Operations: Net investment income............. 0.38 0.50(a) 0.28 0.50 0.54 0.50 Net realized and unrealized gains/ (losses) on investments......... (0.71) 0.01 0.45 (0.16) 0.16 (0.05) ------- ------- ------- ------- ------- ------- Total from investment operations.... (0.33) 0.51 0.73 0.34 0.70 0.45 ------- ------- ------- ------- ------- ------- Less Dividends and Distributions: From net investment income........ (0.38) (0.46) (0.47) (0.50) (0.54) (0.01) From realized gains............... -- (0.15) -- -- (0.21) (0.50) From tax return of capital........ -- (0.05) -- -- -- -- ------- ------- ------- ------- ------- ------- Total Dividends and Distributions... (0.38) (0.66) (0.47) (0.50) (0.75) (0.51) ------- ------- ------- ------- ------- ------- Net asset value per share, end of period.......................... $ 9.13 $ 9.84 $ 9.99 $ 9.73 $ 9.89 $ 9.94 ======= ======= ======= ======= ======= ======= Total Return (excludes sales charge)......................... (3.43%) 5.23% 7.64% 3.39% 7.11% 4.74% Ratios/Supplemental Data: Net Assets End of Period (in thousands)...................... $ 494 $ 548 $ 823 $ 1,420 $ 1,446 $ 1,241 Ratios to Average Net Assets of: Net investment income........... 7.97% 5.03% 4.77% 4.99% 5.37% 5.73%** Expenses net of waivers/reimbursements and expenses paid by third parties....................... 2.16% 2.44% 2.37% 2.15% 2.20% 2.29%** Expenses before waivers/reimbursements and expenses paid by third parties....................... 3.16% 2.96% 2.37% 2.21% 2.25% 2.31%** Portfolio Turnover Rate......... 13% 95% 130% 123% 138% 92%
(a) Calculated using the average share method. ** Annualized. See accompanying notes to financial statements. 27 ESC STRATEGIC FUNDS, INC. Financial Highlights (continued)
INTERNATIONAL EQUITY FUND ------------------------------------------------------------------------------ CLASS A ------------------------------------------------------------------------------ MAY 12, 1994 (COMMENCEMENT SIX MONTHS YEAR YEAR YEAR YEAR OF OPERATIONS) ENDED ENDED ENDED ENDED ENDED THROUGH SEPTEMBER 30, MARCH 31, MARCH 31, MARCH 31, MARCH 31, MARCH 31, 1999 1999 1998 1997 1996 1995 ------------- --------- --------- --------- --------- -------------- (UNAUDITED) Net asset value per share, beginning of period................ $10.75 $12.06 $ 11.66 $ 11.08 $ 9.90 $10.00 ------ ------ ------- ------- ------- ------ Income from Investment Operations Net investment loss.............. (0.03) (0.06) -- (0.04) (0.04) (0.05) Net realized and unrealized gains/(losses) on investments.................... 0.60 (0.31) 2.37 0.97 1.46 (0.03) ------ ------ ------- ------- ------- ------ Total from investment operations... 0.57 (0.37) 2.37 0.93 1.42 (0.08) ------ ------ ------- ------- ------- ------ Less Dividends and Distributions: From realized gains.............. -- (0.94) (1.97) (0.35) (0.24) (0.02)(a) ------ ------ ------- ------- ------- ------ Total Dividends and Distributions.................... -- (0.94) (1.97) (0.35) (0.24) (0.02) ------ ------ ------- ------- ------- ------ Net asset value per share, end of period......................... $11.32 $10.75 $ 12.06 $ 11.66 $ 11.08 $ 9.90 ====== ====== ======= ======= ======= ====== Total Return (excludes sales charge)........................ 5.20% (2.22%) 22.24% 8.44% 14.41% (0.84%) Ratios/Supplemental Data: Net Assets End of Period (in thousands)..................... $6,788 $7,816 $13,286 $18,282 $14,597 $9,213 Ratios to Average Net Assets of: Net investment loss............ (0.46%) (0.44%) (0.50%) (0.40%) (0.36%) (0.65%)** Expenses net of waivers/reimbursements and expenses paid by third parties...................... 2.50% 2.45% 2.48% 2.25% 2.37% 2.50%** Expenses before waivers/reimbursements and expenses paid by third parties...................... 2.81% 2.55% 2.48% 2.25% 2.43% 3.22%** Portfolio Turnover Rate........ 37% 123% 79% 94% 92% 76%
(a) Represents distribution in excess of net investment income. ** Annualized. See accompanying notes to financial statements. 28 ESC STRATEGIC FUNDS, INC. Financial Highlights (continued)
INTERNATIONAL EQUITY FUND ------------------------------------------------------------------------------ CLASS D ------------------------------------------------------------------------------ MAY 12, 1994 (COMMENCEMENT SIX MONTHS YEAR YEAR YEAR YEAR OF OPERATIONS) ENDED ENDED ENDED ENDED ENDED THROUGH SEPTEMBER 30, MARCH 31, MARCH 31, MARCH 31, MARCH 31, MARCH 31, 1999 1999 1998 1997 1996 1995 ------------- --------- --------- --------- --------- -------------- (UNAUDITED) Net asset value per share, beginning of period................ $10.45 $11.81 $ 11.47 $ 10.95 $ 9.82 $10.00 ------ ------ ------- ------- ------- ------ Income from Investment Operations Net investment loss.............. (0.06) (0.16) (0.13) (0.10) (0.09) (0.07) Net realized and unrealized gains/(losses) on investments.................... 0.59 (0.26) 2.44 0.97 1.46 (0.10) ------ ------ ------- ------- ------- ------ Total from investment operations... 0.53 (0.42) 2.31 0.87 1.37 (0.17) ------ ------ ------- ------- ------- ------ Less Dividends and Distributions: From realized gains.............. -- (0.94) (1.97) (0.35) (0.24) (0.01)(a) ------ ------ ------- ------- ------- ------ Total Dividends and Distributions.................... -- (0.94) (1.97) (0.35) (0.24) (0.01) ------ ------ ------- ------- ------- ------ Net asset value per share, end of period......................... $10.98 $10.45 $ 11.81 $ 11.47 $ 10.95 $ 9.82 ====== ====== ======= ======= ======= ====== Total Return (excludes sales charge)........................ 4.97% (2.73%) 22.09% 7.99% 14.01% (1.72%) Ratios/Supplemental Data: Net Assets End of Period (in thousands)..................... $1,542 $1,880 $ 2,776 $ 4,204 $ 3,725 $3,322 Ratios to Average Net Assets of: Net investment loss............ (0.92%) (0.94%) (1.00%) (0.90%) (0.83%) (1.51%)** Expenses net of waivers/reimbursements and expenses paid by third parties...................... 3.00% 2.95% 2.98% 2.78% 2.87% 2.98%** Expenses before waivers/reimbursements and expenses paid by third parties...................... 3.31% 3.05% 2.98% 2.79% 2.96% 3.69%** Portfolio Turnover Rate........ 37% 123% 79% 94% 92% 76%
(a) Represents distribution in excess of net investment income. ** Annualized. See accompanying notes to financial statements. 29 ESC STRATEGIC FUNDS, INC. Financial Highlights (continued)
SMALL CAP FUND ------------------------------------------------------------------------------ CLASS A ------------------------------------------------------------------------------ JUNE 8, 1994 SIX MONTHS YEAR YEAR YEAR YEAR (COMMENCEMENT ENDED ENDED ENDED ENDED ENDED OF OPERATIONS) SEPTEMBER 30, MARCH 31, MARCH 31, MARCH 31, MARCH 31, THROUGH 1999 1999 1998 1997 1996 MARCH 31, 1995 ------------- --------- --------- --------- --------- -------------- (UNAUDITED) Net asset value per share, beginning of period........... $ 16.59 $ 22.81 $ 17.55 $ 15.88 $ 11.25 $10.00 ------- ------- -------- ------- ------- ------ Income from Investment Operations Net investment income/(loss)............. (0.13) (0.12) 0.02 (0.05) (0.08) (0.03) Net realized and unrealized gains/(losses) on investments............... 0.95 (5.59) 6.97 2.46 5.19 1.52 ------- ------- -------- ------- ------- ------ Total from investment operations.................. 0.82 (5.71) 6.99 2.41 5.11 1.49 ------- ------- -------- ------- ------- ------ Less Dividends and Distributions: From net investment income.................... -- -- -- -- -- (0.24) From realized gains......... --(a) (0.51) (1.73) (0.74) (0.48) -- ------- ------- -------- ------- ------- ------ Total Dividends and Distributions............... -- (0.51) (1.73) (0.74) (0.48) (0.24) ------- ------- -------- ------- ------- ------ Net asset value per share, end of period............. $ 17.41 $ 16.59 $ 22.81 $ 17.55 $ 15.88 $11.25 ======= ======= ======== ======= ======= ====== Total Return (excludes sales charge)................... 4.94% (24.97%) 40.64% 14.99% 45.88% 15.03% Ratios/Supplemental Data: Net Assets End of Period (in thousands)................ $61,122 $74,740 $126,857 $72,488 $28,840 $8,785 Ratios to Average Net Assets of: Net investment loss....... (1.22%) (0.54%) (0.18%) (0.44%) (0.80%) (0.43%)** Expenses net of waivers/ reimbursements and expenses paid by third parties................. 1.84% 1.79% 1.65% 1.66% 2.00% 2.00%** Expenses before waivers/ reimbursements and expenses paid by third parties................. 1.84% 1.79% 1.68% 1.74% 2.18% 3.28%** Portfolio Turnover Rate... 19% 57% 67% 65% 102% 151%
(a) Distribution per share was less than $.005. ** Annualized. See accompanying notes to financial statements. 30 ESC STRATEGIC FUNDS, INC. Financial Highlights (continued)
SMALL CAP FUND ------------------------------------------------------------------------------ CLASS D ------------------------------------------------------------------------------ JUNE 8, 1994 SIX MONTHS YEAR YEAR YEAR YEAR (COMMENCEMENT ENDED ENDED ENDED ENDED ENDED OF OPERATIONS) SEPTEMBER 30, MARCH 31, MARCH 31, MARCH 31, MARCH 31, THROUGH 1999 1999 1998 1997 1996 MARCH 31, 1995 ------------- --------- --------- --------- --------- -------------- (UNAUDITED) Net asset value per share, beginning of period........... $ 16.26 $ 22.50 $ 17.35 $ 15.76 $11.22 $10.00 ------- ------- ------- ------- ------ ------ Income from Investment Operations Net investment loss......... (0.18) (0.22) (0.07) (0.11) (0.16) (0.05) Net realized and unrealized gains/(losses) on investments............... 0.96 (5.51) 6.95 2.44 5.18 1.51 ------- ------- ------- ------- ------ ------ Total from investment operations.................. 0.78 (5.73) 6.88 2.33 5.02 1.46 ------- ------- ------- ------- ------ ------ Less Dividends and Distributions: From net investment income.................... -- -- -- -- -- (0.24) From realized gains......... -- (0.51) (1.73) (0.74) (0.48) -- ------- ------- ------- ------- ------ ------ Total Dividends and Distributions............... -- (0.51) (1.73) (0.74) (0.48) (0.24) ------- ------- ------- ------- ------ ------ Net asset value per share, end of period............. $ 17.04 $ 16.26 $ 22.50 $ 17.35 $15.76 $11.22 ======= ======= ======= ======= ====== ====== Total Return (excludes sales charge)................... 4.80% (25.40%) 40.47% 14.59% 45.19% 14.72% Ratios/Supplemental Data: Net Assets End of Period (in thousands)................ $16,780 $22,075 $38,274 $22,392 $8,897 $3,367 Ratios to Average Net Assets of: Net investment loss....... (1.73%) (1.04%) (0.68%) (0.96%) (1.30%) (0.93%)** Expenses net of waivers/ reimbursements and expenses paid by third parties................. 2.34% 2.29% 2.15% 2.19% 2.50% 2.50%** Expenses before waivers/ reimbursements and expenses paid by third parties................. 2.34% 2.29% 2.18% 2.29% 2.74% 3.68%** Portfolio Turnover Rate... 19% 57% 67% 65% 102% 151%
** Annualized. See accompanying notes to financial statements. 31 ESC STRATEGIC FUNDS, INC. Financial Highlights (continued)
APPRECIATION FUND ------------------------------------------------------------------------------ CLASS A ------------------------------------------------------------------------------ JUNE 6, 1994 SIX MONTHS YEAR YEAR YEAR YEAR (COMMENCEMENT ENDED ENDED ENDED ENDED ENDED OF OPERATIONS) SEPTEMBER 30, MARCH 31, MARCH 31, MARCH 31, MARCH 31, THROUGH 1999 1999 1998 1997 1996 MARCH 31, 1995 ------------- --------- --------- --------- --------- -------------- (UNAUDITED) Net asset value per share, beginning of period........... $ 10.73 $ 15.80 $ 14.03 $ 13.02 $ 10.67 $ 10.00 ------- ------- ------- ------- ------- ------- Income from Investment Operations Net investment income/(loss)............. (0.03) (0.06) 0.02 (0.04) (0.05) -- Net realized and unrealized gains/(losses) on investments............... 0.89 (3.50) 6.02 1.92 2.71 0.73 ------- ------- ------- ------- ------- ------- Total from investment operations.................. 0.86 (3.56) 6.04 1.88 2.66 0.73 ------- ------- ------- ------- ------- ------- Less Dividends and Distributions: From realized gains......... -- (1.51) (4.27) (0.87) (0.31) (0.06) ------- ------- ------- ------- ------- ------- Total Dividends and Distributions............... -- (1.51) (4.27) (0.87) (0.31) (0.06) ------- ------- ------- ------- ------- ------- Net asset value per share, end of period............. $ 11.59 $ 10.73 $ 15.80 $ 14.03 $ 13.02 $ 10.67 ======= ======= ======= ======= ======= ======= Total Return (excludes sales charge)................... 8.01% (22.43%) 46.73% 14.25% 25.07% 7.32% Ratios/Supplemental Data: Net Assets End of Period (in thousands)................ $13,143 $18,916 $33,394 $44,767 $25,561 $15,126 Ratios to Average Net Assets of: Net investment loss....... (0.47%) (0.44%) (0.40%) (0.30%) (0.39%) (0.04%)** Expenses net of waivers/ reimbursements and expenses paid by third parties................. 2.00% 1.95% 1.80% 1.82% 2.00% 2.00%** Expenses before waivers/ reimbursements and expenses paid by third parties................. 2.07% 1.97% 1.80% 1.84% 2.10% 2.88%** Portfolio Turnover Rate... 62% 96% 67% 71% 78% 58%
** Annualized. See accompanying notes to financial statements. 32 ESC STRATEGIC FUNDS, INC. Financial Highlights (continued)
APPRECIATION FUND ------------------------------------------------------------------------------ CLASS D ------------------------------------------------------------------------------ JUNE 6, 1994 SIX MONTHS YEAR YEAR YEAR YEAR (COMMENCEMENT ENDED ENDED ENDED ENDED ENDED OF OPERATIONS) SEPTEMBER 30, MARCH 31, MARCH 31, MARCH 31, MARCH 31, THROUGH 1999 1999 1998 1997 1996 MARCH 31, 1995 ------------- --------- --------- --------- --------- -------------- (UNAUDITED) Net asset value per share, beginning of period........... $10.47 $15.54 $13.85 $12.91 $10.63 $10.00 ------ ------ ------ ------ ------ ------ Income from Investment Operations Net investment loss......... (0.06) (0.15) (0.08) (0.08) (0.09) (0.03) ------ ------ ------ ------ ------ ------ Total Dividends and Distributions............... -- (1.51) (4.27) (0.87) (0.31) 0.06 ------ ------ ------ ------ ------ ------ Net realized and unrealized gains/(losses) on investments............... 0.87 (3.41) 6.04 1.89 2.68 0.72 ------ ------ ------ ------ ------ ------ Total from investment operations.................. 0.81 (3.56) 5.96 1.81 2.59 0.69 ------ ------ ------ ------ ------ ------ Less Dividends and Distributions: From realized gains......... -- (1.51) (4.27) (0.87) (0.31) (0.06) ------ ------ ------ ------ ------ ------ Total Dividends and Distributions............... -- (1.51) (4.27) (0.87) (0.31) (0.06) ------ ------ ------ ------ ------ ------ Net asset value per share, end of period............. $11.28 $10.47 $15.54 $13.85 $12.91 $10.63 ====== ====== ====== ====== ====== ====== Total Return (excludes sales charge)................... 7.74% (22.82%) 46.76% 13.81% 24.50% 6.92% Ratios/Supplemental Data: Net Assets End of Period (in thousands)................ $3,651 $4,400 $7,384 $4,054 $2,482 $1,693 Ratios to Average Net Assets of: Net investment loss....... (0.99%) (0.94%) (0.90%) (0.78%) (0.86%) (0.56%)** Expenses net of waivers/ reimbursements and expenses paid by third parties................. 2.50% 2.45% 2.30% 2.34% 2.50% 2.50%** Expenses before waivers/ reimbursements and expenses paid by third parties................. 2.57% 2.47% 2.30% 2.36% 2.64% 3.40%** Portfolio Turnover Rate... 62% 96% 67% 71% 78% 58%
** Annualized. See accompanying notes to financial statements. 33 ESC STRATEGIC FUNDS, INC. Financial Highlights (continued)
SMALL CAP II FUND -------------------------------------------------------------------------- CLASS A -------------------------------------------------------------------------- JANUARY 28, 1997 (COMMENCEMENT OF OPERATIONS) SIX MONTHS ENDED YEAR ENDED YEAR ENDED THROUGH SEPTEMBER 30, 1999 MARCH 31, 1999 MARCH 31, 1998 MARCH 31, 1997 ------------------ -------------- -------------- ---------------- (UNAUDITED) Net asset value per share, beginning of period........................... $ 9.61 $ 13.68 $ 9.64 $10.00 ------- ------- ------- ------ Income from Investment Operations Net investment income/(loss)...... (0.11) (0.09) 0.01 -- Net realized and unrealized gains/(losses) on investments... 0.66 (3.98) 4.65 (0.36) ------- ------- ------- ------ Total from investment operations.... 0.55 (4.07) 4.66 (0.36) ------- ------- ------- ------ Less Dividends and Distributions: From net investment income........ -- -- (0.36) -- From realized gains............... -- -- (0.26) -- ------- ------- ------- ------ Total Dividends and Distributions... -- -- (0.62) -- ------- ------- ------- ------ Net asset value per share, end of period.......................... $ 10.16 $ 9.61 $ 13.68 $ 9.64 ======= ======= ======= ====== Total Return (excludes sales charge)......................... 5.72% (29.75%) 48.92% (3.60%) Ratios/Supplemental Data: Net Assets End of Period (in thousands)...................... $13,468 $20,077 $19,942 $2,852 Ratios to Average Net Assets of: Net investment income/(loss).... (1.51%) (0.87%) (0.36%) 0.25%** Expenses net of waivers/reimbursements and expenses paid by third parties....................... 1.86% 2.00% 1.62% 2.00%** Expenses before waivers/reimbursements and expenses paid by third parties....................... 2.36% 2.27% 2.45% 5.51%** Portfolio Turnover Rate......... 23% 58% 86% 14%
** Annualized. See accompanying notes to financial statements. 34 ESC STRATEGIC FUNDS, INC. Financial Highlights (continued)
SMALL CAP II FUND -------------------------------------------------------------------------- CLASS D -------------------------------------------------------------------------- JANUARY 28, 1997 (COMMENCEMENT OF OPERATIONS) SIX MONTHS ENDED YEAR ENDED YEAR ENDED THROUGH SEPTEMBER 30, 1999 MARCH 31, 1999 MARCH 31, 1998 MARCH 31, 1997 ------------------ -------------- -------------- ---------------- (UNAUDITED) Net asset value per share, beginning of period................ $ 9.52 $13.61 $ 9.63 $10.00 ------ ------ ------ ------ Income from Investment Operations Net investment loss.............. (0.12) (0.16) (0.03) -- Net realized and unrealized gains/(losses) on investments.................... 0.65 (3.93) 4.63 (0.37) ------ ------ ------ ------ Total from investment operations... 0.53 (4.09) 4.60 (0.37) ------ ------ ------ ------ Less Dividends and Distributions: From net investment income....... -- -- (0.36) -- From realized gains.............. -- -- (0.26) -- ------ ------ ------ ------ Total Dividends and Distributions.................... -- -- (0.62) -- ------ ------ ------ ------ Net asset value per share, end of period......................... $10.05 $ 9.52 $13.61 $ 9.63 ====== ====== ====== ====== Total Return (excludes sales charge).......................... 5.57% (30.05%) 48.33% (3.70%) Ratios/Supplemental Data: Net Assets End of Period (in thousands)..................... $5,839 $7,435 $9,689 $1,304 Ratios to Average Net Assets of: Net investment loss............ (2.01%) (1.37%) (0.86%) (0.23%)** Expenses net of waivers/reimbursements and expenses paid by third parties...................... 2.36% 2.50% 2.12% 2.50%** Expenses before waivers/reimbursements and expenses paid by third parties...................... 2.87% 2.77% 2.95% 6.91%** Portfolio Turnover Rate........ 23% 58% 86% 14%
** Annualized. See accompanying notes to financial statements. 35 ESC STRATEGIC FUNDS, INC. Notes to Financial Statements -- September 30, 1999 (unaudited) 1. DESCRIPTION. ESC Strategic Funds, Inc. (the "Company") was incorporated in Maryland on November 24, 1993. The Company currently comprises five portfolios: ESC Strategic Income Fund, ESC Strategic International Equity Fund, (formerly ESC Strategic Global Equity Fund), ESC Strategic Small Cap Fund, ESC Strategic Appreciation Fund, and ESC Strategic Small Cap II Fund, (formerly ESC Strategic Growth Fund),(individually a "Fund"; collectively the "Funds"). The Company is registered under the Investment Company Act of 1940, as amended (the "1940 Act"), as an open-end management investment company. Each Fund, with the exception of ESC Strategic Small Cap Fund, operates as a diversified fund. ESC Strategic Small Cap Fund, operates as a non-diversified fund. The Company's Articles of Incorporation authorize the issuance of two classes of common stock designated as Class A and Class D for each Fund. Class A shares are offered with a maximum front-end sales charge of 4.50% which may be reduced or waived in certain cases. Class A shares are also subject to a Service and Distribution Fee calculated at an annual rate of up to 0.25% of the average daily net asset value of Class A shares. Class D shares are offered with a front-end sales charge of 1.50% and are subject to a Service and Distribution Fee at an annual rate of up to 0.75% based on the average daily net asset value of Class D shares. The Company's Board of Directors may, in the future, authorize the issuance of additional classes of capital stock for the Funds. The Funds' investment objectives are as follows: ESC Strategic Income Fund - To seek a high level of current income, with a secondary objective of total return. The Fund seeks to achieve its investment objective by investing primarily in debt instruments of U.S. and foreign issuers that are rated below investment grade. (Prior to September 30, 1998, this Fund primarily invested in a diversified portfolio of corporate, government and other debt instruments of U.S. issuers.) ESC Strategic International Equity Fund - To seek long-term capital appreciation. The Fund seeks to achieve its investment objective by primarily investing in a diversified portfolio of publicly traded common stocks and securities convertible into or exchangeable for common stock of non-U.S. issuers. (Prior to July 17, 1998, this Fund's investments were diversified across both domestic and international markets.) ESC Strategic Small Cap Fund -- To seek a high level of capital appreciation. The Fund pursues its objective by investing primarily in equity securities of domestic and foreign issuers. ESC Strategic Appreciation Fund -- To seek long-term capital appreciation. The Fund seeks to achieve its investment objective by primarily investing in a diversified portfolio of U.S. based companies publicly traded common stocks and securities convertible into or exchangeable for common stock. ESC Strategic Small Cap II Fund -- To seek a high level of capital appreciation. The Fund pursues its objective by investing primarily in equity securities of domestic and foreign issuers believed to offer superior opportunities for growth. 2. SIGNIFICANT ACCOUNTING POLICIES. The following is a summary of the significant accounting policies followed by the Funds in the preparation of its financial statements. The policies are in conformity with generally accepted accounting principles ("GAAP"). The preparation of financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts and disclosures. Actual results could differ from those estimates. 36 ESC STRATEGIC FUNDS, INC. Notes to Financial Statements -- September 30, 1999 (unaudited) A. PORTFOLIO VALUATION. Investments in securities are valued at the last sales price on the securities exchange or the NASDAQ National Market System on which such securities are primarily traded or, if there are no trades, at the current bid price, as of 4:00 p.m. eastern time. Over-the-counter securities, or securities for which there were no transactions, are valued at the closing bid price. Bid price is used when no asked price is available. Bonds and other fixed income securities are valued by using market quotations, and may be valued on the basis of prices provided by a pricing service. Securities for which market quotations are not readily available are valued at fair value as determined in good faith by or at the direction of the Board of Directors. Short-term securities which mature in 60 days or less are valued at amortized cost, if their terms to maturity at purchase were 60 days or less, or by amortizing their value on the 61st day prior to maturity, if their original term to maturity at purchase exceeded 60 days. B. SECURITIES TRANSACTIONS AND INVESTMENT INCOME. Securities transactions are recorded on a trade date basis. Realized gains and losses from securities transactions are recorded on the identified cost basis. Dividend income is recognized on the ex-dividend date and interest income, including amortization of premium and accretion of discount on investments, is accrued daily as earned. C. DIVIDEND AND CAPITAL GAIN DISTRIBUTIONS TO SHAREHOLDERS. Distributions to shareholders are recorded on the ex-dividend date. The amount of dividends and distributions are determined in accordance with federal income tax regulations, which may differ from generally accepted accounting principles. These "book/tax" differences are considered either temporary or permanent in nature. To the extent these differences are permanent in nature, such amounts are reclassified within the capital accounts based on their federal tax basis treatment; temporary differences do not require reclassification. Dividends and distributions which exceed net investment income and net realized capital gains for financial reporting purposes but not for tax purposes are reported as dividends in excess of net investment income or distributions in excess of net realized capital gains. D. REPURCHASE AGREEMENTS. The Funds may purchase instruments from financial institutions, such as banks and broker-dealers, subject to the seller's agreement to repurchase them at an agreed upon time and price ("repurchase agreements"). The seller under a repurchase agreement is required to maintain the value of the securities subject to the agreement at not less than the repurchase price. Default by the seller would, however, expose the relevant Funds to possible loss because of adverse market action or delay in connection with the disposition of the underlying obligations. Risks may arise from the potential inability of counterparties to honor the terms of the repurchase agreements. Accordingly, the Funds could receive less than the repurchase price upon the sale of collateral securities. E. FEDERAL INCOME TAXES. It is the policy of each of the Funds to continue to qualify as a "Regulated Investment Company" under Subchapter M of the Internal Revenue Code of 1986, as amended. By so qualifying, the Funds will not be subject to Federal income taxes to the extent that they distribute all of their taxable and tax-exempt income for the fiscal year. The Funds also intend to meet the distribution requirements to avoid the payment of an excise tax. Accordingly, no provision for taxes is recorded. F. ORGANIZATIONAL EXPENSES. Costs incurred in connection with the organization and initial registration of the Funds, with the exception of the Small Cap II Fund, have been deferred and are being amortized on a straight-line basis over sixty months beginning with each Fund's commencement of operations. In the event any of the initial 37 ESC STRATEGIC FUNDS, INC. Notes to Financial Statements -- September 30, 1999 (unaudited) shares of the Funds are redeemed during the amortization period, the redemption proceeds will be reduced by a pro rata portion of any unamortized organization expenses in the proportion as the number of shares being redeemed bears to the number of initial shares outstanding at the time of redemption. G. DETERMINATION OF NET ASSET VALUE AND CALCULATION OF EXPENSES. Expenses directly attributable to a Fund are charged to that Fund. Other expenses of the Company are allocated proportionately among the Funds in relation to the net assets of each Fund or on another reasonable basis. In calculating net asset value per share of each class, investment income, realized and unrealized gains and losses, and expenses other than class specific expenses are allocated daily to each class of shares based upon the proportion of net assets of each class at the beginning of each day. Distribution expenses are solely borne by the class incurring the expense. H. FOREIGN EXCHANGE TRANSACTIONS. The books and records of the Funds are maintained in U.S. dollars; non-U.S. dollar denominated amounts are translated into U.S. dollars as follows with the resultant exchange gains and losses recorded in the Statement of Operations: (i) market value of investment securities and other assets and liabilities: at the exchange rate on the valuation date, (ii) purchases and sales of investment securities, income and expenses, at the exchange rate prevailing on the respective date of such transactions. The Funds do not isolate that portion of the results of operations resulting from changes in foreign exchange rates on investments from the fluctuations arising from changes in market prices of securities at period end. Such fluctuations are included with the net realized and unrealized gain or loss from investments. However, the Funds do isolate the effect of fluctuations in foreign exchange rates when determining the gain or loss upon the sale or maturity of foreign currency denominated debt obligations pursuant to U.S. Federal income tax regulations. Such amounts are categorized as foreign exchange gain or loss for both financial reporting and income tax reporting purposes. Reported net realized foreign exchange gains or losses arise from sales and maturities of short-term securities, currency gains and losses realized between the trade and settlement dates on securities transactions, the difference between the amounts of dividends, interest and foreign withholding taxes recorded on the Funds' books, and the U.S. dollar equivalent of the amounts actually received or paid. Net unrealized foreign exchange gains and losses arise from changes in the value of the assets and liabilities, other than investments in securities at period end, resulting from changes in the foreign exchange rate. I. FORWARD FOREIGN EXCHANGE CONTRACTS. A forward foreign exchange contract is a commitment to buy or sell a foreign currency at a future date at a negotiated exchange rate. The Funds bear the market risk which arises from possible changes in foreign exchange values. Risks may arise from the potential inability of counterparties to meet the terms of their contracts and from unanticipated movements in the value of the foreign currency relative to the U.S. dollar. The gain or loss from the difference between the cost of original contracts and the amount realized upon the closing of such contracts is included in net realized gains on foreign exchange transactions. 38 ESC STRATEGIC FUNDS, INC. Notes to Financial Statements -- September 30, 1999 (unaudited) J. OFF-BALANCE SHEET RISK. The Funds may invest in various financial instruments with off-balance sheet risk. These financial instruments include taking positions in foreign currency contracts. During the period the forward contract is open, changes in the value of the contract are recognized as unrealized gains or losses by "marking to market" such contract on a daily basis to reflect the market value of the contract at the end of the day's trading. When the forward contract is closed, the Fund records a realized gain or loss between the proceeds from (or cost of) the closing transaction and the Fund's basis in the contract. The Funds enter into such contracts for the purpose of hedging exposure to change in foreign currency exchange rates on their portfolio holdings. A lack of correlation between the price of the security and the underlying contract could result in a loss to the Funds. At September 30, 1999, the International Equity Fund had the following open forward foreign currency contract: INTERNATIONAL EQUITY FUND LONG CONTRACT:
SETTLEMENT MARKET UNREALIZED AMOUNT/CURRENCY DATE COST VALUE GAIN --------------- ---------- ------- ------- ---------- 9,396,725/Japanese Yen.................... 10/1/99 $88,025 $88,259 $234
K. CREDIT AND MARKET RISK. Funds that invest in high yield instruments are subject to certain credit and market risks. The yields of high yield debt obligations reflect, among other things, perceived credit risk. The Funds' investment in securities rated below investment grade typically involve risks not associated with higher rated securities including, among others, greater risk of timely and ultimate payment of interest and principal, greater market price volatility and less liquid secondary market trading. L. SECURITIES LENDING. To increase current income, each Fund may lend its portfolio securities worth up to one-third of that Fund's total assets to brokers, dealers and financial institutions, provided: (1) the loan is secured continuously by collateral consisting of U.S. Government securities or cash or letters of credit maintained on a daily mark-to-market basis in an amount at least equal to the current market value of the securities loaned; (2) the Funds may at any time call the loan and obtain the return of the securities loaned within five business days, therefore not considered to be illiquid investments; and (3) the Funds will receive any interest or dividends paid on the loaned securities while simultaneously seeking to earn interest on the investment of collateral. The Funds will earn income for lending their securities because cash collateral pursuant to these loans will be invested in short-term money market instruments. The cash or subsequent short-term investments are recorded as assets of the Funds, offset by a corresponding liability to repay the cash at the termination of the loan. In addition, the short-term securities purchased with the cash collateral are included in the accompanying schedules of portfolio investments. In connection with lending securities, the Funds may pay reasonable finders, administrative and custodial fees. Loans of securities involve risk that the borrower may fail to return the securities or may fail to provide additional collateral. According to GAAP, a statement of cash flows is presented if the Fund lent out and received cash as collateral, on average, more than 10% of net assets during the year. 39 ESC STRATEGIC FUNDS, INC. Notes to Financial Statements -- September 30, 1999 (unaudited) As of September 30, 1999, the following Funds had securities with the following market values on loan: MARKET VALUE MARKET VALUE OF COLLATERAL OF LOANED SECURITIES ------------- -------------------- Small Cap...................... $13,421,600 $12,553,770 Appreciation................... $ 1,069,268 $ 1,027,733 Small Cap II................... $ 2,641,100 $ 2,339,440 The loaned securities were fully collateralized by cash which was invested in short term corporate bonds and repurchase agreements at September 30, 1999. As disclosed in the schedules of portfolio investments the Small Cap , Appreciation and Small Cap II Funds collectively invested cash collateral in a Lehman Brothers Repurchase Agreement with an interest rate of 5.83% and a maturity of 10/1/1999 which was collateral by $10,630,000 Collateralized Mortgage Obligation, Series 99-BC2, due 6/25/29 with a market value of $10,638,879. 3. RELATED PARTY TRANSACTIONS. The Company has entered into an investment advisory agreement (the "Investment Advisory Agreement") with SunTrust Equitable Securities Corporation ("STES" or the "Adviser"). The Investment Advisory Agreement provides for the Adviser to be paid a fee calculated and accrued daily and paid monthly at the annual rate of 1.25% of average daily net assets for ESC Strategic Small Cap II Fund and 1.00% of such net assets for each of the other Funds. The Adviser provides portfolio management supervision and certain administrative, clerical and bookkeeping services for the Company. The Adviser has entered into agreements with various portfolio managers (the "Managers") to provide portfolio management services for the Funds. Equitable Asset Management, a wholly-owned subsidiary of the Adviser, provides portfolio management services for Small Cap and Small Cap II Funds and approximately one-third of the assets of the Appreciation Fund. The Adviser has retained various other Managers to advise the International Equity Fund, Income Fund and the remaining assets of the Appreciation Fund. The Adviser pays any fees payable under these agreements with the Managers. For the six months ended September 30, 1999, the Adviser voluntarily waived fees of $37,216, $13,879, $7,789, and $64,598 for the Income Fund, International Equity Fund, Appreciation Fund and Small Cap II Fund, respectively. The Adviser did not waive any fee for the Small Cap Fund. BISYS Fund Services Limited Partnership d/b/a/ BISYS Fund Services ("BISYS") and BISYS Fund Services, Inc ("BFSI") are each a wholly-owned subsidiary of the BISYS Group, Inc. BISYS serves as Administrator subject to the supervision of the Company's Board of Directors and officers pursuant to the administration agreement (the "Administration Agreement"). The services under the Administration Agreement include day-to-day administration of matters related to the corporate existence of the Company, maintenance of its records, preparation of reports, supervision of the Funds' arrangement with their custodian and assistance in the preparation of the Company's Registration Statement under federal and state laws. Pursuant to the Administration Agreement, BISYS is entitled to a fee calculated and accrued daily and paid monthly at the annual rate of 0.15% of the average daily net assets of each Fund. BFSI serves as transfer agent and fund accountant for the Company. Pursuant to a Transfer Agent Agreement between the Company and BFSI, BFSI provides the Company with transfer and dividend disbursing agent services, for which it receives a fee of $15.00 per account per year subject to a required minimum fee of $15,000 for each Fund, plus 40 ESC STRATEGIC FUNDS, INC. Notes to Financial Statements -- September 30, 1999 (unaudited) out-of-pocket expenses. Pursuant to the Fund Accounting Agreement between the Company and BFSI, BFSI assists the Company in calculating net asset values and provides certain other accounting services for each Fund for an annual fee of $30,000 per Fund plus out-of-pocket expenses. STES has voluntarily agreed to reimburse the Funds to the extent that their ratios of expenses to average net assets exceed certain percentages as follows: Income -- 2.00% (Class A), 2.50% (Class D); International Equity -- 2.50% (Class A), 3.00% (Class D); Small Cap -- 2.00% (Class A), 2.50% (Class D); Appreciation -- 2.00% (Class A), 2.50% (Class D), and Small Cap II -- 2.00% (Class A), 2.50% (Class D). BISYS acts as Distributor for the Funds pursuant to a Distribution Contract. Each Fund has adopted a service and distribution plan ("Plan") with respect to each class of its shares. The Plans provide that Class A shares will pay the Distributor a fee up to an annual rate of 0.25% of the value of average daily net assets of Class A shares in return for financing certain distribution and shareholder service activities related to Class A shares. The Plans provide that Class D shares will pay the Distributor amounts up to an annual rate of 0.75% of the average daily net assets of Class D shares to finance certain distribution and shareholder services activities related to Class D shares. 4. SECURITIES TRANSACTIONS. A. PURCHASE AND SALE TRANSACTIONS. The aggregate amount of purchases and sales of investment securities, other than short-term securities, for the six months ended September 30, 1999 were as follows: PURCHASES SALES ----------- ----------- Income.................................... $ 1,081,680 $ 877,108 International Equity...................... $ 3,345,428 $ 4,980,016 Small Cap................................. $16,988,566 $40,820,200 Appreciation.............................. $12,247,385 $21,073,506 Small Cap II.............................. $ 5,819,284 $14,057,679 41 ESC STRATEGIC FUNDS, INC. Notes to Financial Statements -- September 30, 1999 (unaudited) 5. CAPITAL SHARE TRANSACTIONS. The Company is authorized to issue 650 million shares of capital stock with a par value $0.001 each. Transactions in each class of shares of the Funds for the six months ended September 30, 1999, were as follows:
SIX MONTHS ENDED SEPTEMBER 30, 1999 ----------------------------------------- INTERNATIONAL INCOME EQUITY SMALL CAP ----------- ------------- ----------- (UNAUDITED) (UNAUDITED) (UNAUDITED) CLASS A Beginning Balance.......................................... 740,072 727,019 4,504,805 ---------- --------- ---------- Shares Sold................................................ 16,526 17,989 118,276 Shares issued in reinvestment of net dividends and distributions............................................ 27,337 -- (20) Shares redeemed............................................ (60,191) (145,455) (1,111,517) ---------- --------- ---------- Net change in shares....................................... (16,328) (127,466) (993,261) ---------- --------- ---------- Ending Balance............................................. 723,744 599,553 3,511,544 ========== ========= ========== CLASS D Beginning Balance.......................................... 55,694 179,858 1,357,437 ---------- --------- ---------- Shares Sold................................................ 363 (480) 54,922 Shares issued in reinvestment of net dividends and distributions............................................ 2,126 -- -- Shares redeemed............................................ (4,026) (38,937) (427,499) ---------- --------- ---------- Net change in shares....................................... (1,537) (39,417) (372,577) ---------- --------- ---------- Ending Balance............................................. 54,157 140,441 984,860 ========== ========= ========== SIX MONTHS ENDED SEPTEMBER 30, 1999 --------------------------- APPRECIATION SMALL CAP II ------------ ------------ (UNAUDITED) (UNAUDITED) CLASS A Beginning Balance........................................... 1,762,710 2,090,287 --------- --------- Shares Sold................................................. 25,100 123,185 Shares issued in reinvestment of net dividends and distributions............................................. -- -- Shares redeemed............................................. (653,461) (888,456) --------- --------- Net change in shares........................................ (628,361) (765,271) --------- --------- Ending Balance.............................................. 1,134,349 1,325,016 ========= ========= CLASS D Beginning Balance........................................... 420,184 781,351 --------- --------- Shares Sold................................................. 10,621 70,575 Shares issued in reinvestment of net dividends and distributions............................................. -- -- Shares redeemed............................................. (107,009) (270,716) --------- --------- Net change in shares........................................ (96,388) (200,141) --------- --------- Ending Balance.............................................. 323,796 581,210 ========= =========
42 ESC STRATEGIC FUNDS, INC. Notes to Financial Statements -- September 30, 1999 (unaudited) 6. MULTIPLE MANAGER STRATEGY. The Adviser uses the Multiple Manager Strategy for certain of the Funds from time to time. Under this strategy, the Adviser allocates portions of a Fund's assets among multiple specialist Managers with dissimilar investment styles and security selection disciplines. The Adviser monitors the performance of both the total Fund portfolio and of each Manager. The Adviser will reallocate Fund assets among individual Manager's or recommend to the Company that it employ or terminate particular Manager's to the extent the Adviser deems appropriate to achieve the overall objectives of the particular Fund. Effective May 24, 1999, Westcap Investors, LLC replaced Globe Flex Capital, L.P. as a Manager of the ESC Stratagie Appreciation Fund. The Managers are as follows: ESC Strategic Income Fund-Cincinnati Asset Management, Inc. ESC Strategic International Equity Fund-Murray Johnstone International Limited. ESC Strategic Small Cap Fund-Equitable Asset Management, Inc. ESC Strategic Appreciation Fund-Westcap Investors, LLC; Brandes Investment Partners, L.P., and Atlantic Capital Management, LLC. ESC Strategic Small Cap II Fund-Equitable Asset Management, Inc. Equitable Asset Management, Inc. is an affiliate of the Adviser. 43 STI CLASSIC FUNDS PART C: OTHER INFORMATION Post-Effective Amendment No. 35 Item 23. Exhibits: (a) Declaration of Trust - originally filed with Registrant's Registration Statement on Form N-1A filed February 12, 1992 and incorporated by reference to Exhibit 1 of Post-Effective Amendment No. 15 to the Registrant's Registration Statement filed with the SEC via EDGAR Accession No. 0000912057-96-015938 on July 31, 1996. (b)(1) By-Laws - originally filed with Registrant's Pre-Effective Amendment No. 1 filed April 23, 1992 and incorporated by reference to Exhibit 2 of Post-Effective Amendment No. 15 to the Registrant's Registration Statement filed with the SEC via EDGAR Accession No. 0000912057-96- 015938 on July 31, 1996. (b)(2) Amended By-Laws - incorporated by reference to Exhibit (b)(2) of Post- Effective Amendment No. 23 to the Registrant's Registration Statement filed with the SEC via EDGAR Accession No. 0001047469-98-027407 on July 15, 1998. (c) Not applicable. (d)(1) Revised Investment Advisory Agreement with Trusco Capital Management, Inc. - as originally filed with Registrant's Post-Effective Amendment No. 5 filed August 2, 1993 and incorporated by reference to Exhibit 5(c) of Post-Effective Amendment No. 15 to the Registrant's Registration Statement filed with the SEC via EDGAR Accession No. 0000912057-96-015938 on July 31, 1996. (d)(2) Investment Advisory Agreement with American National Bank and Trust Company - as originally filed with Registrant's Post-Effective Amendment No. 6 filed October 22, 1993 and as Exhibit 5(d) of Post- Effective Amendment No. 15 to the Registrant's Registration Statement filed with the SEC via EDGAR Accession No. 0000912057-96-015938 on July 31, 1996. (d)(3) Investment Advisory Agreement with Sun Bank Capital Management, National Association (now STI Capital Management, N.A.) - as originally filed with Registrant's Post-Effective Amendment No. 6 filed October 22, 1993 and incorporated by reference to Exhibit 5(e) of Post-Effective Amendment No. 15 to the Registrant's Registration Statement filed with the SEC via EDGAR Accession No. 0000912057-96- 015938 on July 31, 1996. (d)(4) Investment Advisory Agreement with Trust Company Bank (now SunTrust Bank, Atlanta) - as originally filed with Registrant's Post-Effective Amendment No. 6 filed October 22, 1993 and incorporated by reference to Exhibit D(4) of Post-Effective Amendment No. 24 to the Registrant's Statement filed with the SEC via EDGAR Accession No. 0001047469-98- 028802 on July 30, 1998. (d)(5) Revised Schedule A to the Revised Investment Advisory Agreement with Trusco Capital Management, Inc.dated May 24, 1999 - incorporated by reference to the Registrant's Post-Effective Amendment No. 32 to the Registrant's Registration Statement filed the SEC via EDGAR Accession No. 0001047469-99-037088 on September 28, 1999. (d)(6) Revised Schedule A to the Revised Investment Advisory Agreement with Trusco Capital Management, Inc. dated October 1, 1999 - incorporated by reference to the Registrant's Post-Effective Amendment No. 33 to the Registrant's Registration Statement filed the SEC via EDGAR Accession No. 0001 0000912057-99-007899 on December 1, 1999. (d)(7) Revised Schedule A to the Revised Investment Advisory Agreement with Trusco Capital Management, Inc. dated March 27, 2000 is filed herewith. (e) Distribution Agreement - incorporated by reference to Exhibit 6 of Post-Effective Amendment No. 16 to the Registrant's Registration Statement filed with the SEC via EDGAR Accession No. 0000912057-96- 021336 on September 27, 1996. (f) Not applicable. (g)(1) Custodian Agreement with Trust Company Bank dated February 1, 1994 - originally filed with Registrant's Post-Effective Amendment No. 13 filed September 28, 1995 and incorporated by reference to Exhibit 8(b) of Post-Effective Amendment No. 15 to the Registrant's Registration Statement filed with the SEC via EDGAR Accession No. 0000912057-96- 015938 on July 31, 1996. (g)(2) Custodian Agreement with the Bank of California - incorporated by reference to Exhibit 8(a) of Post-Effective Amendment No. 15 to the Registrant's Registration Statement filed with the SEC via EDGAR Accession No. 0000912057-96-015938 on July 31, 1996. (g)(3) Fourth Amendment to Custodian Agreement by and between STI Trust & Investment Operations, Inc. and The Bank of New York dated May 6, 1997 - incorporated by reference to Exhibit 8(d) of Post-Effective Amendment No. 21 to the Registrant's Registration Statement filed with the SEC via EDGAR Accession No. 0000912057-97- C-1 032207 on September 30, 1997. (h)(1) Transfer Agent Agreement with Federated Services Company dated May 14, 1994 - originally filed with Post-Effective Amendment No. 9 filed September 22, 1994 and incorporated by reference to Exhibit 8(c) of Post-Effective Amendment No. 15 to the Registrant's Registration Statement filed with the SEC via EDGAR Accession No. 0000912057-96- 015938 on July 31, 1996. (h)(2) Administration Agreement with SEI Financial Management Corporation dated May 29, 1995 - incorporated by reference to the Registrant's Post-Effective Amendment No. 32 to the Registrant's Registration Statement filed the SEC via EDGAR Accession No. 0001047469-99-037088 on September 28, 1999. (h)(3) Consent to Assignment and Assumption of the Administration Agreement between STI Classic Funds and SEI Financial Management Corporation - incorporated by reference to Exhibit 9(b) of Post-Effective Amendment No. 21 to the Registrant's Registration Statement filed with the SEC via EDGAR Assession No. 0000912057-97-032207 on September 30, 1997. (i) Opinion and Consent of Counsel - incorporated by reference to the Registrant's Post-Effective Amendment No. 32 to the Registrant's Registration Statement filed the SEC via EDGAR Accession No. 0001047469-99-037088 on September 28, 1999. (j)(1) Consent of Arthur Andersen LLP, independent public accountants, is filed herewith. (j)(2) Consent of PricewaterhouseCoopers LLP, independent public accountants, is filed herewith. (k) Not applicable. (l) Not applicable. (m)(1) Distribution Plan - Investor Class - incorporated by reference to Exhibit 15 of Post-Effective Amendment No. 16 to the Registrant's Registration Statement filed with the SEC via EDGAR Accession No. 0000912057-96-021336 on September 27, 1996. (m)(2) Distribution and Service Agreement relating to Flex Shares dated May 29, 1995 - originally filed with Post-Effective Amendment No. 12 filed August 17, 1995 and incorporated by reference to Exhibit 15(a) of Post-Effective Amendment No. 15 to the Registrant's Registration Statement filed with the SEC via EDGAR Accession No. 0000912057-96- 015938 on July 31, 1996. (n) Not applicable. (o) Rule 18f-3 Plan - incorporated by reference to Exhibit (o) of Post- Effective Amendment No. 23 to the Registrant's Registration Statement filed with the SEC via EDGAR Accession No. 0001047469-98-027407 on July 15, 1998. (o)(1) Certificate of Class Designation - incorporated by reference to Exhibit (o)(1) of Post-Effective Amendment No. 27 to the Registrant's Statement filed with the SEC via EDGAR Accession No. 0001047469-99- 009731 on April 15, 1999. (p)(1) Code of Ethics for STI Classic Funds is filed herewith. (p)(2) Code of SEI Investments Distribution Company is filed herewith. (p)(3) To be filed by amendment. (p)(4) Code of Ethics for Trusco Capital Management, Inc. is filed herewith. (q) Powers of Attorney - incorporated by reference to the Registrant's Post-Effective Amendment No. 32 to the Registrant's Registration Statement filed the SEC via EDGAR Accession No. 0001047469-99-037088 on September 28, 1999. Item 24. Persons Controlled by or under Common Control with Registrant: See the Prospectuses and Statement of Additional Information regarding the Trust's control relationships. The Administrator is a subsidiary of SEI Investments which also controls the distributor of the Registrant, SEI Investments Distribution Co., and other corporations engaged in providing various financial and record keeping services, primarily to bank trust departments, pension plan sponsors, and investment managers. Item 25. Indemnification: Article VIII of the Agreement of Declaration of Trust filed as Exhibit (a) to the Registration Statement is incorporated by reference. Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to trustees, directors, officers and controlling persons of the Registrant by the Registrant pursuant to the Declaration of Trust or otherwise, the Registrant is aware that in the opinion of the Securities and Exchange Commission, such indemnification is against public policy as expressed in the Act and, therefore, is unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the Registrant of expenses incurred or paid by trustees, directors, officers or controlling persons of the Registrant in connection with the successful defense of any act, suit or proceeding) is asserted by such trustees, directors, officers or controlling persons in connection with the shares being registered, the Registrant will, C-2 unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Act and will be governed by the final adjudication of such issues. Item 26. Business and Other Connections of Investment Advisors: Other business, profession, vocation, or employment of a substantial nature in which each director or principal officer of each Advisor is or has been, at any time during the last two fiscal years, engaged for his own account or in the capacity of director, officer, employee, partner or trustee are as follows:
Name of Connection with Name Other Company Other Company ---- ------------- ------------- STI Capital Management, N.A. E. Jenner Wood III SunTrust Banks, Inc. -- Director Hunting F. Deutsch SunTrust Bank, Orlando -- Director Anthony R. Gray -- -- Chairman & Chief Investment Officer James R. Wood -- -- President Elliott A. Perny -- -- Executive Vice President Stuart F. Van Arsdale -- -- Senior Vice President Jonathan D. Rich -- -- Director Larry M. Cole -- -- Senior Vice President L. Earl Denney -- -- Executive Vice President Ronald Schwartz -- -- Senior Vice President Andre B.Prawato -- -- Senior Vice President Edward J. Dau -- -- Senior Vice President James K. Wood -- -- Senior Vice President
C-3
Name of Connection with Name Other Company Other Company ---- ------------- ------------- Mills A. Riddick -- -- Senior Vice President Christopher A. Jones -- -- Senior Vice President David E. West -- -- Vice President Brett L. Barner -- -- Senior Vice President Trusco Capital Management, Inc. Douglas S. Phillips -- -- President Paul L. Robertson, III -- -- Secretary/Treasurer E. Jenner Wood SunTrust Banks, Inc. Director Director Donald W. Thurmond SunTrust Bank, Atlanta Director Director Bob M. Farmer -- -- Vice President M. Elizabeth (Beth) Wines -- -- Vice President Charles Arnold, Jr. -- -- Senior Vice President James R. Dillon, Jr. -- -- First Vice President James P. Foster -- -- Vice President Mark D. Garfinkel -- -- Vice President Robert (Bob) G. Goggin -- -- Vice President Joe E. Ransom -- -- Vice President
C-4
Name of Connection with Name Other Company Other Company ---- ------------- ------------- George D. Smith, Jr. -- -- Vice President Jonathan Mote -- -- Vice President Charles B. Leonard -- -- First Vice President Mary F. Cernilli -- -- Vice President Garrett P. Smith -- -- Vice President Gregory L. Watkins -- -- Vice President David S. Yealy -- -- Vice President Robert J. Rhoades -- -- Senior Vice President Kar Ming Leong -- -- Vice President Stephen M. Yarbrough -- -- Vice President Celia S. Stanley -- -- Vice President Rebekah R. Alley -- -- Vice President SunTrust Bank, Atlanta Robert R. Long SunTrust Banks of Chairman of the Board Chairman of the Board and Georgia, Inc. President Ronald S. Crowding -- Executive Vice President Executive Vice President Charles B. Ginden -- -- Executive Vice President William H. Rogers, Jr. -- -- Executive Vice President
C-5
Name of Connection with Name Other Company Other Company ---- ------------- ------------- Donald Wayne Thurmond -- -- Executive Vice President Dr. William M. Chase Emory University President Director Gaylord O. Coan Gold Kist, Inc. CEO Director A.D. Correll Georgia-Pacific Corporation Chairman & CEO Director R.W. Courts, II Atlantic Realty Company President Director A.W. Dahlberg The Southern Company President, Chairman & Director CEO L. Phillip Humann SunTrust Banks, Inc. President, Chairman & CEO Director Services Corporation William B. Johnson The Ritz Carlton Hotel Chairman of the Board Director J. Hicks Lanier Oxford Industries, Inc. Chairman of the Board Director Director & President Pinehill Development Co. 30% owner Joseph L. Lanier, Jr. Dan River, Inc. Chairman of the Board Director Chairman Larry L. Prince Genuine Parts Company Chairman of the Board Director R. Randall Rollins Rollins, Inc. Chairman of the Board Director Lor, Inc. Director Maran, Inc. Director Gutterworld, Inc. Director Dabora, Inc. Director & Secretary Simpson, Nance & Graham Director Auto Parts Wholesale, Inc. Director Global Expanded Metal, Inc. Director Rollins Holding Co. Director Rol, Ltd. Partner Rollins Investment Fund Partner Energy Partners Partner Petro Partnership Partner The Piedmont Investment Group Director WRG, Ltd. Partner Rollins, Inc. Chairman
C-6
Name of Connection with Name Other Company Other Company ---- ------------- ------------- RPC Energy Services, Inc. Chairman The Mul Company Partner Bugvac, Inc. Director Omnitron Int'l, Inc. Director MRG, Ltd. Partner Gerald T. Adams -- -- Senior Vice President James R. Albach -- -- Group Vice President Gay Cash -- -- Vice President Joseph B. Foley, Jr. -- -- Group Vice President Thomas R. Frisbie -- -- Group Vice President Mark Stancil -- -- Group Vice President David E. Thompson -- -- Vice President Charles C. Watson -- -- Group Vice President Dr. Mary B. Bullock Agnes Scott College President Director Larry L. Gellerstedt, III Beers Construction Co. Chairman Director John T. Glover Post Properties, Inc. President Director M. Douglas Ivester The Coca-Cola Company Chairman of the Board & CEO Director Dennis M. Love Printpack, Inc. President & CEO Director Charles H. McTier Robert Woodruff Foundation President Director
C-7 Item 27. Principal Underwriters: (a) Furnish the name of each investment company (other than the Registrant) for which each principal underwriter currently distributing the securities of the Registrant also acts as a principal underwriter, distributor or investment adviser. Registrant's distributor, SEI Investments Distribution Co. (the "Distributor"), acts as distributor for: SEI Daily Income Trust July 15, 1982 SEI Liquid Asset Trust November 29, 1982 SEI Tax Exempt Trust December 3, 1982 SEI Index Funds July 10, 1985 SEI Institutional Managed Trust January 22, 1987 SEI Institutional International Trust August 30, 1988 The Advisors' Inner Circle Fund November 14, 1991 The Pillar Funds February 28, 1992 CUFUND May 1, 1992 STI Classic Funds May 29, 1992 First American Funds, Inc. November 1, 1992 First American Investment Funds, Inc. November 1, 1992 The Arbor Fund January 28, 1993 Boston 1784 Funds/7/ June 1, 1993 The PBHG Funds, Inc. July 16, 1993 Morgan Grenfell Investment Trust January 3, 1994 The Achievement Funds Trust December 27, 1994 Bishop Street Funds January 27, 1995 CrestFunds, Inc. March 1, 1995 STI Classic Variable Trust August 18, 1995 ARK Funds November 1, 1995 Huntington Funds January 11, 1996 SEI Asset Allocation Trust April 1, 1996 TIP Funds April 28, 1996 SEI Institutional Investments Trust June 14, 1996 First American Strategy Funds, Inc. October 1, 1996 HighMark Funds February 15, 1997 Armada Funds March 8, 1997 PBHG Insurance Series Fund, Inc. April 1, 1997 The Expedition Funds June 9, 1997 Alpha Select Funds January 1, 1998 Oak Associates Funds February 27, 1998 The Nevis Fund, Inc. June 29, 1998 The Parkstone Group of Funds September 14, 1998 CNI Charter Funds April 1, 1999 The Parkstone Advantage Fund May 1, 1999 Amerindo Funds, Inc. July 13, 1999 Huntington VA Fund October 15, 1999 Friends Ivory Funds December 16, 1999 The Distributor provides numerous financial services to investment managers, pension plan sponsors, and bank trust departments. These services include portfolio evaluation, performance measurement and consulting services ("Funds Evaluation") and automated execution, clearing and settlement of securities transactions ("MarketLink"). C-8 (b) Furnish the Information required by the following table with respect to each director, officer or partner of each principal underwriter named in the answer to Item 21 of Part B. Unless otherwise noted, the business address of each director or officer is Oaks, PA 19456.
Position and Office Positions and Offices Name with Underwriter with Registrant - ---- ---------------- --------------- Alfred P. West, Jr. Director, Chairman of the Board of Directors -- Henry H. Greer Director -- Carmen V. Romeo Director -- Mark J. Held President & Chief Operating Officer -- Gilbert L. Beebower Executive Vice President -- Richard B. Lieb Executive Vice President -- Dennis J. McGonigle Executive Vice President -- Robert M. Silvestri Chief Financial Officer & Treasurer -- Leo J. Dolan, Jr. Senior Vice President -- Carl A. Guarino Senior Vice President -- Larry Hutchison Senior Vice President -- Jack May Senior Vice President -- Hartland J. McKeown Senior Vice President -- Barbara J. Moore Senior Vice President Vice President and Assistant Secretary Kevin P. Robins Senior Vice President & General Counsel -- Patrick K. Walsh Senior Vice President -- Robert Aller Vice President -- Gordon W. Carpenter Vice President -- Todd Cipperman Vice President & Assistant Secretary -- S. Courtney E. Collier Vice President & Assistant Secretary -- Robert Crudup Vice President & Managing Director -- Barbara Doyne Vice President -- Jeff Drennen Vice President -- Vic Galef Vice President & Managing Director -- Lydia A. Gavalis Vice President & Assistant Secretary Vice President & Assistant Secretary Greg Gettinger Vice President & Assistant Secretary -- Kathy Heilig Vice President Vice President & Assistant Secretary Jeff Jacobs Vice President -- Samuel King Vice President -- Kim Kirk Vice President & Managing Director -- John Krzeminski Vice President & Managing Director -- Carolyn McLaurin Vice President & Managing Director -- W. Kelso Morrill Vice President -- Mark Nagle Vice President President, Controller, Treasurer & Chief Financial Officer Joanne Nelson Vice President -- Cynthia M. Parrish Vice President & Assistant Secretary -- Kim Rainey Vice President -- Rob Redican Vice President -- Maria Rinehart Vice President -- Mark Samuels Vice President & Managing Director -- Steve Smith Vice President --
C-9 Daniel Spaventa Vice President -- Kathryn L. Stanton Vice President & Assistant Secretary -- Lynda J. Striegel Vice President & Assistant Secretary Vice President & Assistant Secretary Lori L. White Vice President & Assistant Secretary -- Wayne M. Withrow Vice President & Managing Director --
Item 28. Location of Accounts and Records: Books or other documents required to be maintained by Section 31(a) of the Investment Company Act of 1940, and the rules promulgated thereunder, are maintained as follows: (a) With respect to Rules 31a-1(a); 31a-1(b)(1); (2)(a) and (b); (3); (6); (8); (12); and 31a-1(d), the required books and records are maintained at the offices of Registrant's Custodians: Trust Company Bank Park Place P.O. Box 105504 Atlanta, Georgia 30348 Bank of New York One Wall Street New York, New York (International Equity Index Fund, International Equity Fund, Emerging Markets Equity Fund) (b)/(c) With respect to Rules 31a-1(a); 31a-1(b)(1),(4); (2)(C) and (D); (4); (5); (6); (8); (9); (10); (11); and 31a-1(f), the required books and records are maintained at the offices of Registrant's Administrator: SEI Investments Mutual Funds Services One Freedom Valley Road Oaks, Pennsylvania 19456 (c) With respect to Rules 31a-1(b)(5), (6), (9) and (10) and 31a-1(f), the required books and records are maintained at the principal offices of the Registrant's Advisors: STI Capital Management, N.A. P.O. Box 3808 Orlando, Florida 32802 Trusco Capital Management 50 Hurt Plaza, Suite 1400 Atlanta, Georgia 30303 SunTrust Bank, Atlanta 25 Park Place Atlanta, Georgia 30303 Item 29. Management Services: None. Item 30. Undertakings: None. C-10 NOTICE A copy of the Agreement and Declaration of Trust for STI Classic Funds is on file with the Secretary of State of The Commonwealth of Massachusetts and notice is hereby given that this Registration Statement has been executed on behalf of the Trust by an officer of the Trust as an officer and by its Trustees as trustees and not individually and the obligations of or arising out of this Registration Statement are not binding upon any of the Trustees, officers, or Shareholders individually but are binding only upon the assets and property of the Trust. C-11 SIGNATURES Pursuant to the requirements of the Securities Act of 1933 (the "Securities Act") and the Investment Company Act of 1940, as amended, the Registrant certifies that it meets all of the requirements for effectiveness of this Registration Statement pursuant to Rule 485(b) under the Securities Act of 1933 and has duly caused this Post-Effective Amendment No. 35 to Registration Statement No. 33-45671 to be signed on its behalf by the undersigned, duly authorized, in the City of Oaks, Commonwealth of Pennsylvania on the 26th day of March, 2000. By: /s/ Mark Nagle ------------------------------------------------- Mark Nagle, President, Chief Financial Officer, and Chief Executive Officer Pursuant to the requirements of the Securities Act, this Registration Statement has been signed below by the following persons in the capacity on the dates indicated. * Trustee March 26, 2000 - -------------------------- F. Wendell Gooch * Trustee March 26, 2000 - -------------------------- Daniel S. Goodrum * Trustee March 26, 2000 - -------------------------- Wilton Looney * Trustee March 26, 2000 - -------------------------- Champney A. McNair * Trustee March 26, 2000 - -------------------------- T. Gordy Germany * Trustee March 26, 2000 - -------------------------- Bernard F. Sliger * Trustee March 26, 2000 - -------------------------- Jonathan T. Walton * Trustee March 26, 2000 - -------------------------- William H. Cammack /s/ Mark Nagle President, March 26, 2000 - -------------------------- Mark Nagle Chief Financial Officer & Chief Executive Officer
* By: /s/ Kevin P. Robins ------------------------------------------- Kevin P. Robins, With Power of Attorney EXHIBIT INDEX Number Exhibit - ------ ------- EX-99.A Declaration of Trust - originally filed with Registrant's Registration Statement on Form N-1A filed February 12, 1992 and incorporated by reference to Exhibit 1 of Post-Effective Amendment No. 15 to the Registrant's Registration Statement filed with the SEC via EDGAR Accession No. 0000912057-96-015938 on July 31, 1996. EX-99.B1 By-Laws - originally filed with Registrant's Pre-Effective Amendment No. 1 filed April 23, 1992 and incorporated by reference to Exhibit 2 of Post-Effective Amendment No. 15 to the Registrant's Registration Statement filed with the SEC via EDGAR Accession No. 0000912057-96-015938 on July 31, 1996. EX-99.B2 Amended By-Laws - incorporated by reference to Exhibit (b)(2) of Post-Effective Amendment No. 23 to the Registrant's Registration Statement filed with the SEC via EDGAR Accession No. 0001047469-98- 027407 on July 15, 1998. EX-99.C Not applicable. EX-99.D1 Revised Investment Advisory Agreement with Trusco Capital Management, Inc.-as originally filed with Registrant's Post- Effective Amendment No. 5 filed August 2, 1993 and incorporated by reference to Exhibit 5(c) of Post-Effective Amendment No. 15 to the Registrant's Registration Statement filed with the SEC via EDGAR Accession No. 0000912057-96-015938 on July 31, 1996. EX-99.D2 Investment Advisory Agreement with American National Bank and Trust Company - as originally filed with Registrant's Post-Effective Amendment No. 6 filed October 22, 1993 and as Exhibit 5(d) of Post- Effective Amendment No. 15 to the Registrant's Registration Statement filed with the SEC via EDGAR Accession No. 0000912057-96- 015938 on July 31, 1996. EX-99.D3 Investment Advisory Agreement with Sun Bank Capital Management, National Association (now STI Capital Management, N.A. - as originally filed with Registrant's Post-Effective Amendment No. 6 filed October 22, 1993 and incorporated by reference to Exhibit 5(e) of Post-Effective Amendment No. 15 to the Registrant's Registration Statement filed with the SEC via EDGAR Accession No. 0000912057-96- 015938 on July 31, 1996. EX-99.D4 Investment Advisory Agreement with Trust Company Bank (now SunTrust Bank, Atlanta) - as originally filed with Registrant's Post- Effective Amendment No. 6 filed October 22, 1993 and filed herewith. EX-99.D5 Revised Schedule A to the Revised Investment Advisory Agreement with Trusco Capital Management, Inc. dated May 24, 1999 - incorporated by reference to the Registrant's Post- Effective Amendment No. 32 to the Registrant's Registration Statement filed the SEC via EDGAR Accession No. 0001047469-99-037088 on September 28, 1999. EX-99.D6 Revised Schedule A to the Revised Investment Advisory Agreement with Trusco Capital Management, Inc. dated October 1, 1999 - incorporated by reference to the Registrant's Post-Effective Amendment No. 32 to the Registrant's Registration Statement filed the SEC via EDGAR Accession No. 0001047469-99-037088 on September 28, 1999. EX-99.D7 Revised Schedule A to the Revised Investment Advisory Agreement with Trusco Capital Management, Inc. dated March 27, 2000 is filed herewith. EX-99.E Distribution Agreement - incorporated by reference to Exhibit 6 of Post-Effective Amendment No. 16 to the Registrant's Registration Statement filed with the SEC via EDGAR Accession No. 0000912057-96- 021336 on September 27, 1996. EX-99.F Not applicable. EX-99.G1 Custodian Agreement with Trust Company Bank dated February 1, 1994 - originally filed with Registrant's Post-Effective Amendment No. 13 filed September 28, 1995 and incorporated by reference to Exhibit 8(b) of Post-Effective Amendment No. 15 to the Registrant's Registration Statement filed with the SEC via EDGAR Accession No. C-13 0000912057-96-015938 on July 31, 1996. EX-99.G2 Custodian Agreement with the Bank of California - incorporated by reference to Exhibit 8(a) of Post-Effective Amendment No. 15 to the Registrant's Registration Statement filed with the SEC via EDGAR Accession No. 0000912057-96-015938 on July 31, 1996. EX-99.G3 Fourth Amendment to Custodian Agreement by and between STI Trust & Investment Operations, Inc. and The Bank of New York dated May 6, 1997 - incorporated by reference to Exhibit 8(d) of Post-Effective Amendment No. 21 to the Registrant's Registration Statement filed with the SEC via EDGAR Accession No. 0000912057-97-032207 on September 30, 1997. EX-99.H1 Transfer Agent Agreement with Federated Services Company dated May 14, 1994 - originally filed with Post-Effective Amendment No. 9 filed September 22, 1994 and incorporated by reference to Exhibit 8(c) of Post-Effective Amendment No. 15 to the Registrant's Registration Statement filed with the SEC via EDGAR Accession No. 0000912057-96-015938 on July 31, 1996. EX-99.H2 Administration Agreement with SEI Financial Management Corporation dated May 29, 1995 - incorporated by reference to the Registrant's Post-Effective Amendment No. 32 to the Registrant's Registration Statement filed the SEC via EDGAR Accession No. 0001047469-99-037088 on September 28, 1999. EX-99.H3 Consent to Assignment and Assumption of the Administration Agreement between STI Classic Funds and SEI Financial Management Corporation - incorporated by reference to Exhibit 9(b) of Post-Effective Amendment No. 21 to the Registrant's Registration Statement filed with the SEC via EDGAR Assession No. 0000912057-97-032207 on September 30, 1997. EX-99.I Opinion and Consent of Counsel - incorporated by reference to the Registrant's Post-Effective Amendment No. 32 to the Registrant's Registration Statement filed the SEC via EDGAR Accession No. 0001047469-99-037088 on September 28, 1999. EX-99.J1 Consent of Arthur Andersen LLP, independent public accountants, is filed herewith. EX-99.J2 Consent of PricewaterhouseCoopers LLP, independent public accountants, is filed herewith. EX-99.K Not applicable. EX-99.L Not applicable. EX-99.M1 Distribution Plan - Investor Class - incorporated by reference to Exhibit 15 of Post-Effective Amendment No. 16 to the Registrant's Registration Statement filed with the SEC via EDGAR Accession No. 0000912057-96-021336 on September 27, 1996. EX-99.M2 Distribution and Service Agreement relating to Flex Shares dated May 29, 1995 - originally filed with Post-Effective Amendment No. 12 filed August 17, 1995 and incorporated by reference to Exhibit 15(a) of Post-Effective Amendment No. 15 to the Registrant's Registration Statement filed with the SEC via EDGAR Accession No. 0000912057-96- 015938 on July 31, 1996. EX-99.N Not applicable. EX-99.O Rule 18f-3 Plan - incorporated by reference to Exhibit (i) of Post- Effective Amendment No. 23 to the Registrant's Registration Statement filed with the SEC via EDGAR Accession No. 0001047469-98- 027407 on July 15, 1998. EX-99.O1 Certificate of Class Designation - incorporated by reference to Exhibit (o)(1) of Post- Effective Amendment No. 27 to the Registrant's Statement filed with the SEC via EDGAR Accession No. 0001047469-99-009731 on April 15, 1999. EX-99.P1 Code of Ethics for STI Classic Funds is filed herewith. EX-99.P2 Code of SEI Investments Distribution Company is filed herewith. EX-99.P3 To be filed by amendment. EX-99.P4 Code of Ethics for Trusco Capital Management, Inc. is filed herewith. EX-99.Q Powers of Attorney - incorporated by reference to the Registrant's Post-Effective Amendment No. 32 to the Registrant's Registration Statement filed the SEC via EDGAR Accession No. 0001047469-99-037088 on September 28, 1999. C-14 EX-99.D7 2 INVESTMENT ADVISORY AGREEMENT Exhibit 99.d7 Revised Schedule A Dated March 27, 2000 to the Investment Advisory Agreement between STI Classic Funds and Trusco Capital Management Pursuant to Article 3, the Trust shall pay the Adviser compensation at an annual rate as follows: Portfolio Fee - ---------- --- Prime Quality Money Market Fund .65% U.S. Government Securities Money Market Fund .65% Tax -Exempt Money Market Fund .55% Short-Term Bond Fund .65% Short-Term U.S. Treasury Securities Fund .65% Sunbelt Equity Fund 1.15% U.S. Government Securities Fund .74% International Equity Index Fund .90% Classic Institutional Cash Management Money Market Fund .20% 1 Classic Institutional U.S. Treasury Securities Money Market Fund .20% Small Cap Growth Stock Fund 1.15% Tax Sensitive Growth Stock Fund 1.15% Maryland Municipal Bond Fund .65% Virginia Intermediate Municipal Bond Fund .65% Virginia Municipal Bond Fund .65% Tax-Free Money Market Fund .40% U.S. Treasury Money Market Fund .65% Growth and Income Fund .90% Life Vision Maximum Growth Portfolio .25% Life Vision Growth and Income Portfolio .25% Life Vision Balanced Portfolio .25% Classic Institutional U.S. Government Securities Money Market Fund .20% Core Equity Fund 1.10% E-Commerce Opportunity Fund 1.10% High Income Fund .80% 2 EX-99.J1 3 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS Exhibit 99.j1 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS As independent public accountants, we hereby consent to the use of our firm name included in the Post-Effective Amendment No. 35 to the Registration Statement on Form N-1A of the STI Classic Funds (File No. 33-45671). /s/ Arthur Andersen LLP - ----------------------- Philadelphia, Pennsylvania March 28, 2000 EX-99.J2 4 CONSENT OF INDEPENDENT ACCOUNTANTS Exhibit 99.j2 Consent of Independent Accountants We consent to the inclusion in this Registration Statement on Form N-1A of STI Classic Funds, of our report dated May 14, 1999 on our audits of the financial statements and financial highlights of ESC Strategic Income Fund, ESC Strategic International Equity Fund, ESC Strategic Small Cap Fund, ESC Strategic Appreciation Fund and ESC Strategic Small Cap II Fund (separate portfolios constituting ESC Strategic Funds, Inc.) which report is included in the Annual Report to Shareholders for the year ended March 31, 1999. We also consent to the reference to our Firm under the caption "Financial Statements" relating to ESC Strategic Funds, Inc. in the Registration Statement on Form N-1A. /s/ PricewaterhouseCoopers LLP - ------------------------------ Columbus, Ohio March 24, 2000 EX-99.P1 5 CODE OF ETHICS Exhibit P.1 CODE OF ETHICS -------------- Adopted Under Rule 17j-1 While affirming its confidence in the integrity and good faith of all of its officers and trustees, STI Classic Funds and STI Classic Variable Trust (collectively the "Trusts"), recognize that the knowledge of present or future portfolio transactions and, in certain instances, the power to influence portfolio transactions which may be possessed by certain of their officers, employees and trustees could place such individuals, if they engage in personal transactions in securities which are eligible for investment by a Trust, in a position where their personal interest may conflict with that of a Trust. In view of the foregoing and of the provisions of Rule 17j-1(b)(1) under the Investment Company Act of 1940 (the "1940 Act"), each Trust has determined to adopt this Code of Ethics to specify and prohibit certain types of transactions deemed to create conflicts of interest (or at least the potential for or the appearance of such a conflict), and to establish reporting requirements and enforcement procedures. I. Statement of General Principles. In recognition of the trust and confidence placed in the Trusts by their shareholders, and to give effect to the Trusts' belief that its operations should be directed to the benefit of its shareholders, the Trusts hereby adopt the following general principles to guide the actions of their trustees, officers and employees. (1) The interests of the Trusts' shareholders are paramount, and all of the Trusts' personnel must conduct themselves and their operations to give maximum effect to this tenet by assiduously placing the interests of the shareholders before their own. (2) All personal transactions in securities by the Trusts' personnel must be accomplished so as to avoid even the appearance of a conflict of interest on the part of such personnel with the interests of the Trusts and their shareholders. (3) All of the Trusts' personnel must avoid actions or activities that allow (or appear to allow) a person to profit or benefit from his or her position with respect to the Trusts, or that otherwise bring into question the person's independence or judgment. II. Definitions. (1) "Access Person" shall mean (i) each trustee or officer of a Trust, (ii) each employee of a Trust (or of any company in a control relationship to a Trust) who, in connection with his or her regular functions or duties, makes, participates in, or obtains information regarding the purchase or sale of a security by a Trust or any series thereof (herein a "Fund"), or whose functions relate to the making of any recommendations with respect to such purchases or sales, and (iii) each officer, director or general partner of each adviser or sub-adviser to the Trusts and any employee of any such adviser or sub-adviser who, in connection with his or her regular functions or duties, makes participates in, or obtains information regarding the purchase or sale of a security by a Fund, or whose functions relate to the making of any recommendations with respect to such purchases or sales; (iv) each director, officer or general partner of any principal underwriter for a Trust, but only where such person in the ordinary course either makes, participates in, or obtains information regarding the purchase or sale of securities by the Fund(s), or whose functions relate to the making of recommendations regarding securities to the Fund(s); and (v) any natural person in a control relationship with a Fund or any of the Funds' advisers or sub- advisers who obtains information concerning recommendations made to the Funds with regard to the purchase or sale of a security. (2) "Beneficial ownership" of a security is to be determined in the same manner as it is for purposes of Section 16 of the Securities Exchange Act of 1934 and Rule 16a-1(a)(2) thereunder. This means that a person should generally consider himself the beneficial owner of any securities in which he has a direct or indirect pecuniary interest. In addition, a person should consider himself the beneficial owner of securities held by his spouse, his minor children, a relative who shares his home, or other persons by reason of any contract, arrangement, understanding or relationship that provides him with sole or shared voting or investment power. (3) "Control" shall have the same meaning as that set forth in Section 2(a)(9) of the 1940 Act. Section 2(a)(9) provides that "control" means the power to exercise a controlling influence over the management or policies of a company, unless such power is solely the result of an official position with such company. Ownership of 25% or more of a company's outstanding voting security is presumed to give the holder thereof control over the company. Such presumption may be countered by the facts and circumstances of a given situation. (4) "Independent Trustee" means a Trustee of a Trust who is not an "interested person" of the Trust within the meaning of Section 2(a)(19) of the 1940 Act. (5) "Initial Public Offering" ("IPO") means an offering of Securities registered under the Securities Act of 1933, the issuer of which, immediately before registration, was not subject to the reporting requirements of Section 13 or Section 15(d) of the Securities Exchange Act of 1934. (6) "Private Placement" means an offering that is exempt from registration under the Securities Act of 1933 pursuant to Section 4(2) or Section 4(6) in the Securities Act of 1933. -2- (7) "Special Purpose Investment Personnel" means each Access Person who, in connection with his or her regular functions (including, where appropriate, attendance at Board meetings and other meetings at which the official business of a Trust or any Fund thereof is discussed or carried on), obtains contemporaneous information regarding the purchase or sale of a security by a Fund. Special Purpose Investment Personnel shall occupy this status only with respect to those securities as to which he or she obtains such contemporaneous information. (8) "Purchase or sale of a security" includes, among other things, the writing of an option to purchase or sell a security. (9) "Security" shall have the same meaning as that set forth in Section 2(a)(36) of the 1940 Act, except that it shall not include securities issued by the Government of the United States or an agency thereof, bankers' acceptances, bank certificates of deposit, commercial paper, shares of registered, open-end mutual funds and high quality short-term debt instruments, including repurchase agreements. (10) A Security "held or to be acquired" by a Trust or any Fund means (A) any Security which, within the most recent fifteen days, (i) is or has been held by a Trust or any Fund thereof, or (ii) is being or has been considered by a Fund's investment adviser for purchase by the Fund; (B) and any option to purchase or sell and any Security convertible into or exchangeable for any Security described in (A) above. (11) A Security is "being purchased or sold" by a Trust from the time when a purchase or sale program has been communicated to the person who places the buy and sell orders for such Trust until the time when such program has been fully completed or terminated. III. Prohibited Purchases and Sales of Securities. (1) No Access Person shall, in connection with the purchase or sale, directly or indirectly, by such person of a Security held or to be acquired by any Fund of a Trust: (A) employ any device, scheme or artifice to defraud such Fund; (B) make to such Fund any untrue statement of a material fact or omit to state to such Fund a material fact necessary in order to make the statements made, in light of the circumstances under which they are made, not misleading; -3- (C) engage in any act, practice or course of business which would operate as a fraud or deceit upon such Fund; or (D) engage in any manipulative practice with respect to such Fund. (2) No Special Purpose Investment Personnel may purchase or sell, directly or indirectly, any Security as to which such person is a Special Purpose Investment Personnel in which he had (or by reason of such transaction acquires) any Beneficial Ownership at any time within 7 calendar days before or after the time that the same (or a related) Security is being purchased or sold by any Fund. (3) No Special Purpose Investment Personnel may sell a Security as which he or she is a Special Purpose Investment Personnel within 60 days of acquiring beneficial ownership of that Security. IV. Additional Restrictions and Requirements (1) Pre-approval of IPOs and Private Placements - Each Access Person must obtain approval from the Review Officer before acquiring beneficial ownership of any securities offered in connection with an IPO or a Private Placement. (2) No Access Person shall accept or receive any gift of more than de -- minimis value from any person or entity that does business with or ------- on behalf of a Trust. (3) Each Access Person (other than each Trust's Independent Trustees and its Trustees and officers who are not currently affiliated with or employed by each Trust's investment adviser or principal underwriter) who is not required to provide such information under the terms of a code of ethics described in Section VII hereof must provide to the Review Officer a complete listing of all securities owned by such person as of December 31st of the previous year. Thereafter, each such person shall submit a revised list of such holdings to the Review Officer as of December 31st of each subsequent year. The initial listing must be submitted within 10 days of the date upon which such person first becomes an Access Person of the Trust, and each update thereafter must be provided no later than 30 days after the start of the subsequent year. V. Reporting Obligation. (1) Each Access Person (other than each Trust's Independent Trustees) shall report all transactions in Securities in which the person has, or by reason of such transaction acquires, any direct or indirect beneficial ownership. Reports shall be filed with the Review Officer quarterly. The Review Officer shall submit confidential quarterly reports with respect to his or her own personal securities transactions to an officer designated to receive his or her reports ("Alternate -4- Review Officer"), who shall act in all respects in the manner prescribed herein for the Review Officer. (2) Every report shall be made not later than 10 days after the end of the calendar quarter in which the transaction to which the report relates was effected, and shall contain the following information: (A) The date of the transaction, the title and the number of shares or the principal amount of each security involved; (B) The nature of the transaction (i.e., purchase, sale or any other type of acquisition or disposition); (C) The price at which the transaction was effected; (D) The name of the broker, dealer or bank with or through whom the transaction was effected; and (E) The date the report was submitted. (3) In the event no reportable transactions occurred during the quarter, the report should be so noted and returned signed and dated (4) An Access Person who would otherwise be required to report his or her transactions under this Code shall not be required to file reports pursuant to this Section V where such person is required to file reports pursuant to a code of ethics described in Section VII, hereof. (5) An Independent Trustee shall report transactions in Securities only if the Trustee knew at the time of the transaction or, in the ordinary course of fulfilling his or her official duties as a trustee, should have known, that during the 15 day period immediately preceding or following the date of the transaction, such security was purchased or sold, or was being considered for purchase or sale, by any Fund of a Trust. (The "should have known" standard implies no duty of inquiry, does not presume there should have been any deduction or extrapolation from discussions or memoranda dealing with tactics to be employed meeting the Fund's investment objectives, or that any knowledge is to be imputed because of prior knowledge of the Funds' portfolio holdings, market considerations, or the Trust's investment policies, objectives and restrictions.) (6) Any such report may contain a statement that the report shall not be construed as an admission by the person making such report that he has any direct or indirect beneficial ownership in the security to which the report relates. -5- (7) Each Independent Trustee shall report the name of any publicly-owned company (or any company anticipating a public offering of its equity securities) and the total number of its shares beneficially owned by him or her if such total ownership is more than 1/2 of 1% of the company's outstanding shares. Such report shall be made promptly after the date on which the Trustee's ownership interest equaled or exceeded 1/2 of 1%. VI. Review and Enforcement. (1) The Review Officer shall compare all reported personal securities transactions with completed portfolio transactions of each Trust and a list of securities being considered for purchase or sale by each Trust's adviser(s) to determine whether a violation of this Code may have occurred. Before making any determination that a violation has been committed by any person, the Review Officer shall give such person an opportunity to supply additional explanatory material. (2) If the Review Officer determines that a violation of this Code may have occurred, he or she shall submit his or her written determination, together with the confidential monthly report and any additional explanatory material provided by the individual, to the President of the appropriate Trusts and outside counsel, who shall make an independent determination as to whether a violation has occurred. (3) If the President and outside counsel find that a violation has occurred, the President shall impose upon the individual such sanctions as he or she deems appropriate and shall report the violation and the sanction imposed to the Board of Trustees of the Trust(s). (4) No person shall participate in a determination of whether he or she has committed a violation of the Code or of the imposition of any sanction against himself or herself. If a securities transaction of a President is under consideration, any Vice President shall act in all respects in the manner prescribed herein for the President. VII. Investment Adviser's, Administrator's or Principal Underwriter's Code of Ethics. Each investment adviser (including, where applicable, any sub-adviser), administrator or manager (where applicable), and principal underwriter of the Trust shall: (1) Submit to the Board of Trustees of the Trust a copy of its code of ethics adopted pursuant to Rule 17j-1, which code shall comply with the recommendations of the Investment Company Institute's Advisory Group on Personal Investing or be accompanied by a written statement explaining any differences and supplying the rationale therefor; -6- (2) Promptly report to the appropriate Trust in writing any material amendments to such code of ethics; (3) Promptly furnish to the Trust upon request copies of any reports made pursuant to such code of ethics by any person who is an Access Person as to the Trust; and (4) Shall immediately furnish to the appropriate Trust, without request, all material information regarding any violation of such Code by any person who is an Access Person as to the Trust. VIII. Annual Written Report to the Board. At least once a year, the Review Officer will provide the Board of Trustees a written report that includes: (1) Issues Arising Under the Code - The Report will describe any issue(s) that arose during the previous year under the Code, including any material Code violations, and any resulting sanctions. (2) Certification - The Report will certify to the Board of Trustees that the each Trust has adopted measures reasonably necessary to prevent its personnel from violating the Code currently and in the future. IX. Records. Each Trust shall maintain records in the manner and to the extent set forth below, which records may be maintained under the conditions described in Rule 31a-2 under the Investment Company Act and shall be available for examination by representatives of the Securities and Exchange Commission. (1) A copy of this code of ethics and any other code which is, or at any time within the past five years has been, in effect shall be preserved in an easily accessible place; (2) A record of any violation of this Code and of any action taken as a result of such violation shall be preserved in an easily accessible place for a period of not less than five years following the end of the fiscal year in which the violation occurs; (3) A copy of each report made by an officer or trustee pursuant to this code of ethics shall be preserved for a period of not less than five years from the end of the fiscal year in which it is made, the first two years in an easily accessible place; and -7- (4) A list of all persons who are, or within the past five years have been, required to make reports pursuant to this Code shall be maintained in an easily accessible place. (5) A copy of each annual report to the Board of Trustees will be maintained for at least five years from the end of the fiscal year in which it is made, the first two years in an easily accessible place; and (6) A record of any decision, and the reasons supporting the decision, to approve the acquisition of Securities in an IPO or a Private Placement, shall be preserved for at least five years after the end of the fiscal year in which the approval is granted. X. Miscellaneous (1) Confidentiality. All reports of securities transactions and any --------------- other information filed with the Trusts pursuant to this Code shall be treated as confidential. (2) Interpretation of Provisions. The Boards of Trustees may from time ---------------------------- to time adopt such interpretations of this Code as it deems appropriate. (3) Periodic Review and Reporting. The President of each Trust shall ----------------------------- report to the Board of Trustees at least annually as to the operation of this Code and shall address in any such report the need (if any) for further changes or modifications to this Code. Adopted February 15, 2000. -8- EX-99.P2 6 SEI INSIDER TRADING POLICY Exhibit 99.p2 SEI INVESTMENTS COMPANY CODE OF ETHICS AND INSIDER TRADING POLICY January, 2000 SEI INVESTMENTS COMPANY CODE OF ETHICS AND INSIDER TRADING POLICY TABLE OF CONTENTS I. General Policy II. Code of Ethics A. Purpose of Code B. Employee Categories C. Restrictions on Personal Securities Transactions D. Pre-clearance of Personal Securities Transactions E. Reporting Requirements F. Detection and Reporting of Code Violations G. Violations of the Code of Ethics H. Confidential Treatment I. Definitions Applicable to the Code of Ethics III. Insider Trading Policy A. What is "Material" Information? B. What is "Nonpublic Information"? C. Who is an Insider? D. What is Misappropriation? E. What is Tipping? F. Identifying Inside Information? G. Trading in SEI Investments Company Securities H. Violations of the Insider Trading Policy 2 I. GENERAL POLICY SEI Investments Company, through various subsidiaries (jointly "SEI"), is an investment adviser, administrator, distributor, and/or trustee of investment companies, collective investment trusts, investment partnerships, and asset management accounts (jointly "Investment Vehicles"). As an investment adviser, SEI is subject to various U.S. securities laws and regulations governing the use of confidential information and personal securities transactions. This Code of Ethics and Insider Trading Policy (jointly "Policy") was developed based on those laws and regulations, and sets forth the procedures and restrictions governing the personal securities transactions of all SEI employees. SEI has a highly ethical business culture and expects that all employees will conduct any personal securities transactions consistent with this Policy and in such a manner as to avoid any actual or potential conflict of interest or abuse of a position of trust and responsibility. When an employee invests for his or her own account, conflicts of interest may arise between a client's and the employee's interest. Such conflicts may include using an employee's advisory position to take advantage of available investment opportunities, taking an investment opportunity from a client for an employee's own portfolio, or frontrunning, which occurs when an employee trades in his or her personal account before making client transactions. As a fiduciary, SEI owes a duty of loyalty to clients which requires that an employee must always place the interests of clients first and foremost and shall not take inappropriate advantage of his or her position. Thus, SEI employees must conduct themselves and their personal securities transactions in a manner that does not create conflicts of interest with the firm's clients. Pursuant to this Policy, employees will be subject to various pre-clearance and reporting standards, based on their responsibilities within SEI. As a result, it is important that all employees pay special attention to the employee category section within this Policy to determine what provisions of the Policy applies to them, as well as to the sections on restrictions, pre-clearance, and reporting of personal securities transactions. Employees outside the United States are subject to this Policy and the applicable laws of the jurisdictions in which they are located. These laws may differ substantially from U.S. law and may subject employees to additional requirements. To the extent any particular portion of the Policy is inconsistent with foreign law not included herein or within the firm's Compliance Manual, employees should consult their designated Compliance Officer or the Compliance Department at SEI's Oaks facility. Each employee subject to this Policy must read and retain a copy and agree to abide by its terms. Failure to comply with the provisions of this Policy may result in the imposition of serious sanctions, including, but not limited to disgorgement of profits, dismissal, substantial personal liability and/or referral to regulatory or law enforcement agencies. Any questions regarding SEI's policy or procedures should be referred to the Compliance Department, which currently includes Cyndi Parrish, the Compliance Director. (x2807). II. CODE OF ETHICS A. Purpose of Code This Code of Ethics ("Code") was adopted pursuant to the provisions of Section 17(j) of the Investment Company Act of 1940, as amended, and Rule 17j-1 thereunder, as amended. Those provisions of the 3 U.S. securities laws were adopted to prevent persons who are actively engaged in the management, portfolio selection or underwriting of registered investment companies from participating in fraudulent, deceptive or manipulative acts, practices or courses of conduct in connection with the purchase or sale of securities held or to be acquired by such companies. Employees (including contract employees) will be subject to various pre-clearance and reporting standards based on their responsibilities within SEI and accessibility to certain information. Those functions are set forth in the categories listed below. B. Employee Categories 1. Access Person - any director, officer or employee of SEI Investments Mutual Fund Services who, in connection with his or her regular functions or duties, makes, participates in, or obtains prior or contemporaneous information regarding the purchase or sale of an Investment Vehicle's portfolio securities for which SEI acts as distributor and/or administrator. 2. Investment Person - any director, officer or employee of the Asset Management Group who (1) directly oversees the performance of one or more sub- advisers for any Investment Vehicle for which SEI acts as investment adviser, (2) executes or helps execute portfolio transactions for any such Investment Vehicle, or (3) obtains or is able to obtain prior or contemporaneous information regarding the purchase or sale of an Investment Vehicle's portfolio securities. 3. Portfolio Persons - any director, officer or employee entrusted with direct responsibility and authority to make investment decisions affecting one or more client portfolios. 4. Registered Representative - any director, officer or employee who is registered with the National Association of Securities Dealers as a registered representative (Series 6, 7 or 63), a registered principal (Series 24 or 26) or an investment representative (Series 65), regardless of job title or responsibilities. 5. Associate - any director, officer or employee who does not fall within definitions 1, 2, 3 or 4 above. C. Restrictions on Personal Securities Transactions When buying or selling securities, SEI employees may not employ any device, scheme or artifice to defraud, mislead, or manipulate any fund or investment client. The following restrictions are applicable to an employee's personal securities transactions. 1. Access Persons: . may not purchase or sell, directly or indirectly, any Security within 24 hours before or after the time that the same (or a related) Security is being purchased or sold by any Investment Vehicle for which SEI acts as advisor, distributor and/or administrator. . may not acquire Securities as part of an Initial Public Offering("IPO") without obtaining the written approval of the designated Compliance Officer at Mutual Fund Services before directly or indirectly acquiring a beneficial ownership in such securities. 4 . may not acquire a beneficial ownership interest in Securities issued in a private placement transaction without obtaining prior written approval from the designated Compliance Officer at Mutual Fund Services. 2. Investment Persons: . may not purchase or sell, directly or indirectly, any Security within 24 hours before or after the time that the same (or a related) Security is being purchased or sold by any Investment Vehicle for which SEI or one of its sub- advisers acts as investment adviser or sub-adviser to the Investment Vehicle. . may not profit from the purchase and sale or sale and purchase of a Security within 60 days of acquiring or disposing of Beneficial Ownership of that Security. This prohibition does not apply to transactions resulting in a loss, or to futures or options on futures on broad-based securities indexes or U.S. government securities. . may not acquire Securities as part of an Initial Public Offering without obtaining the written approval of the Compliance Department before directly or indirectly acquiring a beneficial ownership in such securities. . may not acquire a beneficial ownership interest in Securities issued in a private placement transaction without obtaining prior written approval from the Compliance Department. . may not receive any gift of more than de minimus value (currently $100.00 per year) from any person or entity that does business with or on behalf of any Investment Vehicle. . may not serve on the board of directors of any publicly traded company. 3. Portfolio Persons: . may not purchase or sell, directly or indirectly, any Security within 7 days before or after a client portfolio has executed a trade in that same (or an equivalent) Security, unless the order is withdrawn. . may not acquire Securities as part of an Initial Public Offering without obtaining the written approval of the designated Compliance Officer before directly or indirectly acquiring a beneficial ownership in such securities. . may not acquire a beneficial ownership interest in Securities issued in a private placement transaction without obtaining prior written approval from the Compliance Department. . may not profit from the purchase and sale or sale and purchase of a Security within 60 days of acquiring or disposing of Beneficial Ownership of that Security. This prohibition does not apply to transactions resulting in a loss, or to futures or options on futures on broad-based securities indexes or U.S. government securities. 5 . may not receive any gift of more than de minimus value (currently $100.00 per year) from any person or entity that does business with or on behalf of any Investment Vehicle. . may not serve on the board of directors of any publicly traded company. 4. Registered Representatives: . may not acquire Securities as part of an Initial Public Offering. D. Pre-clearance of Personal Securities Transactions 1. Access, Investment and Portfolio Persons: . must pre-clear each proposed securities transaction with the Compliance Department or the designated Compliance Officer for Accounts held in their names or in the names of others in which they hold a Beneficial Ownership interest. No transaction in Securities may be effected without the prior written approval of the Compliance Department or the designated Compliance Officer, except as set forth below in Section D.4 which sets forth the securities transactions that do not require pre-clearance. . the Compliance Department or the designated Compliance Officer will keep a record of the approvals, and the rationale supporting, investments in IPO and private placement transactions. 2. Registered Representatives/Associates: . must pre-clear transactions with the Compliance Department or designated Compliance Officer only if the Registered ------- Representative or Associate knew or should have known at the time of the transaction that, during the 24 hour period immediately preceding or following the transaction, the Security was purchased or sold or was being considered for purchase or sale by any Investment Vehicle. 3. Transactions that do not have to be pre-cleared: ------ . Purchases or sales over which the employee pre-clearing the transaction ( the "Pre-clearing Person") has no direct or indirect influence or control; . Purchases, sales or other acquisitions of Securities which are non- volitional on the part of the Pre-clearing Person or any Investment Vehicle, such as purchases or sales upon exercise of puts or calls written by the Pre- clearing Person, sales from a margin account pursuant to a bona fide margin call, stock --------- dividends, stock splits, mergers, consolidations, spin-offs, or other similar corporate reorganizations or distributions; . Purchases which are part of an automatic dividend reinvestment plan or automatic employee stock purchase plans; . Purchases effected upon the exercise of rights issued by an issuer pro rata to all holders of a class of its Securities, to the --- ---- extent such rights were acquired from such issuer; 6 . Acquisitions of Securities through gifts or bequests; and . Transactions in open-end mutual funds. -------- 4. Pre-clearance procedures: . All requests for pre-clearance of securities transactions must be submitted to the Compliance Department or the designated Compliance Officer by completing a Pre-clearance Request Form (attached as Exhibit 1). SEI Employees located in the U.S. with access to the I drive may also complete an electronic version of the form located at I:\register\preform.doc. . The following information must be provided on the Form: a. Name, date, extension, title; b. Transaction detail, i.e., whether the transaction is a buy or sell; the security name and security type; number of shares; price; date acquired if a sale; and whether the security is held in a portfolio or Investment Vehicle, part of an initial public offering, or part of a private placement transaction; and c. Signature and date; if electronically submitted, initial and date. . The Compliance Department or the designated Compliance Officer will notify the employee whether the request is approved or denied by telephone or email, and by sending a copy of the signed form to the employee. An employee is not officially notified that the transaction has been pre-cleared until he or she receives a copy of the signed form. Employees should retain copies of the signed form. . Employees may not submit a Pre-clearance Request Form for a transaction that he or she does not intend to execute. . Pre-clearance authorization is valid for 3 business days only. Transactions, which are not completed within this period, must be resubmitted with an explanation why the previous pre-cleared transaction was not completed. . Investment persons must submit to the Compliance Department or the designated Compliance Officer transaction reports showing the transactions in all the Investment Vehicles for which SEI or a sub-adviser serves as an investment adviser for the 24 hour period before and after the date on which their securities transactions were effected. Transaction reports need only be submitted for the portfolios that hold or are eligible to purchase and sell the types of securities proposed to be bought or sold by the Investment Person. For example, if the Investment Person seeks to obtain approval for a proposed equity trade, only the transaction reports for the portfolios effecting transactions in equity securities are required. . The Compliance Department or the designated Compliance Officer will maintain pre-clearance records for 5 years. 7 E. Reporting Requirements 1. Duplicate Brokerage Statements [All Employees] ------------- . All SEI Employees are required to instruct their brokers/dealers to file duplicate brokerage statements with the Compliance Department at SEI Oaks. Employees in SEI's global offices are required to have their duplicate statements sent to the offices in which they are located. Statements must be filed for all Accounts (including those in which employees have a Beneficial Ownership interest), except those that trade exclusively in open-end mutual funds, government securities, or SEI stock through the employee stock/stock option plan. Failure of a broker-dealer to send duplicate statements will not excuse an Employee's violation of this Section, unless the Employee demonstrates that he or she took every reasonable step to monitor the broker's or dealer's compliance. . Sample letters instructing the brokers/dealers to send the statements to SEI are attached as Exhibit 2, and may be found at I:\register\407pers.doc and I:\register\permltr.doc. If the broker or dealer requires a letter authorizing a SEI employee to open an account, the permission letter may used and may be found at I:\register\permltr.doc. Please complete the necessary information in the letter and forward a signature ready copy to the Compliance Department. . If no such duplicate statement can be supplied, the Employee should contact the Compliance Department or the designated Compliance Officer. 2. Initial Holdings Report [Access, Investment and Portfolio Persons] ---------------------------------------- . Access, Investment and Portfolio Persons must submit an Initial Holdings Report to the Compliance Department or designated Compliance Officer disclosing every security beneficially owned directly or indirectly by such person within 10 days of becoming an Access, Investment or Portfolio Person. . The Initial Holdings Report must include the following information: (1) the title of the security; (2) the number of shares held; (3) the principal amount of the security; and (4) the name of the broker, dealer or bank where the security is held. The information disclosed in the report must be current as of a date no more than 30 days before the report is submitted. . The Initial Holdings Report is attached as Exhibit 3 to this Code and can be found on the I drive at I:register\inhold.doc. 3. Quarterly Report of Securities Transactions [Access, Investment and ----------------------- Portfolio Persons] ----------------- . Access, Investment and Portfolio Persons must submit quarterly transaction reports of the purchases and/or sales of securities in which such persons have a direct or indirect Beneficial Ownership interest (See Exhibit 4- Quarterly Transaction Report). The report --- 8 will be provided to all Investment Persons before the end of each quarter by the Compliance Department or the designated Compliance Officer and must be completed and returned no later than 10 days ------------- after the end of each calendar quarter. Quarterly Transaction Reports that are not returned by the date they are due will be considered late and will be reported as violations of the Code of Ethics. Investment and Portfolio Persons who repeatedly return the reports late (5 late filings) will be subject to a monetary fine for their Code of Ethics violations. . The following information must be provided on the report: a. The date of the transaction, the description and number of shares, and the principal amount of each security involved; b. Whether the transaction is a purchase, sale or other acquisition or disposition; c. The transaction price; and d. The name of the broker, dealer or bank through whom the transaction was effected. 4. Annual Report of Securities Holdings [Access, Investment and ---------------------- Portfolio Persons] ----------------- . On an annual basis, Investment and Portfolio Persons must submit to the Compliance Department or the designated Compliance Officer an Annual Report of Securities Holdings that contains a list of all securities subject to this Code in which they have any direct or indirect Beneficial Ownership interest (See Exhibit 5 - Annual Securities Holdings Report). The information disclosed in the report must be current as of a date no more than 30 days before the report is submitted. . Annual reports must be returned to the Compliance Department or the designated Compliance Officer within 30 days after the end of the calendar year- end. 9 4. Annual Certification of Compliance [All Employees] ------------- . All employees will be required to certify annually that they: - have read the Code of Ethics; - understand the Code of Ethics; and - have complied with the provisions of the Code of Ethics. . The Compliance Department or the designated Compliance Officer will send out annual forms (attached as Exhibit 6) to all employees that must be completed and returned no later than 30 ------------- days after the end of the calendar year. ---- F. Detection and Reporting of Code Violations The Compliance Department or the designated Compliance Officer will: . review the trading activity reports or duplicate statements filed by Employees, focusing on patterns of personal trading; . review the trading activity of Investment Vehicles; . review the holdings reports submitted by Access, Investment and Portfolio Persons; . prepare an Annual Issues and Certification Report to the Board of Trustees or Directors of the Investment Vehicles that, (1) describes the issues that arose during the year under this Code, including, but not limited to, material violations of and sanctions under the Code, and (2) certifies that SEI has adopted procedures reasonably necessary to prevent its access, investment and portfolio personnel from violating this Code; and . prepare a written report to SEI management personnel outlining any violations of the Code together with recommendations for the appropriate penalties. G. Violations of the Code of Ethics 1. Penalties: . Employees who violate the Code of Ethics may be subject to serious penalties which may include: - written warning; - reversal of securities transaction; - restriction on trading privileges; - disgorgement of trading profits; - fine; - suspension or termination of employment; and/or - referral to regulatory or law enforcement agencies. 2. Penalty Factors: 10 . Factors which may be considered in determining an appropriate penalty include, but are not limited to: - the harm to clients; - the frequency of occurrence; - the degree of personal benefit to the employee; - the degree of conflict of interest; - the extent of unjust enrichment; - evidence of fraud, violation of law, or reckless disregard of a regulatory requirement; and/or - the level of accurate, honest and timely cooperation from the employee. H. Confidential Treatment . The Compliance Department or the designated Compliance Officer will use their best efforts to assure that all requests for pre-clearance, all personal securities transaction reports and all reports for securities holding are treated as "Personal and Confidential." However, such documents will be available for inspection by appropriate regulatory agencies and other parties within and outside SEI as are necessary to evaluate compliance with or sanctions under this Code. I. Definitions Applicable to the Code of Ethics 1. Account - a securities trading account held by an Employee and by any such person's spouse, minor children and adults residing in his or her household (each such person, an "immediate family member"); any trust for which the person is a trustee or from which the Employee benefits directly or indirectly; any partnership (general, limited or otherwise) of which the Employee is a general partner or a principal of the general partner; and any other account over which the Employee exercises investment discretion. 2. Beneficial Ownership - Security ownership in which a person has a direct or indirect financial interest. Generally, an employee will be regarded as a beneficial owner of Securities that are held in the name of: a. a spouse or domestic partner; b. a minor child; c. a relative who resides in the employee's household; or d. any other person IF: (a) the employee obtains from the -- securities benefits substantially similar to those of ownership (for example, income from securities that are held by a spouse); or (b) the employee can obtain title to the securities now or in the future. 3. Initial Public Offering - an offering of securities for which a registration statement has not been previously filed with the U.S. SEC and for which there is no active public market in the shares. 4. Purchase or sale of a Security - includes the writing of an option to purchase or sell a security. 5. Security - includes notes, bonds, stocks (including closed-end funds), convertibles, preferred stock, options on securities, futures on broad-based market indices, warrants and rights. A "Security" does not include direct ---------------- obligations of the U.S. Government ; bankers' acceptances, bank certificates 11 of deposit, commercial paper and high quality short-term debt instruments, including repurchase agreements; and, shares issued by open-end mutual funds. III. INSIDER TRADING POLICY All Employees are required to refrain from investing in Securities based on material nonpublic inside information. This policy is based on the U.S. federal securities laws that prohibit any person from: 1. trading on the basis of material, nonpublic information; 2. tipping such information to others; 3. recommending the purchase or sale of securities on the basis of such information; 4. assisting someone who is engaged in any of the above activities; and 5. trading a security, which is the subject of an actual or impending tender offer when in possession of material nonpublic information relating to the offer. This includes any confidential information that may be obtained by Access, Investment and Portfolio Persons regarding the advisability of purchasing or selling specific securities for any Investment Vehicles or on behalf of clients. Additionally, this policy includes any confidential information that may be obtained about SEI Investments Company or any of its affiliated entities. This Section outlines basic definitions and provides guidance to Employees with respect to this Policy. 12 A. What is "Material" Information? ------------------------------- Information is material when there is a substantial likelihood that a reasonable investor would consider it important in making his or her investment decisions. Generally, if disclosing certain information will have a substantial effect on the price of a company's securities, or on the perceived value of the company or of a controlling interest in the company, the information is material, but information may be material even if it does not have any immediate direct effect on price or value. There is no simple "bright line" test to determine when information is material; assessments of materiality involve a highly fact- specific inquiry. For this reason, any question as to whether information is material should be directed to the Compliance Department. B. What is "Nonpublic" Information? -------------------------------- Information about a publicly traded security or issuer is "public" when it has been disseminated broadly to investors in the marketplace. Tangible evidence of such dissemination is the best indication that the information is public. For example, information is public after it has become available to the general public through a public filing with the SEC or some other governmental agency, the Dow Jones "tape" or the Wall Street Journal or some other publication of general circulation, and after sufficient time has passed so that the information has been disseminated widely. Information about securities that are not publicly traded, or about the issuers of such securities, is not ordinarily disseminated broadly to the public. However, for purposes of this Policy, such private information may be considered "public" private information to the extent that the information has been disclosed generally to the issuer's security holders and creditors. For example, information contained in a private placement memorandum to potential investors may be considered "public" private information with respect to the class of persons who received the memorandum, but may still be considered --------------------------- "nonpublic" information with respect to creditors who were not entitled to - -------------------------------------------------------------------------- receive the memorandum. As another example, a controlling shareholder may have - ---------------------- access to internal projections that are not disclosed to minority shareholders; such information would be considered "nonpublic" information. C. Who Is an Insider? ------------------ Unlawful insider trading occurs when a person, who is considered an insider, with a duty not to take advantage of material nonpublic information violates that duty. Whether a duty exists is a complex legal question. This portion of the Policy is intended to provide an overview only, and should not be read as an exhaustive discussion of ways in which persons may become subject to insider trading prohibitions. Insiders of a company include its officers, directors (or partners), and employees, and may also include a controlling shareholder or other controlling person. A person who has access to information about the company because of some special position of trust or has some other confidential relationship with a company is considered a temporary insider of that company. Investment advisers, lawyers, auditors, financial institutions, and certain consultants and all of their officers, directors or partners, and employees are all likely to be temporary insiders of their clients. Officers, directors or partners, and employees of a controlling shareholder may be temporary insiders of the controlled company, or may otherwise be subject to a duty not to take advantage of inside information. D. What is Misappropriation? ------------------------- 13 Misappropriation usually occurs when a person acquires inside information about Company A in violation of a duty owed to Company B. For example, an employee of Company B may know that Company B is negotiating a merger with Company A; the employee has material nonpublic information about Company A and must not trade in Company A's shares. For another example, Employees who, because of their association with SEI, receive inside information as to the identity of the companies being considered for investment by SEI Investment Vehicles or by other clients, have a duty not to take advantage of that information and must refrain from trading in the securities of those companies. E. What is Tipping? ---------------- Tipping is passing along inside information; the recipient of a tip (the "tippee") becomes subject to a duty not to trade while in possession of that information. A tip occurs when an insider or misappropriator (the "tipper") discloses inside information to another person, who knows or should know that the tipper was breaching a duty by disclosing the information and that the tipper was providing the information for an improper purpose. Both tippees and tippers are subject to liability for insider trading. F. Identifying Inside Information - --------------------------------- Before executing any securities transaction for your personal account or for others, you must consider and determine whether you have access to material, nonpublic information. If you think that you might have access to material, ----- nonpublic information, you must take the following steps: ---- 1. Report the information and proposed trade immediately to the Compliance Department or designated Compliance Officer; 2. Do not purchase or sell the securities on behalf of yourself or others; and 3. Do not communicate the information inside or outside SEI, other than to the Compliance Department or designated Compliance Officer. These prohibitions remain in effect until the information becomes public. Employees managing the work of consultants and temporary employees who have access to material nonpublic information are responsible for ensuring that consultants and temporary employees are aware of this Policy and the consequences of non-compliance. G. Trading in SEI Investments Company Securities --------------------------------------------- This Policy applies to all employees with respect to trading in the securities ------------- of SEI Investments Company, including shares held directly or indirectly in the Company's 401(k) plan. Employees, particularly "officers" (as defined in Rule 16(a)-1(f) in the Securities Exchange Act of 1934, as amended), of the company should be aware of their fiduciary duties to SEI and should be sensitive to the appearance of impropriety with respect to any of their personal transactions in SEI's publicly traded securities. Thus, the following restrictions apply to all transactions in SEI's publicly traded securities occurring in an employee's Account and in all other accounts in which the employee benefits directly or indirectly, or over which the employee exercises investment discretion. 14 . Blackout Period - Directors and Officers are prohibited from buying or selling SEI's publicly traded securities during the blackout period. The blackout periods are as follows: . for the first, second and third quarterly financial reports - begins at the close of the prior quarter and ends after SEI publicly announces the financial results for that quarter. . for the annual and fourth quarter financial reports - begins on the 6th business day of the first month following the end of the calendar year-end and ends after SEI publicly announces its financial results. All securities trading during this period may only be conducted with the approval of SEI's General Counsel or the Compliance Director. In no event may securities trading in SEI's stock be conducted while an Director or Officer of the company is in possession of material nonpublic information regarding SEI. . Major Events - Employees who have knowledge of any SEI events or developments that may have a "material" impact on SEI's stock that have not been publicly announced are prohibited from buying or selling SEI's publicly traded securities before such announcements. (See definition of --- "material information" contained in III. A. above.) . Short Selling and Derivatives Trading Prohibition - All employees are prohibited from engaging in short sales and options trading of SEI's common stock. Section 16(a) directors and officers are subject to the following additional trading restriction. . Short Swing Profits - Directors and Officers may not profit from the purchase and sale or sale and purchase of SEI's securities within 6 months of acquiring or disposing of Beneficial Ownership of that Security. H. Violations of the Insider Trading Policy - -------------------------------------------- Unlawful trading of securities while in possession of material nonpublic information, or improperly communicating that information to others, is a violation of the federal securities laws and may expose violators to stringent penalties. Criminal sanctions may include a fine of up to $1,000,000 and/or ten years imprisonment. The SEC can recover the profits gained or losses avoided through the violative trading, a penalty of up to three times the illicit windfall or loss avoided, and an order permanently enjoining violators from such activities. Violators may be sued by investors seeking to recover damages for insider trading violations. In addition, violations by an employee of SEI may expose SEI to liability. SEI views seriously any violation of this Policy, even if the conduct does not, by itself, constitute a violation of the federal securities laws. Violations of this Policy constitute grounds for disciplinary sanctions, including dismissal. 15 SEI INVESTMENTS COMPANY CODE OF ETHICS AND INSIDER TRADING POLICY EXHIBITS Exhibit 1 Pre-clearance Request Form Exhibit 2 Account Opening Letters to Brokers/Dealers Exhibit 3 Initial Holdings Report Exhibit 4 Quarterly Transaction Report Exhibit 5 Annual Securities Holdings Report Exhibit 6 Annual Compliance Certification 16 EXHIBIT 1 17 PRECLEARANCE REQUEST FORM Name: Date: Ext #: Title/Position: - -------------------------------------------------------------------------------- Transaction Detail: I request prior written approval to execute the following trade: - -------------------------------------------------------------------------------- Buy:[_] Sell: [_] Security Name: Security type: No. of Shares: Price: If sale, date acquired: Held in an SEI Portfolio: Yes [_] No[_] If yes, provide: (a) the Portfolio's name: (b) the date Portfolio bought or sold the security: Initial Public Offering: Private Placement: [_] Yes [_] No [_] Yes [_] No - -------------------------------------------------------------------------------- Disclosure Statements - -------------------------------------------------------------------------------- I hereby represent that, to the best of my knowledge, neither I nor the registered account holder: (1) have knowledge of a possible or pending purchase or sale of the above security in any of the portfolios for which SEI acts as an investment adviser, distributor, administrator, or for which SEI oversees the performance of one or more it sub-advisers; (2) is in possession of any material nonpublic information concerning the security to which this request relates; and (3) is engaging in any manipulative or deceptive trading activity. I acknowledge that if the Compliance Officer to whom I submit this written request determines that the above trade would contravene SEI Investments Company's Code of Ethics and Insider Trading Policy ("the Policy"), the Compliance Officer in his or her sole discretion has the right not to approve the trade, and I undertake to abide by his or her decision. I acknowledge that this authorization is valid for a period of three (3) business days. - -------------------------------------------------------------------------------- Signature: Date: - -------------------------------------------------------------------------------- Compliance Officer's Use Only - -------------------------------------------------------------------------------- Approved: [_] Disapproved: [_] Date: By: Comments: Transaction Report Received: Yes [_] No [_] - -------------------------------------------------------------------------------- Note: This preclearance will lapse at the end of the day on , 20 . If you decide not to effect the trade, please notify the Compliance Department or designated Compliance Officer immediately. 18 EXHIBIT 2 19 Date: Your Broker street address city, state zip code Re: Your Name your S.S. number or account number Dear Sir or Madam: Please be advised that I am an employee of SEI Investments Distribution, Co., a registered broker/dealer an/or SEI Investments Management Corporation, a registered investment adviser. Please send duplicate statements only of this brokerage account to the attention of: SEI Investments Company Attn: The Compliance Department One Freedom Valley Drive Oaks, PA 19456 This request is made pursuant to SEI's Code of Ethics and Insider Trading Policy and Rule 3050 of the NASD's Code of Conduct. Thank you for your cooperation. Sincerely, Your name 20 Date: [Address] Re: Employee Name Account # SS# Dear Sir or Madam: Please be advised that the above referenced person is an employee of SEI Investments Distribution, Co., a registered broker/dealer and/or SEI Investments Management Corporation, a registered investment adviser. We grant permission for him/her to open a brokerage account with your firm and request that you send duplicate statements only of this employee's brokerage account to: SEI Investments Company Attn: The Compliance Department One Freedom Valley Drive Oaks, PA 19456 This request is made pursuant to SEI's Code of Ethics and Insider Trading Policy and Rule 3050 of the NASD's Code of Conduct. Thank you for your cooperation. Sincerely, Cynthia M. Parrish Compliance Director 21 EXHIBIT 3 SEI INVESTMENTS MANAGEMENT CORPORATION INITIAL HOLDINGS REPORT Name:_____________________________________________________________ Signature:__________________ Submission Date:_____________________ Number of Name of Broker, Dealer or Title of Security Shares Held Principal Amount Bank Where Security is Held ================================================================================ ================================================================================ This report must be submitted within 10 days of becoming an Access, Investment or Portfolio Person under SEI Investments Company's Code of Ethics. All securities holdings must be reported on this form. I confirm that the above list is an accurate and complete listing of all securities in which I have a direct or indirect beneficial interest. _________________ Signature _________ Date _________________ Received by: EXHIBIT 4 2 SEI INVESTMENTS MANAGEMENT CORPORATION QUARTERLY TRANSACTION REPORT Transaction Record of Securities Directly or Indirectly Beneficially Owned ________________, 2000 to ____________, 2000 Name:___________________________________________________________________________ Signature:______________________________________________________________________ Submission Date:________________________________________________________________ Number of Shares and Issuer & Broker/Dealer Type of Title of Principal or Date Transaction Security Price Amount Bank ================================================================================ ================================================================================ This report is required of all officers, directors and certain other persons under Section 204 of the Investment Advisers Act of 1940 and Rule 17j-1 of the Investment Company Act of 1940 and is subject to examination. Transactions in direct obligations of the U.S. Government need not be reported. In addition, persons need not report transactions in bankers' acceptances, certificates of deposit, commercial paper or open-end investment companies. The report must be returned within 10 days of the applicable calendar quarter end. The reporting of transactions on this record shall not be construed as an admission that the reporting person has any direct or indirect beneficial ownership in the security listed. By signing this document, I represent that all reported transactions were pre- cleared through the Compliance Department or the designated Compliance Officer in compliance with the SEI Investments Company Code of Ethics and Insider Trading Policy. 3 EXHIBIT 5 4 SEI INVESTMENTS ANNUAL SECURITIES HOLDINGS REPORT As of December 31, 19__ Employee Name: __________________
- --------------------------------------------------------------------------------------------------------------------- 0 Security 1 Number of Shares Type of Ownership (direct Account Number and Name of -------- ---------------- or indirect) Brokerage Firm Where Securities are Held - --------------------------------------------------------------------------------------------------------------------- - --------------------------------------------------------------------------------------------------------------------- - --------------------------------------------------------------------------------------------------------------------- - --------------------------------------------------------------------------------------------------------------------- - --------------------------------------------------------------------------------------------------------------------- - --------------------------------------------------------------------------------------------------------------------- - --------------------------------------------------------------------------------------------------------------------- - ---------------------------------------------------------------------------------------------------------------------
I confirm that the above list is an accurate and complete listing of all securities in which I have a direct or indirect beneficial interest. ________________________ _________________________ Name Received by _________ Date Note: Do not report holdings of U.S. Government securities, bankers' ------ acceptances, certificates of deposit, commercial paper and mutual funds. 5 EXHIBIT 6 SEI INVESTMENTS CODE OF ETHICS ANNUAL COMPLIANCE CERTIFICATION TO: Compliance Department FROM: DATE: 1. I hereby acknowledge receipt of a copy of the Code of Ethics and Insider Trading Policy. 2. I have read and understand the Code of Ethics and Insider Trading Policy and recognize that I am subject thereto. 3. I hereby declare that I have complied with the terms of the Code of Ethics and Insider Trading Policy. Signature: __________________ Date:_________ Received by: ________________ 7 EX-99.P4 7 CODE OF ETHICS FOR STI CLASSIC FUNDS CODE OF ETHICS FOR STI CLASSIC FUNDS Trusco Capital Management (the "Adviser") has confidence in the integrity and good faith of all of its directors, officers and employees. However, the Adviser recognizes those individuals may have knowledge of present or future portfolio transactions and, in certain instances, the power to influence portfolio transactions made on behalf of or for one or more of the separately managed series (the "Funds") of the STI Classic Funds (the "Trust"). Such knowledge could place those individuals, if they engage in personal transactions in securities which are eligible for investment by the Trust, in a position where their personal interest may conflict with that of the Trust. In view of the foregoing and of the provisions of Rule 17j-1(b)(1) under the Investment Company Act of 1940 (the "1940 Act"), the Adviser has determined to adopt this Code of Ethics. This Code prohibits certain types of personal transactions deemed to create conflicts of interest, or at least the potential for or the appearance of such a conflict, and establishes reporting requirements and enforcement procedures. I. Definitions. ----------- (1) "Access Person" shall mean each employee, director and officer of the Adviser and the Executive Vice President of SunTrust Banks, Inc. charged with responsibility for the Trust and Investment Services area. (2) "Beneficial ownership" of a security generally is to be determined in the same manner as it is for purposes of Section 16 of the Securities Exchange Act of 1934. A person should consider himself or herself the beneficial owner of any securities in which that person has a direct or indirect pecuniary interest. In addition, a person should consider himself or herself the beneficial owner of securities held by his or her spouse, minor children, a relative who shares his or her home, or other persons by reason of any contract, arrangement, understanding or relationship that provides him or her with sole or shared voting or investment power in a capacity outside the scope of his or her employment. (3) "Investment Personnel" means all Access Persons who occupy the position of portfolio manager or who serve on an investment committee that carries out the portfolio management function with respect to any Fund of the Trust and all Access Persons who provide or supply information and/or advice to any portfolio manager or investment committee, or who execute or help execute any portfolio manager's or investment committee's decisions. (4) "Purchase or sale of a security" includes the writing of an option to purchase or sell a security. (5) "Security" shall have the same meaning as set forth in Section 2(a)(36) of the 1940 Act, including private placements thereof, except that it shall not include securities issued by the Government of the United States or an agency thereof, bankers' acceptances, bank certificates of deposit, commercial paper and registered, open-end mutual funds. (6) A "Security held or to be acquired" by the Trust or any Fund means any Security which, within the most recent fifteen days, (I) is or has been held by any Fund of the Trust advised by the Adviser, or (ii) is being or has been considered by the Adviser for purchase by the Trust or any Fund. (7) A Security is "being purchased or sold" by the Trust or any Fund from the time a purchase or sale program has been communicated to the person who places the buy and sell orders for the Trust or any Fund until the time when such program has been fully completed or terminated. (8) A "Related Security" includes a security of any class not exempt under Section II(5) of this Code issued by the same company whose securities are being purchased or sold, including rights, warrants, preferred shares, bonds or common shares of different classes. A "Related Security" also includes any security not exempt under Section II(5) of this Code which is issued by a subsidiary, parent or an affiliated company of the company whose securities are being purchased or sold. II. Statement of General Principles. ------------------------------- In recognition of the trust and confidence placed in the Adviser by the Trust and its shareholders and to give effect to the Adviser's belief that its operations with respect to the Trust should be directed to the benefit of the Trust's shareholders, the Adviser hereby adopts the following general principles to guide the actions of its directors, officers and employees. (1) The interests of the Trust's shareholders are paramount to the personal interests of the Advisers Access Persons, all of whom must conduct themselves and their operations to give maximum effect to this principle by assiduously placing the interests of the shareholders before their own. (2) All personal transactions in securities by the Adviser's Access Persons must be accomplished so as to avoid even the appearance of a conflict of interest on the part of such persons with the interests of the Trust and its shareholders. (3) All of the Adviser's Access Persons must avoid actions or activities that allow, or appear to allow, any such person to profit or benefit from his or her position with respect to the Trust, or that otherwise bring into question the person's independence or judgment. III. Prohibited Purchases and Sales of Securities. -------------------------------------------- (1) No Access Person shall, in connection with the purchase or sale, directly or indirectly, by such person of a Security held or to be acquired by any Fund advised by the Adviser: (A) Employ any device, scheme or artifice to defraud such Fund; (B) Make to such Fund any untrue statement of a material fact or omit to state to such Fund a material fact necessary in order to make the statements made, in light of the circumstances under which they are made, not misleading; (C) Engage in any act, practice or course of business which would operate as a fraud or deceit upon such Fund; or (D) Engage in any manipulative practice with respect to such Fund. (2) Subject only to Section IV(2) of this Code, no Access Person shall purchase or sell, directly or indirectly, any Security in which he or she had or by reason of such transaction acquires any Beneficial Ownership, within 24 hours before or after the time that the same (or a related) Security is being purchased or sold by any Fund advised by the Adviser. Subject only to Section IV(2) of this Code, no Portfolio Manager shall purchase or sell, directly or indirectly, any Security in which he or she had or by reason of such transaction acquires any Beneficial Ownership, within seven calendar days before or after the time that the same (or a related) Security is being purchased or sold by any Fund managed by him or her. (3) Subject to Sections IV(2) and IV(3)(B) and (C) of this Code, no Investment Personnel shall sell a Security at a profit or cover a short sale at a profit within 60 days of acquiring beneficial ownership of that security. (4) No Investment Personnel may acquire beneficial ownership of securities as part of an initial public offering by the issuer. IV. Preclearance of Personal Transactions. -------------------------------------- (1) Except as provided in Section IV(2) of this Code, each Access Person must preclear each proposed personal transaction in Securities with the Adviser's designated Review Officer prior to proceeding with the transaction. No such transaction in Securities may be effected without the prior written approval of the Review Officer. In determining whether to grant such approval, the Review Officer shall refer to all relevant Sections of this Code, including Section IV(3), below. (2) The requirements of Section IV(1) shall not apply to the following personal transactions: (A) Purchases or sales over which the Access Person has no direct or indirect control or influence; (B) Purchases or sales which are non-volitional on the part of either the Access Person or any Fund, including purchases or sales upon exercise of puts or calls written by the Access Person and sales from a margin account pursuant to a bona fide margin call; (C) Purchases which are part of an automatic dividend reinvestment plan; (D) Purchases effected upon the exercise of rights issued by an issuer pro rata to all holders of a class of its Securities, to the extent such rights were acquired from such issuer. (3) The following personal transactions shall be precleared by the Review Officer: (A) Transactions which do not violate the provisions of Section III(1) of this Code, are not subject to Section III(2), (3) or (4) of this Code and which appear upon reasonable inquiry and investigation to present no reasonable likelihood of harm to any Fund advised by the Adviser; (B) Transactions otherwise not permitted under Section III(3) of this Code in Securities which are: I. Not included on a guidance list of Securities eligible for investment by any Fund of the Trust advised by the Adviser (if such a list is maintained by the Adviser); or ii. Securities which are not eligible for purchase or sale by any Fund of the Trust advised by the Adviser, as determined by reference to the 1940 Act and blue sky laws and regulations thereunder, the investment objectives and policies and investment restrictions of the Trust and its series, and undertakings made to regulatory authorities; or iii Securities of an issuer which is one of the 100 largest-capitalized public companies in the United States, as reflected in the Standard & Poors 100 list of companies with the largest market capitalization. (C) Transactions not permitted under Section III(3) of this Code which the Review Officer, after consideration of such facts and circumstances as significant changes in the personal circumstances of the person whose transaction is under consideration or unanticipated market or corporate events affecting the security, determines to not violate Section III(1) of this Code and present no reasonable likelihood of harm to the Trust or to any Fund. V. Additional Restrictions and Requirements. ---------------------------------------- (1) No Access Person shall accept any gift or other thing of more than de minimis value from any person or entity that does business with or on behalf of the Adviser or any Fund advised by the Adviser. (2) No Access Person may accept a position as a director or trustee of a publicly-traded company without prior approval of such position by the Adviser and by the Trust's Board of Trustees, as consistent with the interests of the Trust and its shareholders. (3) Each Access Person must direct each brokerage firm or bank at which such person maintains a securities account to send duplicate copies of such person's confirmations and statements to the Review Officer. Compliance with this provision can also be effected by the Access Person providing duplicate copies of all such confirmations and statements directly to the Review Officer within seven business days of receipt by the Access Person. VI. Reporting Obligations. --------------------- (1) The Adviser shall create and maintain a list of all Access Persons. (2) Each Access Person shall provide to the Review Officer a complete listing of all securities beneficially owned by such person as of the later of the date when such person became an Access Person with respect to the Trust or January 1, 1995, and thereafter shall submit an updated listing of such holdings to the Review Officer as of January 1 of each subsequent year. The initial listing shall be submitted on or before the later of January 1, 1995 or ten days after such person first became an Access Person and each updated listing shall be submitted on or before the last business day of January in each subsequent year. (3) Each Access Person shall report, in the manner and form set out in Section VII of this Code, all transactions in Securities which are not reflected on bank or brokerage firm statements required to be sent under Section V(3) of this Code in which the person has, or by reason of such transaction acquires, any direct or indirect beneficial ownership. VII. Reports. ------- (1) The quarterly reports for transactions described in Section VI(3) of this Code shall be filed by all Access Persons with the Review Officer. The Review Officer shall file quarterly reports with respect to his or her own personal securities transactions with the President of the Adviser, who shall act in all respects in the manner prescribed herein for the Review Officer. (2) Any such report may contain a statement that the report shall not be construed as an admission by the person making such report that he or she has any direct or indirect beneficial ownership in the security or securities to which the report relates. (3) Every Access Person shall include in such report the name of any publicly-owned company or any company anticipating a public offering of its equity securities and the total number of its shares beneficially owned by him or her if such total ownership is more than 1/2 of 1% of the company's outstanding shares. (4) Each report shall be filed not later than 10 days after the end of each calendar quarter and shall contain the following information: (A) The date of each transaction required to be reported, the title and number of shares or principal amount of each security involved; (B) The nature of each transaction required to be reported (whether purchase, sale or any other type of acquisition or disposition); (C) The price at which each such transaction was effected; (D) The name of the broker, dealer or bank with or through whom each such transaction was effected; and (E) The date of the report and the signature of the person making the report. (5) If no reportable transactions occurred during a quarter, the Access Person shall file a signed and dated timely report so stating. VIII. Review and Enforcement. ---------------------- (1) The Review Officer shall compare all personal securities transactions reported pursuant to Sections V(3) and VI(3) of this Code with completed portfolio transactions of the Funds advised by the Adviser during the relevant time to determine whether a violation of this Code may have occurred. Before determining that a violation has been committed by any person, the Review Officer shall give such person the opportunity to supply additional explanatory material. (2) If the Review Officer determines that a violation of this Code may have occurred, the Review Officer shall submit such written determination, together with the information upon which the Review Officer made the determination and any additional explanatory material provided by the person, to the President of the Adviser, who shall make an independent determination as to whether a violation has occurred. (3) If the President finds that a violation has occurred, the President shall impose upon the person such sanctions as he or she deems appropriate and shall report the violation and the sanctions imposed to the Board of Trustees of the Trust. (4) No person shall participate in a determination of whether he or she has committed a violation of this Code or of the imposition of any sanction against himself or herself. If a securities transaction of the President is under consideration, the Chairman of the Board of Directors of the Adviser shall act in all respects in the manner prescribed herein for the President. -----END PRIVACY-ENHANCED MESSAGE-----