<PAGE> 1
AmSouth Funds
Prospectus
CLASS A SHARES
CLASS B SHARES
TRUST SHARES
DECEMBER 14, 1999
As with all mutual funds, the
Securities and Exchange Commission
has not approved or disapproved these
Fund shares or determined whether
this prospectus is truthful or
complete. Anyone who tells you
otherwise is committing a crime.
AmSouth Funds Logo
<PAGE> 2
AMSOUTH FUNDS TABLE OF CONTENTS
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DESCRIPTION OF THE FUNDS -- OBJECTIVES, RISK/RETURN AND EXPENSES
[LOGO]
Carefully review this important 2 Overview
section to learn about each Fund's CAPITAL APPRECIATION FUNDS
goal, main investment strategies 4 AmSouth International Equity Fund
and risks, and fees. 6 AmSouth Mid Cap Fund
8 AmSouth Capital Growth Fund
10 AmSouth Large Cap Fund
INCOME FUNDS
12 TAXABLE FUND
13 AmSouth Limited Term U.S. Government Fund
15 TAX-FREE FUNDS
16 AmSouth Tennessee Tax-Exempt Fund
18 AmSouth Limited Term Tennessee Tax-Exempt Fund
MONEY MARKET FUND
21 AmSouth Treasury Reserve Money Market Fund
STRATEGIC PORTFOLIOS
24 AmSouth Strategic Portfolios: Aggressive Growth Portfolio
27 AmSouth Strategic Portfolios: Growth Portfolio
30 AmSouth Strategic Portfolios: Growth and Income Portfolio
33 AmSouth Strategic Portfolios: Moderate Growth and Income
36 Portfolio
AmSouth Strategic Portfolios: Current Income Portfolio
ADDITIONAL INVESTMENT STRATEGIES AND RISKS
[LOGO]
Review this section for additional CAPITAL APPRECIATION FUNDS
information on investment 39 AmSouth International Equity Fund
strategies and risks. 39 AmSouth Mid Cap Fund
39 AmSouth Capital Growth Fund
39 AmSouth Large Cap Fund
INCOME FUNDS
40 AmSouth Limited Term U.S. Government Fund
41 AmSouth Tennessee Tax-Exempt Fund
41 AmSouth Limited Term Tennessee Tax-Exempt Fund
MONEY MARKET FUND
42 AmSouth Treasury Reserve Money Market Fund
42 STRATEGIC PORTFOLIOS
47 APPLICABLE TO ALL FUNDS
FUND MANAGEMENT
[LOGO]
Review this section for details on 48 Investment Advisers
the people and organizations who 48 Investment Sub-Advisers
oversee the Funds. 48 Primary Portfolio Managers
49 Administrator and Distributor
SHAREHOLDER INFORMATION
[LOGO]
Review this section for details on 50 Choosing a Share Class
how shares are valued, how to 51 Pricing of Fund Shares
purchase, sell and exchange 52 Purchasing and Adding to Your Shares
shares, related charges and 55 Selling Your Shares
payments of dividends and 57 General Policies on Selling Shares
distributions. 58 Distribution Arrangements/Sales Charges
62 Exchanging Your Shares
63 Dividends, Distributions, and Taxes
WHERE TO LEARN MORE ABOUT THE FUNDS.
[LOGO]
Back Cover
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[LOGO]
DESCRIPTION OF THE FUNDS -- OBJECTIVES, RISK/RETURN AND
EXPENSES OVERVIEW
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THE FUNDS AmSouth Funds consist of thirty-one separate Funds, each
with its own investment strategy and risk/return profile.
This prospectus gives you important information about the
Class A Shares, Class B Shares and Trust Shares of thirteen
funds. Please read this prospectus, and keep it for future
reference.
Each of the Funds in this prospectus is a mutual fund. A
mutual fund pools shareholders' money and, using
professional investment managers, invests it in securities
like stocks and bonds. Before you look at specific Funds,
you should know a few general basics about investing in
mutual funds.
The value of your investment in a Fund is based on the
market prices of the securities the Fund holds. These prices
change daily due to economic and other events that affect
securities markets generally, as well as those that affect
particular companies or government units. These price
movements, sometimes called volatility, will vary depending
on the types of securities a Fund owns and the markets where
these securities trade.
LIKE OTHER INVESTMENTS, YOU COULD LOSE MONEY ON YOUR
INVESTMENTS IN A FUND. YOUR INVESTMENT IN A FUND IS NOT A
DEPOSIT OR AN OBLIGATION OF AMSOUTH BANK, ITS AFFILIATES, OR
ANY BANK. IT IS NOT INSURED BY THE FDIC OR ANY GOVERNMENT
AGENCY.
Each Fund has its own investment goal and strategies for
reaching that goal. However, it cannot be guaranteed that a
Fund will achieve its goal. Before investing, make sure that
the Fund's goal matches your own.
The portfolio manager invests each Fund's assets in a way
that the manager believes will help the Fund achieve its
goal. A manager's judgments about the stock markets, economy
and companies, or selecting investments may cause a Fund to
underperform other funds with similar objectives.
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2
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DESCRIPTION OF THE FUNDS -- OBJECTIVES, RISK/RETURN AND
EXPENSES OVERVIEW
CAPITAL APPRECIATION FUNDS
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These Funds seek capital appreciation and invest primarily
in equity securities, principally common stocks and, to a
limited extent, preferred stocks and convertible securities.
WHO MAY WANT TO INVEST? Consider investing in these Funds if you are:
- seeking a long-term goal such as retirement
- looking to add a growth component to your portfolio
- willing to accept the risks of investing in the stock
markets
These Funds may not be appropriate if you are:
- pursuing a short-term goal or investing emergency reserves
- uncomfortable with an investment that will fluctuate in
value
</TABLE>
3
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AMSOUTH INTERNATIONAL
DESCRIPTION OF THE FUNDS -- OBJECTIVES, RISK/RETURN AND
EXPENSES EQUITY FUND
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INVESTMENT OBJECTIVE The Fund seeks to provide investors with capital
appreciation.
PRINCIPAL INVESTMENT STRATEGIES The Fund invests primarily in equity securities of large
non-U.S. companies (i.e., incorporated or organized outside
the United States).
In choosing stocks for the Fund, the Fund's Sub-Adviser,
Lazard Asset Management, looks for established companies in
economically developed countries that it believes are
undervalued based on their return on total capital or
equity. The Sub-Adviser attempts to identify undervalued
securities through traditional measures of value, including
low price to earnings ratio, high yield, unrecognized
assets, potential for management change and the potential to
improve profitability.
The Sub-Adviser focuses on individual stock selection (a
"bottom-up" approach) rather than on forecasting stock
market trends (a "top-down" approach).
The percentage of the Fund's assets invested in particular
geographic sectors may shift from time to time in accordance
with the judgment of the Adviser and Sub-Adviser.
Ordinarily, the Fund invests in at least three different
foreign countries. Although the Fund invests primarily in
the stocks of companies located in developed foreign
countries, it may invest up to 25% of its total assets in
typically large companies located, or doing significant
business in emerging markets. In addition, the Fund may have
substantial investments in American and Global Depositary
Receipts.
PRINCIPAL INVESTMENT RISKS The Fund's performance will be influenced by political,
social and economic factors affecting companies in foreign
countries. The securities of foreign issuers fluctuate in
price, often based on factors unrelated to the issuers'
value, and such fluctuations can be pronounced. Foreign
securities include special risks such as exposure to
currency fluctuations, a lack of adequate company
information, political instability, and differing auditing
and legal standards. As a result, you could lose money by
investing in the Fund, particularly if there is a sudden
decline in the share prices of the Fund's holdings or an
overall decline in the stock markets of the foreign
countries in which the Fund is invested.
Emerging market countries have economic structures that are
generally less diverse and mature, and political systems
that are less stable, than those of developed countries. As
a result, their markets are more volatile.
Value stocks involve the risk that they may never reach what
the Sub-Adviser believes is their full market value. They
also may decline in price, even though in theory they are
already underpriced.
The Fund is non-diversified and may invest a greater
percentage of its assets in a particular company compared
with other funds. Accordingly, the Fund's portfolio may be
more sensitive to changes in the market value of a single
company or industry.
</TABLE>
4
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AMSOUTH INTERNATIONAL
DESCRIPTION OF THE FUNDS -- OBJECTIVES, RISK/RETURN AND
EXPENSES EQUITY FUND
FEES AND EXPENSES
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SHAREHOLDER TRANSACTION EXPENSES CLASS A CLASS B TRUST
(FEES PAID BY YOU DIRECTLY)(1) SHARES SHARES SHARES
Maximum sales charge (load) on
purchases as a % of offering price 4.50%(2) None None
Maximum deferred sales charge (CDSC) None 5.00%(3) None
Redemption Fee(4) 0.00% 0.00% 0.00%
ANNUAL FUND OPERATING EXPENSES CLASS A CLASS B TRUST
(FEES PAID FROM FUND ASSETS) SHARES SHARES SHARES
Management Fee 1.25% 1.25% 1.25%
Distribution (12b-1) Fee 0.00% 0.75% None
Other Expenses 1.21% 1.21% 1.11%(5)
Total Annual Fund Operating Expenses(6) 2.46% 3.21% 2.36%
Fee Waiver and/or Expense Reimbursement (.15%) (.30%) (.30%)
Net Expenses 2.31% 2.91% 2.06%
</TABLE>
(1) AmSouth Bank or other financial
institutions may change their customer account
fees for automatic investment and other cash
management services provided in connection
with investment in the Funds.
(2) Sales charges may be reduced depending
upon the amount invested or, in certain
circumstances, waived. Class A shares bought
as part of an investment of $1 million or more
are not subject to an initial sales charge,
but may be charged a CDSC of 1.00% if sold
within one year of purchase.
(3) For B Shares acquired in the combination
of AmSouth Funds with ISG Funds, waivers are
in place on the CDSC charged if such Class B
shares are sold within six years of purchase,
which will decline as follows: 4%, 3%, 3%, 2%,
2%, 1% to 0% in the seventh year. For all
other B Shares, the CDSC declines over a six
year period as follows: 5%, 4%, 3%, 3%, 2%, 1%
to 0% in the seventh and eighth year.
Approximately eight years after purchase
(seven years in the case of Shares acquired in
the ISG combination), Class B Shares
automatically convert to Class A shares.
(4) A wire transfer fee of $7.00 will be
deducted from the amount of your redemption if
you request a wire transfer.
(5) The above amount includes a shareholder
servicing fee that will become effective on
March 13, 2000.
(6) Other expenses for each Class are based on
estimated amounts for the current fiscal year.
The expenses noted above do not reflect any
fee waivers or expense reimbursement
arrangements that are in effect. Total
expenses after fee waivers and expense
reimbursements for each class through April
30, 2000 will be as follows: Class A, 1.77%;
and Trust, 1.77%. AmSouth Bank has
contractually agreed to waive fees and/or
reimburse expenses to limit total annual fund
operating expenses to: Class A, 2.31%; Class
B, 2.91%; and Trust, 2.06% until October 1,
2001.
EXPENSE EXAMPLE
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3 5 10
1 YEAR YEARS YEARS YEARS
CLASS A SHARES $688 $1,182 $1,702 $3,120
CLASS B SHARES
Assuming Redemption $824 $1,289 $1,878 $3,260
Assuming No Redemption $324 $ 989 $1,678 $3,260
TRUST SHARES $239 $ 736 $1,260 $2,696
</TABLE>
If you purchase and hold
shares of the AmSouth
International Equity Fund, you
will pay certain fees and
expenses, which are described
in the tables. Shareholder
transaction fees are paid from
your account. Annual Fund
operating expenses are paid
out of Fund assets, and are
reflected in the share price.
Use the example at right to
help you compare the cost of
investing in the Fund with the
cost of investing in other
mutual funds. It illustrates
the amount of fees and
expenses you would pay,
assuming the following:
- $10,000 investment
- 5% annual return
- no changes in the Fund's
operating expenses
- redemption at the end of
each time period
Because actual returns and
operating expenses will be
different, this example is for
comparison only.
5
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DESCRIPTION OF THE FUNDS -- OBJECTIVES, RISK/RETURN AND
EXPENSES AMSOUTH MID CAP FUND
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INVESTMENT OBJECTIVE The Fund seeks to provide investors with capital
appreciation.
PRINCIPAL INVESTMENT STRATEGIES The Fund invests primarily in equity securities of companies
publicly traded on U.S. exchanges that are either included
in the Russell Mid-Cap Growth Index or have market
capitalizations within the range of such included companies.
In choosing stocks for the Fund, the Fund's Sub-Adviser,
Bennett Lawrence Management, seeks to identify industries
that are benefiting from major demand trends or themes and
are therefore growing at a much faster rate than the overall
economy. The Sub-Adviser then typically gathers information
on the companies that are benefiting from these trends or
themes. Generally, the Fund will not invest in a company
unless the Sub-Adviser has met with the company's top
management. The Sub-Adviser also seeks to talk to suppliers,
purchasers, and competitors to reinforce its analysis and
monitor the Fund's holdings. The Sub-Adviser's experience
has been that when mid-sized companies are backed by major
demand trends, they can create attractive gains for
investors.
PRINCIPAL INVESTMENT RISKS Stocks and other equity securities fluctuate in price, often
based on factors unrelated to the issuers' value, and such
fluctuations can be pronounced. The value of your investment
in the Fund will fluctuate in response to movements in the
stock market and the activities of individual portfolio
companies. As a result, you could lose money by investing in
the Fund, particularly if there is a sudden decline in share
prices of the Fund's holdings or an overall decline in the
stock market.
The Fund invests in mid-cap companies which carry additional
risks. These companies typically have less predictable
earnings than larger companies and their securities trade
less frequently and in more limited volume than those of
larger, more established companies. As a result, mid-cap
stocks and thus the Fund's shares may fluctuate more in
value than larger-cap stocks and funds that focus on them.
Over time, growth companies are expected to increase their
earnings at an above-average rate. If these expectations are
not met, the stock price can fall drastically -- even if
earnings show an absolute increase.
Because demand trends and themes can change, the Fund's
performance could suffer if the Adviser is slow to respond
to such changes.
</TABLE>
6
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DESCRIPTION OF THE FUNDS -- OBJECTIVES, RISK/RETURN AND
EXPENSES AMSOUTH MID CAP FUND
FEES AND EXPENSES
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SHAREHOLDER TRANSACTION EXPENSES CLASS A CLASS B TRUST
(FEES PAID BY YOU DIRECTLY)(1) SHARES SHARES SHARES
Maximum sales charge (load) on
purchases as a % of offering price 4.50%(2) None None
Maximum deferred sales charge
(CDSC) None 5.00%(3) None
Redemption Fee(4) 0.00% 0.00% 0.00%
ANNUAL FUND OPERATING EXPENSES CLASS A CLASS B TRUST
(FEES PAID FROM FUND ASSETS) SHARES SHARES SHARES
Management Fee 1.00% 1.00% 1.00%
Distribution (12b-1) Fee 0.00% 0.75% None
Other Expenses 1.34% 1.34% 1.24%(5)
Total Annual Fund Operating
Expenses(6) 2.34% 3.09% 2.24%
</TABLE>
(1) AmSouth Bank or other financial
institutions may change their customer account
fees for automatic investment and other cash
management services provided in connection
with investment in the Funds.
(2) Sales charges may be reduced depending
upon the amount invested or, in certain
circumstances, waived. Class A shares bought
as part of an investment of $1 million or more
are not subject to an initial sales charge,
but may be charged a CDSC of 1.00% if sold
within one year of purchase.
(3) For B Shares acquired in the combination
of AmSouth Funds with ISG Funds, waivers are
in place on the CDSC charged if such Class B
shares are sold within six years of purchase,
which will decline as follows: 4%, 3%, 3%, 2%,
2%, 1% to 0% in the seventh year. For all
other B Shares, the CDSC declines over a six
year period as follows: 5%, 4%, 3%, 3%, 2%, 1%
to 0% in the seventh and eighth year.
Approximately eight years after purchase
(seven years in the case of ISG Shares
acquired in the combination), Class B shares
automatically convert to Class A shares.
(4) A wire transfer fee of $7.00 will be
deducted from the amount of your redemption if
you request a wire transfer.
(5) The above amount includes a shareholder
servicing fee that will become effective on
March 13, 2000.
(6) Other expenses for each Class are based on
estimated amounts for the current fiscal year.
The expenses noted above do not reflect any
fee waivers or expense reimbursement
arrangements that are in effect. AmSouth Bank
has contractually agreed to waive fees and/or
reimburse expenses to limit total annual fund
operating expenses to: Class A, 3.00%; Class
B, 3.60%; Trust, 2.75% until October 1, 2001.
EXPENSE EXAMPLE
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1 3
YEAR YEARS
CLASS A SHARES $676 $1,148
CLASS B SHARES
Assuming Redemption $812 $1,254
Assuming No Redemption $312 $ 954
TRUST SHARES $227 $ 700
</TABLE>
If you purchase and hold
shares of the AmSouth Mid Cap
Fund, you will pay certain
fees and expenses, which are
described in the tables.
Shareholder transaction fees
are paid from your account.
Annual Fund operating expenses
are paid out of Fund assets,
and are reflected in the share
price.
Use the example at right to
help you compare the cost of
investing in the Fund with the
cost of investing in other
mutual funds. It illustrates
the amount of fees and
expenses you would pay,
assuming the following:
- $10,000 investment
- 5% annual return
- no changes in the Fund's
operating expenses
- redemption at the end of
each time period
Because actual returns and
operating expenses will be
different, this example is for
comparison only.
7
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AMSOUTH CAPITAL
DESCRIPTION OF THE FUNDS -- OBJECTIVES, RISK/RETURN AND
EXPENSES GROWTH FUND
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INVESTMENT OBJECTIVES The Fund seeks to provide investors with capital growth.
PRINCIPAL INVESTMENT STRATEGIES The Fund invests primarily in equity securities of U.S.
companies with market capitalizations of at least $500
million that the Adviser believes offer opportunities for
capital appreciation and growth of earnings. The Fund also
may invest in medium-sized companies.
In choosing stocks for the Fund, the Adviser first
identifies industries that it believes will expand over the
next few years or longer. The Adviser then uses fundamental
analysis of company financial statements to find large U.S.
companies within these industries that offer the prospect of
solid earnings growth. The Adviser also may consider other
factors in selecting investments for the Fund, including the
development of new or improved products or services,
opportunities for greater market share, more effective
management or other signs that the company will have greater
than average earnings growth and capital appreciation.
PRINCIPAL INVESTMENT RISKS Stocks and other equity securities fluctuate in price, often
based on factors unrelated to the issuers' value, and such
fluctuations can be pronounced. The value of your investment
in the Fund will fluctuate in response to movements in the
stock market and the activities of individual portfolio
companies. As a result, you could lose money by investing in
the Fund, particularly if there is a sudden decline in the
share prices of the Fund's holdings or an overall decline in
the stock market.
The Fund may invest in medium-sized companies which carry
additional risks because their earnings tend to be less
predictable, their share prices more volatile and their
securities less liquid than larger, more established
companies.
Over time, growth companies are expected to increase their
earnings at an above-average rate. If these expectations are
not met, the stock price can fall drastically--even if
earnings show an absolute increase.
The Fund is non-diversified and may invest a greater
percentage of its assets in a particular company compared
with other funds. Accordingly, the Fund's portfolio may be
more sensitive to changes in the market value of a single
company or industry.
</TABLE>
8
<PAGE> 10
AMSOUTH CAPITAL
DESCRIPTION OF THE FUNDS -- OBJECTIVES, RISK/RETURN AND
EXPENSES GROWTH FUND
FEES AND EXPENSES
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SHAREHOLDER TRANSACTION EXPENSES (FEES CLASS A CLASS B TRUST
PAID BY YOU DIRECTLY)(1) SHARES SHARES SHARES
Maximum sales charge (load) on
purchases as a % of offering price 4.50%(2) None None
Maximum deferred sales charge (CDSC) None 5.00%(3) None
Redemption Fee(4) 0.00% 0.00% 0.00%
ANNUAL FUND OPERATING EXPENSES (FEES CLASS A CLASS B TRUST
PAID FROM FUND ASSETS) SHARES SHARES SHARES
Management Fee 0.80% 0.80% 0.80%
Distribution (12b-1) Fee 0.00% 0.75% None
Other Expenses 0.61% 0.61% 0.51%(5)
Total Annual Fund Operating Expenses(6) 1.41% 2.16% 1.31%
Fee Waiver and/or Expense Reimbursement (.07%) (.20%) (.20%)
Net Expenses 1.36% 1.96% 1.11%
</TABLE>
(1) AmSouth Bank or other financial
institutions may change their customer account
fees for automatic investment and other cash
management services provided in connection
with investment in the Funds.
(2) Sales charges may be reduced depending
upon the amount invested or, in certain
circumstances, waived. Class A shares bought
as part of an investment of $1 million or more
are not subject to an initial sales charge,
but may be charged a CDSC of 1.00% if sold
within one year of purchase.
(3) For B Shares acquired in the combination
of AmSouth Funds with ISG Funds, waivers are
in place on the CDSC charged if such Class B
shares are sold within six years of purchase,
which will decline as follows: 4%, 3%, 3%, 2%,
2%, 1% to 0% in the seventh year. For all
other B Shares, the CDSC declines over a six
year period as follows: 5%, 4%, 3%, 3%, 2%, 1%
to 0% in the seventh and eighth year.
Approximately eight years after purchase
(seven years in the case of Shares acquired in
the ISG combination), Class B shares
automatically convert to Class A shares.
(4) A wire transfer fee of $7.00 will be
deducted from the amount of your redemption if
you request a wire transfer.
(5) The above amount includes a shareholder
servicing fee that will become effective on
March 13, 2000.
(6) Other expenses for each Class are based on
estimated amounts for the current fiscal year.
The expenses noted above do not reflect any
fee waivers or expense reimbursement
arrangements that are in effect. AmSouth Bank
has contractually agreed to waive fees and/or
reimburse expenses to limit total annual fund
operating expenses to: Class A, 1.36%; Class
B, 1.96%; and Trust, 1.11% until October 1,
2001.
EXPENSE EXAMPLE
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<S> <C> <C> <C> <C>
1 3 5 10
YEAR YEARS YEARS YEARS
CLASS A SHARES $587 $876 $1,186 $2,065
CLASS B SHARES
Assuming Redemption $719 $976 $1,359 $2,213
Assuming No Redemption $219 $676 $1,159 $2,213
TRUST SHARES $133 $415 $ 718 $1,579
</TABLE>
If you purchase and hold
shares of the AmSouth Capital
Growth Fund, you will pay
certain fees and expenses,
which are described in the
tables. Shareholder
transaction fees are paid from
your account. Annual Fund
operating expenses are paid
out of Fund assets, and are
reflected in the share price.
Use the example at right to
help you compare the cost of
investing in the Fund with the
cost of investing in other
mutual funds. It illustrates
the amount of fees and
expenses you would pay,
assuming the following:
- $10,000 investment
- 5% annual return
- no changes in the Fund's
operating expenses
- redemption at the end of
each time period
Because actual returns and
operating expenses will be
different, this example is for
comparison only.
9
<PAGE> 11
AMSOUTH LARGE
DESCRIPTION OF THE FUNDS -- OBJECTIVES, RISK/RETURN AND EXPENSES CAP FUND
<TABLE>
<S> <C>
INVESTMENT OBJECTIVE The Fund seeks to provide investors with long-term capital
appreciation and, as a secondary objective, current income.
PRINCIPAL INVESTMENT STRATEGIES The Fund invests primarily in equity securities of large
U.S. companies with market capitalizations over $1 billion
that the Adviser believes have the potential to provide
capital appreciation and growth of income.
In choosing stocks for the Fund, the Adviser's strategy is
to select well managed U.S. companies that have demonstrated
sustained patterns of profitability, strong balance sheets,
and the potential to achieve predictable, above-average
earnings growth. The Adviser also looks for companies that
pay above-average dividends. The Adviser seeks to diversify
the Fund's portfolio within the various industries typically
comprising, what the Adviser believes to be, the Class A
growth segments of the U.S. economy: Technology, Consumer
Non-Durables, Health Care, Business Equipment and Services,
Retail, and Capital Goods.
The Fund invests for long-term growth rather than short-term
profits.
PRINCIPAL INVESTMENT RISKS Stocks and other equity securities fluctuate in price, often
based on factors unrelated to the issuers' value, and such
fluctuations can be pronounced. The value of your investment
in the Fund will fluctuate in response to movements in the
stock market and the activities of individual portfolio
companies. As a result, you could lose money by investing in
the Fund, particularly if there is a sudden decline in the
share prices of the Fund's holdings or an overall decline in
the stock market.
Over time, growth companies are expected to increase their
earnings at an above-average rate. If these expectations are
not met, the stock price can fall drastically--even if
earnings show an absolute increase.
The risks and returns of different industries can vary over
the long-term and short-term. Because of this, the Fund's
performance could suffer during times when the stocks of
companies in the Class A growth industries in which it is
invested are out of favor.
</TABLE>
10
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AMSOUTH LARGE
DESCRIPTION OF THE FUNDS -- OBJECTIVES, RISK/RETURN AND EXPENSES CAP FUND
FEES AND EXPENSES
<TABLE>
<S> <C> <C> <C>
SHAREHOLDER TRANSACTION EXPENSES (FEES CLASS A CLASS B TRUST
PAID BY YOU DIRECTLY)(1) SHARES SHARES SHARES
Maximum sales charge (load) on
purchases as a % of offering price 4.50%(2) None None
Maximum deferred sales charge (CDSC) None 5.00%(3) None
Redemption Fee(4) 0.00% 0.00% 0.00%
ANNUAL FUND OPERATING EXPENSES (FEES CLASS A CLASS B TRUST
PAID FROM FUND ASSETS) SHARES SHARES SHARES
Management Fee 0.80% 0.80% 0.80%
Distribution (12b-1) Fee 0.00% 0.75% None
Other Expenses 0.57% 0.57% 0.47%(5)
Total Annual Fund Operating Expenses(6) 1.37% 2.12% 1.27%
Fee Waiver and/or Expense Reimbursement n/a (.10%) (.10%)
Net Expenses n/a 2.02% 1.17%)
</TABLE>
(1) AmSouth Bank or other financial
institutions may change their customer account
fees for automatic investment and other cash
management services provided in connection
with investment in the Funds.
(2) Sales charges may be reduced depending
upon the amount invested or, in certain
circumstances, waived. Class A shares bought
as part of an investment of $1 million or more
are not subject to an initial sales charge,
but may be charged a CDSC of 1.00% if sold
within one year of purchase.
(3) For B Shares acquired in the combination
of AmSouth Funds with ISG Funds, waivers are
in place on the CDSC charged if such Class B
shares are sold within six years of purchase,
which will decline as follows: 4%, 3%, 3%, 2%,
2%, 1% to 0% in the seventh year. For all
other B Shares, the CDSC declines over a six
year period as follows: 5%, 4%, 3%, 3%, 2%, 1%
to 0% in the seventh and eighth year.
Approximately eight years after purchase
(seven years in the case of Shares acquired in
the ISG combination), Class B shares
automatically convert to Class A shares.
(4) A wire transfer fee of $7.00 will be
deducted from the amount of your redemption if
you request a wire transfer.
(5) The above amount includes a shareholder
servicing fee that will become effective on
March 13, 2000.
(6) Other expenses for each Class are based on
estimated amounts for the current fiscal year.
The expenses noted above do not reflect any
fee waivers or expense reimbursement
arrangements that are in effect. Total
expenses after fee waivers and expense
reimbursements for each class through April
30, 2000 will be as follows: Class A, 1.04%;
and Trust Class, 1.07%. AmSouth Bank has
contractually agreed to waive fees and/or
reimburse expenses to limit total annual fund
operating expenses to: Class A, 1.41%; Class
B, 2.01%; and Trust, 1.16% until October 1,
2001.
EXPENSE EXAMPLE
<TABLE>
<S> <C> <C> <C> <C>
1 3 5 10
YEAR YEARS YEARS YEARS
CLASS A SHARES $583 $ 864 $1,166 $2,022
CLASS B SHARES
Assuming Redemption $715 $ 964 $1,339 $2,171
Assuming No Redemption $215 $ 664 $1,139 $2,171
TRUST SHARES $129 $ 403 $ 697 $1,534
</TABLE>
If you purchase and hold
shares of the AmSouth Large
Cap Fund, you will pay certain
fees and expenses, which are
described in the tables.
Shareholder transaction fees
are paid from your account.
Annual Fund operating expenses
are paid out of Fund assets,
and are reflected in the share
price.
Use the example at right to
help you compare the cost of
investing in the Fund with the
cost of investing in other
mutual funds. It illustrates
the amount of fees and
expenses you would pay,
assuming the following:
- $10,000 investment
- 5% annual return
- no changes in the Fund's
operating expenses
- redemption at the end of
each time period
Because actual returns and
operating expenses will be
different, this example is for
comparison only.
11
<PAGE> 13
DESCRIPTION OF THE FUNDS -- OBJECTIVES, RISK/RETURN AND
EXPENSES OVERVIEW
TAXABLE INCOME FUNDS
<TABLE>
<S> <C>
AmSouth Taxable Income Funds seek current income and invest
primarily in fixed income securities, such as U.S.
Government securities, or corporate, bank and commercial
obligations.
WHO MAY WANT TO INVEST? Consider investing in these Funds if you are:
- looking to add a monthly income component to your
portfolio
- willing to accept the risks of price and dividend
fluctuations
These Funds may not be appropriate if you are:
- investing emergency reserves
- uncomfortable with an investment that will fluctuate in
value
</TABLE>
12
<PAGE> 14
AMSOUTH LIMITED TERM
DESCRIPTION OF THE FUNDS -- OBJECTIVES, RISK/RETURN AND EXPENSES U.S.
GOVERNMENT FUND
<TABLE>
<S> <C>
INVESTMENT OBJECTIVE The Fund seeks to provide investors with high current income
without assuming undue risk.
PRINCIPAL INVESTMENT STRATEGIES The Fund invests in securities issued or guaranteed as to
payment of principal and interest by the U.S. Government,
its agencies or instrumentalities, and enters into
repurchase agreements in respect of such securities.
In choosing U.S. Government securities for the Fund, the
Adviser follows a controlled duration strategy which limits
how much the Fund's portfolio duration will differ from its
benchmark -- the Merrill Lynch 1-5 Year Government Bond
Index. Typically, the Fund will have a portfolio duration
between one and four years and a dollar weighted average
portfolio life between one and five years, depending on
market conditions. Duration is an indication of how
sensitive a bond or mutual fund portfolio may be to changes
in interest rates. For example, the market price of a bond
with a duration of three years should decline 3% if interest
rates rise 1%. Conversely, the market price of the same bond
should increase 3% if interest rates fall 1%. The market
price of a bond with a duration of six years should increase
or decline twice as much as the market price of a bond with
a three-year duration.
PRINCIPAL INVESTMENT RISKS Prices of U.S. Government securities tend to move inversely
with changes in interest rates. The most immediate effect of
a rise in rates is usually a drop in the prices of such
securities, and therefore in the Fund's share price as well.
Interest rate risk is usually greater for fixed-income
securities with longer maturities or durations. A security
backed by the U.S. Government is guaranteed only as to
timely payment of interest and principal when held to
maturity. Neither the market value of such securities nor
the Fund's share price is guaranteed. As a result, the value
of your investment in the Fund will fluctuate and you could
lose money by investing in the Fund.
</TABLE>
13
<PAGE> 15
AMSOUTH LIMITED TERM
DESCRIPTION OF THE FUNDS -- OBJECTIVES, RISK/RETURN AND EXPENSES U.S.
GOVERNMENT FUND
FEES AND EXPENSES
<TABLE>
<S> <C> <C> <C>
SHAREHOLDER TRANSACTION EXPENSES CLASS A CLASS B TRUST
(FEES PAID BY YOU DIRECTLY)(1) SHARES SHARES SHARES
Maximum sales charge (load) on
purchases as a % of offering price 4.00%(2) None None
Maximum deferred sales charge (CDSC) None 5.00%(3) None
Redemption Fee(4) 0.00% 0.00% 0.00%
ANNUAL FUND OPERATING EXPENSES CLASS A CLASS B TRUST
(FEES PAID FROM FUND ASSETS) SHARES SHARES SHARES
Management Fee 0.65% 0.65% 0.65%
Distribution (12b-1) Fee 0.00% 0.75% None
Other Expenses 0.76% 0.76% 0.66%(5)
Total Annual Fund Operating Expenses(6) 1.41% 2.16% 1.31%
Fee Waiver and/or Expense Reimbursement (.05%) (.20%) (.20%)
Net Expenses 1.36% 1.96% 1.11%
</TABLE>
(1) AmSouth Bank or other financial
institutions may change their customer account
fees for automatic investment and other cash
management services provided in connection
with investment in the Funds.
(2) Sales charges may be reduced depending
upon the amount invested or, in certain
circumstances, waived. Class A shares bought
as part of an investment of $1 million or more
are not subject to an initial sales charge,
but may be charged a CDSC of 1.00% if sold
within one year of purchase.
(3) For B Shares acquired in the combination
of AmSouth Funds with ISG Funds, waivers are
in place on the CDSC charged if such Class B
shares are sold within six years of purchase,
which will decline as follows: 4%, 3%, 3%, 2%,
2%, 1% to 0% in the seventh year. For all
other B Shares, the CDSC declines over a six
year period as follows: 5%, 4%, 3%, 3%, 2%, 1%
to 0% in the seventh and eighth year.
Approximately eight years after purchase
(seven in the case of Shares acquired in the
ISG combination), Class B shares automatically
convert to Class A shares.
(4) A wire transfer fee of $7.00 will be
deducted from the amount of your redemption if
you request a wire transfer.
(5) The above amount includes a shareholder
servicing fee that will become effective on
March 13, 2000.
(6) Other expenses for each Class are based on
estimated amounts for the current fiscal year.
The expenses noted above do not reflect any
fee waivers or expense reimbursement
arrangements that are in effect. AmSouth Bank
has contractually agreed to waive fees and/or
reimburse expenses to limit total annual fund
operating expenses to: Class A, 1.36%; Class
B, 1.96%: and Trust, 1.11% until October 1,
2001.
EXPENSE EXAMPLE
<TABLE>
<S> <C> <C> <C> <C>
1 3 5 10
YEAR YEARS YEARS YEARS
CLASS A SHARES $546 $ 852 $1,181 $2,108
CLASS B SHARES
Assuming Redemption $727 $1,000 $1,400 $2,297
Assuming No Redemption $227 $ 700 $1,200 $2,297
TRUST SHARES $142 $ 440 $ 761 $1,669
</TABLE>
If you purchase and hold
shares of the AmSouth Limited
Term U.S. Government Fund, you
will pay certain fees and
expenses, which are described
in the tables. Shareholder
transaction fees are paid from
your account. Annual Fund
operating expenses are paid
out of Fund assets, and are
reflected in the share price.
Use the example at right to
help you compare the cost of
investing in the Fund with the
cost of investing in other
mutual funds. It illustrates
the amount of fees and
expenses you would pay,
assuming the following:
- $10,000 investment
- 5% annual return
- no changes in the Fund's
operating expenses
- redemption at the end of
each time period
Because actual returns and
operating expenses will be
different, this example is for
comparison only.
14
<PAGE> 16
DESCRIPTION OF THE FUNDS -- OBJECTIVES, RISK/RETURN AND
EXPENSES OVERVIEW
TAX-FREE INCOME FUNDS
<TABLE>
<S> <C>
AmSouth Tax-Free Income Funds seek tax-exempt income and
invest primarily in Municipal Obligations which are exempt
from Federal and, in the case of the Tennessee Funds,
Tennessee income taxes.
WHO MAY WANT TO INVEST? Consider investing in these Funds if you are:
- looking to reduce Federal or Tennessee taxes on investment
income
- seeking monthly Federal or Tennessee tax-exempt dividends
- willing to accept the risks of price and dividend
fluctuations
These Funds may not be appropriate if you are:
- investing through a tax-exempt retirement plan
- uncomfortable with an investment that will fluctuate in
value
</TABLE>
15
<PAGE> 17
AMSOUTH TENNESSEE
DESCRIPTION OF THE FUNDS -- OBJECTIVES, RISK/RETURN AND
EXPENSES TAX-EXEMPT FUND
<TABLE>
<S> <C>
INVESTMENT OBJECTIVE The Fund seeks to provide investors with current income
exempt from Federal and Tennessee income taxes without
assuming undue risk.
PRINCIPAL INVESTMENT STRATEGIES The Fund normally invests substantially all of its assets in
municipal obligations of the State of Tennessee, its
political subdivisions, authorities and corporations, that
provide income exempt from Federal and Tennessee personal
income taxes.
The average dollar-weighted credit rating of the municipal
obligations held by the Fund will be at least A-. To further
limit credit risk, the Fund invests only in investment grade
municipal obligations or the unrated equivalent as
determined by the Adviser. The Adviser evaluates municipal
obligations based on credit quality, financial outlook and
yield potential. Although the Fund concentrates its assets
in Tennessee municipal obligations, the Adviser strives to
diversify the portfolio across sectors and issuers within
Tennessee. The Fund may purchase securities of any maturity.
Generally, the average maturity of the Fund's investments is
primarily between six and ten years.
PRINCIPAL INVESTMENT RISKS The Fund's investments in municipal obligations will be
subject primarily to interest rate and credit risk.
Prices of municipal obligations tend to move inversely with
changes in interest rates. The most immediate effect of a
rise in rates is usually a drop in the prices of such
securities, and therefore in the Fund's share price as well.
Interest rate risk is usually greater for fixed-income
securities with longer maturities or durations. If interest
rates fall, it is possible that issuers of callable bonds
with high interest coupons will "call" (or prepay) their
bonds before their maturity date. If a call were exercised
by the issuer during a period of declining interest rates,
the Fund is likely to replace such called security with a
lower yielding security. If that were to happen, it could
decrease the Fund's dividends. As a result, the value of
your investment in the Fund will fluctuate and you could
lose money by investing in the Fund.
The Fund's investments also are subject to credit risk,
which is the risk that the issuer of the security will fail
to make timely payments of interest or principal, or to
otherwise honor its obligations. Credit risk includes the
possibility that any of the Fund's investments will have its
credit rating downgraded or will default.
Because of the Fund's concentration in Tennessee municipal
obligations, the Fund will be vulnerable to any development
in Tennessee's economy that weakens or jeopardizes the
ability of Tennessee municipal obligation issuers to pay
interest and principal. As a result, the value of the Fund's
shares may fluctuate more widely than those of a fund
investing in municipal obligations from a number of
different states.
Although the Fund's objective is to generate income exempt
from Federal and Tennessee income taxes, interest from some
of the Fund's holdings may be subject to the Federal
alternative minimum tax.
The Fund is non-diversified and may invest a greater
percentage of its assets in a particular issuer compared
with other funds. Accordingly, the Fund's portfolio may be
more sensitive to changes in the market value of a single
issuer or industry.
</TABLE>
16
<PAGE> 18
AMSOUTH TENNESSEE
DESCRIPTION OF THE FUNDS -- OBJECTIVES, RISK/RETURN AND
EXPENSES TAX-EXEMPT FUND
FEES AND EXPENSES
<TABLE>
<S> <C> <C> <C>
SHAREHOLDER TRANSACTION EXPENSES (FEES CLASS A CLASS B TRUST
PAID BY YOU DIRECTLY)(1) SHARES SHARES SHARES
Maximum sales charge (load) on
purchases as a % of offering price 4.00%(2) None None
Maximum deferred sales charge (CDSC) None 5.00%(3) None
Redemption Fee(4) 0.00% 0.00% 0.00%
ANNUAL FUND OPERATING EXPENSES (FEES CLASS A CLASS B TRUST
PAID FROM FUND ASSETS) SHARES SHARES SHARES
Management Fee 0.65% 0.65% 0.65%
Distribution (12b-1) Fee 0.00% 0.75% None
Other Expenses 0.67% 0.67% 0.57%(5)
Total Annual Fund Operating Expenses(6) 1.32% 2.07% 1.22%
Fee Waiver and/or Expense Reimbursement (.05%) (.20%) (.20%)
Net Expenses 1.27% 1.87% 1.02%
</TABLE>
(1) AmSouth Bank or other financial
institutions may change their customer account
fees for automatic investment and other cash
management services provided in connection
with investment in the Funds.
(2) Sales charges may be reduced depending
upon the amount invested or, in certain
circumstances, waived. Class A shares bought
as part of an investment of $1 million or more
are not subject to an initial sales charge,
but may be charged a CDSC of 1.00% if sold
within one year of purchase.
(3) For B Shares acquired in the combination
of AmSouth Funds with ISG Funds, waivers are
in place on the CDSC charged if such Class B
shares are sold within six years of purchase,
which will decline as follows: 4%, 3%, 3%, 2%,
2%, 1% to 0% in the seventh year. For all
other B Shares, the CDSC declines over a six
year period as follows: 5%, 4%, 3%, 3%, 2%, 1%
to 0%. Approximately eight years after
purchase (seven years in the case of Shares
acquired in the ISG combination), Class B
shares automatically convert to Class A
shares.
(4) A wire transfer fee of $7.00 will be
deducted from the amount of your redemption if
you request a wire transfer.
(5) The above amount includes a shareholder
servicing fee that will become effective on
March 13, 2000.
(6) Other expenses for each Class are based on
estimated amounts for the current fiscal year.
The expenses noted above do not reflect any
fee waivers or expense reimbursement
arrangements that are in effect. AmSouth Bank
has contractually agreed to waive fees and/or
reimburse expenses to limit total annual fund
operating expenses to: Class A, 1.27%; Class
B, 1.87% and Trust, 1.02% until October 1,
2001.
EXPENSE EXAMPLE
<TABLE>
<S> <C> <C> <C> <C>
1 3 5 10
YEAR YEARS YEARS YEARS
CLASS A SHARES $529 $802 $1,095 $1,927
CLASS B SHARES
Assuming Redemption $710 $949 $1,314 $2,118
Assuming No Redemption $210 $649 $1,114 $2,118
TRUST SHARES $124 $387 $ 670 $1,477
</TABLE>
If you purchase and hold
shares of the AmSouth
Tennessee Tax- Exempt Fund,
you will pay certain fees and
expenses, which are described
in the tables. Shareholder
transaction fees are paid from
your account. Annual Fund
operating expenses are paid
out of Fund assets, and are
reflected in the share price.
Use the example at right to
help you compare the cost of
investing in the Fund with the
cost of investing in other
mutual funds. It illustrates
the amount of fees and
expenses you would pay,
assuming the following:
- $10,000 investment
- 5% annual return
- no changes in the Fund's
operating expenses
- redemption at the end of
each time period
Because actual returns and
operating expenses will be
different, this example is for
comparison only.
17
<PAGE> 19
AMSOUTH LIMITED TERM TENNESSEE
DESCRIPTION OF THE FUNDS -- OBJECTIVES, RISK/RETURN AND
EXPENSES TAX-EXEMPT FUND
<TABLE>
<S> <C>
INVESTMENT OBJECTIVE The Fund seeks to provide investors with current income
exempt from Federal and Tennessee income taxes without
assuming undue risk.
PRINCIPAL INVESTMENT STRATEGIES The Fund normally invests substantially all of its assets in
municipal obligations of the State of Tennessee, its
political subdivisions, authorities and corporations, that
provide income exempt from Federal and Tennessee personal
income taxes.
In choosing municipal obligations for the Fund, the Adviser
attempts to reduce interest rate risk by maintaining a
portfolio duration of under five years and an effective
average portfolio maturity between three and five years,
depending on market conditions. Duration is an indication of
how sensitive a bond or mutual fund portfolio may be to
changes in interest rates. For example, the market price of
a bond with a duration of three years should decline 3% if
interest rates rise 1%. Conversely, the market price of the
same bond should increase 3% if interest rates fall 1%. The
market price of a bond with a duration of six years should
increase or decline twice as much as the market price of a
bond with a three-year duration.
The average dollar-weighted credit rating of the municipal
obligations held by the Fund will be at least A-. To further
limit credit risk, the Fund invests only in investment grade
municipal obligations or the unrated equivalent as
determined by the Adviser. The Adviser evaluates municipal
obligations based on credit quality, financial outlook and
yield potential. Although the Fund concentrates its assets
in Tennessee municipal obligations, the Adviser strives to
diversify the portfolio across sectors and issuers within
Tennessee.
PRINCIPAL INVESTMENT RISKS The Fund's investments in municipal obligations will be
subject primarily to interest rate and credit risk.
Prices of municipal obligations tend to move inversely with
changes in interest rates. The most immediate effect of a
rise in rates is usually a drop in the prices of such
securities, and therefore in the Fund's share price as well.
Interest rate risk is usually greater for fixed-income
securities with longer maturities or durations. If interest
rates fall, it is possible that issuers of callable bonds
with high interest coupons will "call" (or prepay) their
bonds before their maturity date. If a call were exercised
by the issuer during a period of declining interest rates,
the Fund is likely to replace such called security with a
lower yielding security. If that were to happen, it could
decrease the Fund's dividends. As a result, the value of
your investment in the Fund will fluctuate and you could
lose money by investing in the Fund.
The Fund's investments also are subject to credit risk,
which is the risk that the issuer of the security will fail
to make timely payments of interest or principal, or to
otherwise honor its obligations. Credit risk includes the
possibility that any of the Fund's investments will have its
credit rating downgraded or will default.
Because of the Fund's concentration in Tennessee municipal
obligations, the Fund will be vulnerable to any development
in Tennessee's economy that weakens or jeopardizes the
ability of Tennessee municipal obligation issuers to pay
interest and principal. As a result, the value of the Fund's
shares may fluctuate more widely than those of a fund
investing in municipal obligations from a number of
different states.
Although the Fund's objective is to generate income exempt
from Federal and Tennessee income taxes, interest from some
of the Fund's holdings may be subject to the Federal
alternative minimum tax.
The Fund is non-diversified and may invest a greater
percentage of its assets in a particular issuer compared
with other funds. Accordingly, the Fund's portfolio may be
more sensitive to changes in the market value of a single
issuer or industry.
</TABLE>
18
<PAGE> 20
AMSOUTH LIMITED TERM TENNESSEE
DESCRIPTION OF THE FUNDS -- OBJECTIVES, RISK/RETURN AND
EXPENSES TAX-EXEMPT FUND
FEES AND EXPENSES
<TABLE>
<S> <C> <C> <C>
SHAREHOLDER TRANSACTION EXPENSES CLASS A CLASS B TRUST
(FEES PAID BY YOU DIRECTLY)(1) SHARES SHARES SHARES
Maximum sales charge (load) on
purchases as a % of offering price 4.00%(2) None None
Maximum deferred sales charge (CDSC) None 5.00%(3) None
Redemption Fee(4) 0.00% 0.00% 0.00%
ANNUAL FUND OPERATING EXPENSES CLASS A CLASS B TRUST
(FEES PAID FROM FUND ASSETS) SHARES SHARES SHARES
Management Fee 0.65% 0.65% 0.65%
Distribution (12b-1) Fee 0.00% 0.75% None
Other Expenses 1.00% 1.00% 0.90%(5)
Total Annual Fund Operating Expenses(6) 1.65% 2.40% 1.55%
Fee Waiver and/or Expense Reimbursement (.05%) (.20%) (.20%)
Net Expenses 1.60% 2.20% 1.35%
</TABLE>
(1) AmSouth Bank or other financial
institutions may change their customer account
fees for automatic investment and other cash
management services provided in connection
with investment in the Funds.
(2) Sales charges may be reduced depending
upon the amount invested or, in certain
circumstances, waived. Class A shares bought
as part of an investment of $1 million or more
are not subject to an initial sales charge,
but may be charged a CDSC of 1.00% if sold
within one year of purchase.
(3) For B Shares acquired in the combination
of AmSouth Funds with ISG Funds, waivers are
in place on the CDSC charged if Class B shares
are sold within six years of purchase, which
will decline as follows: 4%, 3%, 3%, 2%, 2%,
1% to 0% in the seventh year. For all other B
Shares, the CDSC declines over a six year
period as follows: 5%, 4%, 3%, 3%, 2%, 1%, to
0% in the seventh and eighth year.
Approximately eight years after purchase
(seven years for Shares acquired in the ISG
combination), Class B shares automatically
convert to Class A shares.
(4) A wire transfer fee of $7.00 will be
deducted from the amount of your redemption if
you request a wire transfer.
(5) The above amount includes a shareholder
servicing fee that will become effective on
March 13, 2000.
(6) Other expenses for each Class are based on
estimated amounts for the current fiscal year.
The expenses noted above do not reflect any
fee waivers or expense reimbursement
arrangements that are in effect. AmSouth Bank
has contractually agreed to waive fees and/or
reimburse expenses to limit total annual fund
operating expenses to: Class A, 1.60%; Class
B, 2.20%; and Trust 1.35% until October 1,
2001.
EXPENSE EXAMPLE
<TABLE>
<S> <C> <C> <C> <C>
3 5 10
1 YEAR YEARS YEARS YEARS
CLASS A SHARES $561 $ 900 $1,261 $2,276
CLASS B SHARES
Assuming Redemption $743 $1,048 $1,480 $2,463
Assuming No Redemption $243 $ 748 $1,280 $2,463
TRUST SHARES $158 $ 490 $ 845 $1,845
</TABLE>
If you purchase and hold
shares of the AmSouth Limited
Term Tennessee Tax-Exempt
Fund, you will pay certain
fees and expenses, which are
described in the tables.
Shareholder transaction fees
are paid from your account.
Annual Fund operating expenses
are paid out of Fund assets,
and are reflected in the share
price.
Use the example at right to help
you compare the cost of investing
in the Fund with the cost of
investing in other mutual funds.
It illustrates the amount of fees
and expenses you would pay,
assuming the following:
- $10,000 investment
- 5% annual return
- no changes in the Fund's
operating expenses
- redemption at the end of each
time period
Because actual returns and
operating expenses will be
different, this example is for
comparison only.
19
<PAGE> 21
DESCRIPTION OF THE FUNDS -- OBJECTIVES, RISK/RETURN AND
EXPENSES OVERVIEW
MONEY MARKET FUNDS
<TABLE>
<S> <C>
These Funds seek current income and liquidity and invest
primarily in short-term securities and will seek to maintain
a stable price of $1.00 per share. An investment in these
Funds is not insured or guaranteed by the FDIC or any other
government agency.
WHO MAY WANT TO INVEST? Consider investing in these Funds if you are:
- seeking preservation of capital
- investing short-term reserves
- willing to accept lower potential returns in exchange for
a higher degree of safety
These Funds may not be appropriate if you are:
- seeking high total returns
- pursuing a long-term goal or investing for retirement
</TABLE>
20
<PAGE> 22
AMSOUTH TREASURY RESERVE
DESCRIPTION OF THE FUNDS -- OBJECTIVES, RISK/RETURN AND
EXPENSES MONEY MARKET FUND
<TABLE>
<S> <C>
INVESTMENT OBJECTIVE The Fund seeks to provide investors with as high a level of
current income as is consistent with the preservation of
capital and the maintenance of liquidity.
PRINCIPAL INVESTMENT STRATEGIES The Fund invests primarily in U.S. Treasury securities and
repurchase agreements in respect thereof. The Fund may
invest up to 35% of its assets in other securities
guaranteed as to payment of principal and interest by the
U.S. Government and repurchase agreements in respect
thereof.
The income from the Fund's investment in direct obligations
of the United States is exempt from state and local, but not
Federal, income taxes. Dividends and distributions
attributable to income from repurchase agreements may be
subject to Federal, state and local taxes.
The Fund invests based on considerations of safety of
principal and liquidity, which means that the Fund may not
necessarily invest in securities paying the highest
available yield at a particular time. The Fund will attempt
to increase its yield by trading to take advantage of
short-term market variations. The Adviser generally
evaluates investments based on interest rate sensitivity.
PRINCIPAL INVESTMENT RISKS Although the Fund seeks to preserve the value of your
investment at $1.00 per share, it is possible to lose money
by investing in the Fund. The Fund is subject to the risk
that changes in interest rates will affect the yield or
value of the Fund's investments.
A security backed by the U.S. Treasury or the full faith and
credit of the United States is guaranteed only as to timely
payment of interest and principal when held to maturity.
Neither the market value of such securities nor the Fund's
share price is guaranteed.
</TABLE>
21
<PAGE> 23
AMSOUTH TREASURY RESERVE
DESCRIPTION OF THE FUNDS -- OBJECTIVES, RISK/RETURN AND
EXPENSES MONEY MARKET FUND
FEES AND EXPENSES
<TABLE>
<S> <C> <C>
SHAREHOLDER TRANSACTION EXPENSES CLASS A TRUST
(FEES PAID BY YOU DIRECTLY)(1) SHARES SHARES
Maximum sales charge (load) on
purchases as a % of offering price None None
Maximum deferred sales charge
(CDSC) None None
Redemption Fee(2) 0.00% 0.00%
ANNUAL FUND OPERATING EXPENSES CLASS A TRUST
(FEES PAID FROM FUND ASSETS) SHARES SHARES
Management Fee 0.40% 0.40%
Distribution (12b-1) Fee 0.00% None
Other Expenses 0.57% 0.47%(3)
Total Annual Fund Operating
Expenses(4) 0.97% 0.87%
Fee Waiver and/or Expense
Reimbursement (.23%) (.23%)
Net Expenses .72% .62%
</TABLE>
(1) AmSouth Bank or other financial
institutions may change their customer account
fees for automatic investment and other case
management services provided in connection
with investment in the Funds.
(2) A wire transfer fee of $7.00 will be
deducted from the amount of your redemption if
you request a wire transfer.
(3) The above amount includes a shareholder
servicing fee that will become effective on
March 13, 2000.
(4) Other expenses for each class are based on
estimated amounts for the current fiscal year.
The expenses noted above do not reflect any
fee waivers or expense reimbursement
arrangements that are or were in effect. Total
expenses after fee waivers and expense
reimbursements through April 30, 2000 are as
follows: Class A, .60%; and Trust Class, .60%
AmSouth Bank has contractually agreed to waive
fees and/or reimburse expenses to limit total
annual fund operating expenses to: Class A,
.72%; and Trust Class, .62% until October 1,
2001.
EXPENSE EXAMPLE
<TABLE>
<S> <C> <C> <C> <C>
1 3 5 10
YEAR YEARS YEARS YEARS
CLASS A SHARES $99 $309 $536 $1,190
TRUST SHARES $89 $278 $482 $1,073
</TABLE>
If you purchase and hold
shares of the AmSouth Treasury
Reserve Money Market Fund, you
will pay certain fees and
expenses, which are described
in the tables. Shareholder
transaction fees are paid from
your account. Annual Fund
operating expenses are paid
out of Fund assets, and are
reflected in the share price.
Use the example at right to help
you compare the cost of investing
in the Fund with the cost of
investing in other mutual funds.
It illustrates the amount of fees
and expenses you would pay,
assuming the following:
- $10,000 investment
- 5% annual return
- no changes in the Fund's
operating expenses
- redemption at the end of each
time period
Because actual returns and
operating expenses will be
different, this example is for
comparison only.
22
<PAGE> 24
DESCRIPTION OF THE FUNDS -- OBJECTIVES, RISK/RETURN AND
EXPENSES OVERVIEW
STRATEGIC PORTFOLIOS
<TABLE>
<S> <C>
These Funds are "funds of funds" which will invest
substantially all of their assets in Trust Shares of other
Funds of the AmSouth Funds (Underlying Funds) as described
herein.
WHO MAY WANT TO INVEST? Consider investing in these Funds if you are:
- seeking to spread your investment among many different
mutual funds that match your goals in one simple package
- seeking investment professionals to select and maintain a
portfolio of mutual funds for you
- seeking the benefits of asset allocation and multiple
levels of risk reducing diversification
These Funds may not be appropriate if you are:
- pursuing a short-term goal or investing emergency reserves
- uncomfortable with an investment that will fluctuate in
value
</TABLE>
23
<PAGE> 25
AMSOUTH STRATEGIC PORTFOLIOS:
DESCRIPTION OF THE FUNDS -- OBJECTIVES, RISK/RETURN AND
EXPENSES AGGRESSIVE GROWTH PORTFOLIO
<TABLE>
<S> <C>
INVESTMENT OBJECTIVE The Fund seeks to provide investors with capital growth.
PRINCIPAL INVESTMENT STRATEGIES The Fund allocates its assets among the Underlying Funds
within predetermined strategy ranges, as set forth below.
The Adviser will make allocation decisions according to its
outlook for the economy, financial markets and relative
market valuation of the Underlying Funds.
The Fund will invest 0% to 100% of its total assets in five
Underlying Funds which invest primarily in equity securities
and up to 30% of its total assets in one Underlying Fund
which invests in money market instruments. The Fund will
invest its assets in the following Underlying Funds within
the strategy ranges (expressed as a percentage of the Fund's
total assets) indicated below:
</TABLE>
<TABLE>
<S> <C>
UNDERLYING FUND STRATEGY RANGE
AmSouth Large Cap Fund 0%-70%
AmSouth Capital Growth Fund 0%-45%
AmSouth Small Cap Fund 0%-30%
AmSouth International Equity Fund 0%-20%
AmSouth Mid Cap Fund 0%-30%
AmSouth Prime Money Market Fund 0%-30%
</TABLE>
The Underlying Funds are described elsewhere in this
Prospectus.
<TABLE>
<S> <C>
PRINCIPAL INVESTMENT RISKS The Fund's investments are concentrated in the Underlying
Funds, so the Fund's investment performance is directly
related to the performance of those Underlying Funds. Before
investing in the Fund, investors should assess the risks
associated with the Underlying Funds in which the Fund
invests and the types of investments made by such Underlying
Funds. In addition, since the Fund must allocate its
investments among the Underlying Funds, the Fund does not
have the same flexibility to invest as a mutual fund without
such constraints. As a result, you could lose money by
investing in the Fund, particularly if there is a sudden
decline in the share prices of the Underlying Fund's
holdings.
The Fund invests in Underlying Funds that invest primarily
in equity securities. Stocks and other equity securities
fluctuate in price, often based on factors unrelated to the
issuers' value, and such fluctuations can be pronounced.
</TABLE>
24
<PAGE> 26
AMSOUTH STRATEGIC PORTFOLIOS:
DESCRIPTION OF THE FUNDS -- OBJECTIVES, RISK/RETURN AND
EXPENSES AGGRESSIVE GROWTH PORTFOLIO
If you purchase and hold
shares of the AmSouth
Strategic Portfolios:
Aggressive Growth Portfolio,
you will pay certain fees and
expenses, which are described
in the tables. Shareholder
transaction fees are paid from
your account. Annual Fund
operating expenses are paid
out of Fund assets, and are
reflected in the share price.
FEES AND EXPENSES
<TABLE>
<S> <C> <C> <C>
SHAREHOLDER TRANSACTION EXPENSES CLASS A CLASS B TRUST
(FEES PAID BY YOU DIRECTLY)(1) SHARES SHARES SHARES
Maximum sales charge (load) on
purchases as a % of offering price 4.50%(2) None None
Maximum deferred sales charge
(CDSC) None 5.00%(3) None
Redemption Fee(4) 0.00% 0.00% 0.00%
ANNUAL FUND OPERATING EXPENSES CLASS A CLASS B TRUST
(FEES PAID FROM FUND ASSETS) SHARES SHARES SHARES
Management Fee 0.20% 0.20% 0.20%
Distribution (12b-1) Fee 0.00% 0.75% None
Other Expenses 0.79% 0.79% 0.64%(5)
Total Annual Fund Operating
Expenses(6) 0.99% 1.74% 0.84%
Fee Waiver and/or Expense
Reimbursement (.15%) (.15%) (.05%)
Net Expenses(7) .84% 1.59% .79%
</TABLE>
(1) AmSouth Bank or other financial
institutions may change their customer account
fees for automatic investment and other cash
management services provided in connection
with investment in the Funds.
(2) Sales charges may be reduced depending
upon the amount invested or, in certain
circumstances, waived. Class A shares bought
as part of an investment of $1 million or more
are not subject to an initial sales charge,
but may be charged a CDSC of 1.00% if sold
within one year of purchase.
(3) For B Shares acquired in the combination
of AmSouth Funds with ISG Funds, waivers are
in place on the CDSC charged if such Class B
shares are sold within six years of purchase,
which will decline as follows: 4%, 3%, 3%, 2%,
2%, 1% to 0% in the seventh year. For all
other B Shares, the CDSC declines over a six
year period as follows: 5%, 4%, 3%, 3%, 2%,
1%, to 0% in the seventh and eighth year.
Approximately eight years after purchase
(seven years in the case of Shares acquired in
the ISG combination), Class B shares
automatically convert to Class A shares.
(4) A wire transfer fee of $7.00 will be
deducted from the amount of your redemption if
you request a wire transfer.
(5) The above amount includes a shareholder
servicing fee that will become effective on
March 13, 2000.
(6) Other expenses for each class are based on
estimated amounts for the current fiscal year.
The expenses noted above do not reflect any
fee waivers or expense reimbursement
arrangements that are or were in effect. Any
fee waiver or expense reimbursement
arrangement is voluntary and may be
discontinued at any time.
(7) The above amounts reflect a reduction in
shareholder servicing fees required by
National Association of Securities Dealers
(NASD) rules. As reduced, the shareholder
servicing fees are .10% for each class. Absent
such reduction, the shareholder servicing fees
would be: Class A, .25%; Class B, .25%; Trust
Class, .15%.
In addition to the expenses shown
above, if you buy and hold shares
of the AmSouth Strategic
Portfolios: Aggressive Growth
Portfolio you will indirectly bear
your pro rata share of fees and
expenses incurred by the
Underlying Funds in which the Fund
invests, so that the investment
returns of the Fund will be net of
the expenses of the Underlying
Funds. After combining the total
operating expenses of the Fund
with those of the Underlying
Funds, the estimated average
weighted expense ratio is as
follows:
AMSOUTH STRATEGIC PORTFOLIOS: AGGRESSIVE
GROWTH PORTFOLIO
<TABLE>
<S> <C>
CLASS A SHARES 2.36%
CLASS B SHARES 3.11%
TRUST SHARES 2.36%
</TABLE>
Actual expenses will differ depending on the
actual allocation of investments in the
Underlying Funds in effect from time to time.
25
<PAGE> 27
AMSOUTH STRATEGIC PORTFOLIOS:
DESCRIPTION OF THE FUNDS -- OBJECTIVES, RISK/RETURN AND
EXPENSES AGGRESSIVE GROWTH PORTFOLIO
EXPENSE EXAMPLE
<TABLE>
<S> <C> <C>
1 3
YEAR YEARS
CLASS A SHARES $678 $1,153
CLASS B SHARES
Assuming Redemption $814 $1,260
Assuming No Redemption $314 $ 960
TRUST SHARES $234 $ 721
</TABLE>
Use the example at right to
help you compare the cost of
investing in the Fund with the
cost of investing in other
mutual funds. It illustrates
the amount of fees and
expenses you would pay,
assuming the following:
- $10,000 investment
- 5% annual return
- no changes in the Fund's
operating expenses
- redemption at the end of
each time period
Because actual returns and
operating expenses will be
different, this example is for
comparison only.
26
<PAGE> 28
AMSOUTH STRATEGIC PORTFOLIOS:
DESCRIPTION OF THE FUNDS -- OBJECTIVES, RISK/RETURN AND
EXPENSES GROWTH PORTFOLIO
<TABLE>
<S> <C>
INVESTMENT OBJECTIVE The Fund seeks to provide investors with long-term capital
growth.
PRINCIPAL INVESTMENT STRATEGIES The Fund allocates its assets among the Underlying Funds
within predetermined strategy ranges, as set forth below.
The Adviser will make allocation decisions according to its
outlook for the economy, financial markets and relative
market valuation of the Underlying Funds.
The Fund will invest 0% to 100% of its total assets in six
Underlying Funds which invest primarily in equity
securities, up to 20% of its total assets in one Underlying
Fund which invests primarily in fixed income securities and
up to 20% of its total assets in one Underlying Fund which
invests in money market instruments. The Fund will invest
its assets in the following Underlying Funds within the
strategy ranges (expressed as a percentage of the Fund's
total assets) indicated below:
</TABLE>
<TABLE>
<S> <C>
UNDERLYING FUND STRATEGY RANGE
AmSouth Large Cap Fund 0%-65%
AmSouth Capital Growth Fund 0%-25%
AmSouth Equity Income Fund 0%-25%
AmSouth Small Cap Fund 0%-25%
AmSouth International Equity Fund 0%-15%
AmSouth Prime Money Market Fund 0%-20%
AmSouth Mid Cap Fund 0%-25%
AmSouth Government Income Fund 0%-25%
</TABLE>
The Underlying Funds are described elsewhere in this
Prospectus.
<TABLE>
<S> <C>
PRINCIPAL INVESTMENT RISKS The Fund's investments are concentrated in the Underlying
Funds, so the Fund's investment performance is directly
related to the performance of those Underlying Funds. Before
investing in the Fund, investors should assess the risks
associated with the Underlying Funds in which the Fund
invests and the types of investments made by such Underlying
Funds. In addition, since the Fund must allocate its
investments among the Underlying Funds, the Fund does not
have the same flexibility to invest as a mutual fund without
such constraints. As a result, you could lose money by
investing in the Fund, particularly if there is a sudden
decline in the share prices of the Underlying Fund's
holdings.
The Fund invests in Underlying Funds that invest primarily
in equity securities. Stocks and other equity securities
fluctuate in price, often based on factors unrelated to the
issuers' value, and such fluctuations can be pronounced.
</TABLE>
27
<PAGE> 29
AMSOUTH STRATEGIC PORTFOLIOS:
DESCRIPTION OF THE FUNDS -- OBJECTIVES, RISK/RETURN AND
EXPENSES GROWTH PORTFOLIO
FEES AND EXPENSES
<TABLE>
<S> <C> <C> <C>
SHAREHOLDER TRANSACTION EXPENSES CLASS A CLASS B TRUST
(FEES PAID BY YOU DIRECTLY)(1) SHARES SHARES SHARES
Maximum sales charge (load) on
purchases as a % of offering price 4.50%(2) None None
Maximum deferred sales charge (CDSC) None 5.00%(3) None
Redemption Fee(4) 0.00% 0.00% 0.00%
ANNUAL FUND OPERATING EXPENSES CLASS A CLASS B TRUST
(FEES PAID FROM FUND ASSETS) SHARES SHARES SHARES
Management Fee 0.20% 0.20% 0.20%
Distribution (12b-1) Fee 0.00% 0.75% None
Other Expenses 0.79% 0.79% 0.64%(5)
Total Annual Fund Operating Expenses(6) 0.99% 1.74% 0.84%
Fee Waiver and/or Expense Reimbursement (.15%) (.15%) (.05%)
Net Expenses(7) .84% 1.59% .79%
</TABLE>
(1) AmSouth Bank or other financial
institutions may change their customer account
fees for automatic investment and other cash
management services provided in connection
with investment in the Funds.
(2) Sales charges may be reduced depending
upon the amount invested or, in certain
circumstances, waived. Class A shares bought
as part of an investment of $1 million or more
are not subject to an initial sales charge,
but may be charged a CDSC of 1.00% if sold
within one year of purchase.
(3) For B Shares acquired in the combination
of AmSouth Funds with ISG Funds, waivers are
in place on the CDSC charged if such Class B
shares are sold within six years of purchase,
which will decline as follows: 4%, 3%, 3%, 2%,
2%, 1% to 0% in the seventh year. For all
other B Shares, the CDSC declines over a six
year period as follows: 5%, 4%, 3%, 3%, 2%, 1%
to 0% in the seventh and eighth year.
Approximately eight years after purchase
(seven years in the case of Shares acquired in
the ISG combination), Class B shares
automatically convert to Class A shares.
(4) A wire transfer fee of $7.00 will be
deducted from the amount of your redemption if
you request a wire transfer.
(5) The above amount includes a shareholder
servicing fee that will become effective on
March 13, 2000.
(6) Other expenses for each class are based on
estimated amounts for the current fiscal year.
The expenses noted above do not reflect any
fee waivers or expense reimbursement
arrangements that are or were in effect. Any
fee waiver or expense reimbursement
arrangement is voluntary and may be
discontinued at any time.
(7) The above amounts reflect a reduction in
shareholder servicing fees required by NASD
rules. As reduced, the shareholder servicing
fees are .10% for each class. Absent such
reduction, the shareholder servicing fees
would be: Class A, .25%; Class B, .25%; Trust
Class, .15%.
AMSOUTH STRATEGIC PORTFOLIOS: GROWTH
PORTFOLIO
<TABLE>
<S> <C>
CLASS A SHARES 2.23%
CLASS B SHARES 2.94%
TRUST SHARES 2.23%
</TABLE>
Actual expenses will differ depending on the
actual allocation of investments in the
Underlying Funds in effect from time to time.
If you purchase and hold
shares of the AmSouth
Strategic Portfolios: Growth
Portfolio, you will pay
certain fees and expenses,
which are described in the
tables. Shareholder
transaction fees are paid from
your account. Annual Fund
operating expenses are paid
out of Fund assets, and are
reflected in the share price.
In addition to the expenses shown
above, if you buy and hold shares
of the AmSouth Strategic
Portfolios: Growth Portfolio you
will indirectly bear your pro rata
share of fees and expenses
incurred by the Underlying Funds
in which the Fund invests, so that
the investment returns of the Fund
will be net of the expenses of the
Underlying Funds. After combining
the total operating expenses of
the Fund with those of the
Underlying Funds, the estimated
average weighted expense ratio is
as follows:
28
<PAGE> 30
AMSOUTH STRATEGIC PORTFOLIOS:
DESCRIPTION OF THE FUNDS -- OBJECTIVES, RISK/RETURN AND
EXPENSES GROWTH PORTFOLIO
EXPENSE EXAMPLE
<TABLE>
<S> <C> <C>
1 3
YEAR YEARS
CLASS A SHARES $666 $1,116
CLASS B SHARES
Assuming Redemption $797 $1,210
Assuming No Redemption $297 $ 910
TRUST SHARES $221 $ 670
</TABLE>
Use the example at right to
help you compare the cost of
investing in the Fund with the
cost of investing in other
mutual funds. It illustrates
the amount of fees and
expenses you would pay,
assuming the following:
- $10,000 investment
- 5% annual return
- no changes in the Fund's
operating expenses
- redemption at the end of
each time period
Because actual returns and
operating expenses will be
different, this example is for
comparison only.
29
<PAGE> 31
AMSOUTH STRATEGIC PORTFOLIOS:
DESCRIPTION OF THE FUNDS -- OBJECTIVES, RISK/RETURN AND
EXPENSES GROWTH AND INCOME PORTFOLIO
<TABLE>
<S> <C>
INVESTMENT OBJECTIVE The Fund seeks to provide investors with long-term capital
growth and a moderate level of current income.
PRINCIPAL INVESTMENT STRATEGIES The Fund allocates its assets among the Underlying Funds
within predetermined strategy ranges, as set forth below.
The Adviser will make allocation decisions according to its
outlook for the economy, financial markets and relative
market valuation of the Underlying Funds.
The Fund will invest 0% to 100% of its total assets in six
Underlying Funds which invest primarily in equity
securities, 0% to 80% of its total assets in two Underlying
Funds which invest primarily in fixed income securities and
up to 20% of its total assets in one Underlying Fund which
invests in money market instruments. The Fund will invest
its assets in the following Underlying Funds within the
strategy ranges (expressed as a percentage of the Fund's
total assets) indicated below:
</TABLE>
<TABLE>
<S> <C>
UNDERLYING FUND STRATEGY RANGE
AmSouth International Equity Fund 0%-15%
AmSouth Small Cap Fund 0%-20%
AmSouth Mid Cap Fund 0%-20%
AmSouth Government Income Fund 0%-60%
AmSouth Large Cap Fund 0%-60%
AmSouth Capital Growth Fund 0%-25%
AmSouth Equity Income Fund 0%-25%
AmSouth Limited Term Bond Fund 0%-20%
AmSouth Prime Money Market Fund 0%-20%
</TABLE>
The Underlying Funds are described elsewhere in this
Prospectus.
<TABLE>
<S> <C>
PRINCIPAL INVESTMENT RISKS The Fund's investments are concentrated in the Underlying
Funds, so the Fund's investment performance is directly
related to the performance of those Underlying Funds. Before
investing in the Fund, investors should assess the risks
associated with the Underlying Funds in which the Fund
invests and the types of investments made by such Underlying
Funds. In addition, since the Fund must allocate its
investments among the Underlying Funds, the Fund does not
have the same flexibility to invest as a mutual fund without
such constraints. As a result, you could lose money by
investing in the Fund, particularly if there is a sudden
decline in the share prices of the Underlying Fund's
holdings.
The Fund invests in Underlying Funds that invest primarily
in equity securities. Stocks and other equity securities
fluctuate in price, often based on factors unrelated to the
issuers' value, and such fluctuations can be pronounced.
The Fund also invests in Underlying Funds that invest
primarily in fixed income securities, which are subject to
interest rate and credit risk. Interest rate risk is the
potential for a decline in bond prices due to rising
interest rates. Credit risk is the possibility that the
issuer of a fixed-income security will fail to make timely
payments of interest or principal, or that the security will
have its credit rating downgraded.
</TABLE>
30
<PAGE> 32
AMSOUTH STRATEGIC PORTFOLIOS:
DESCRIPTION OF THE FUNDS -- OBJECTIVES, RISK/RETURN AND
EXPENSES GROWTH AND INCOME PORTFOLIO
FEES AND EXPENSES
<TABLE>
<S> <C> <C> <C>
SHAREHOLDER TRANSACTION EXPENSES CLASS A CLASS B TRUST
(FEES PAID BY YOU DIRECTLY)(1) SHARES SHARES SHARES
Maximum sales charge (load) on
purchases as a % of offering price 4.50%(2) None None
Maximum deferred sales charge
(CDSC) None 5.00%(3) None
Redemption Fee(4) 0.00% 0.00% 0.00%
ANNUAL FUND OPERATING EXPENSES CLASS A CLASS B TRUST
(FEES PAID FROM FUND ASSETS) SHARES SHARES SHARES
Management Fee 0.20% 0.20% 0.20%
Distribution (12b-1) Fee 0.00% 0.75% None
Other Expenses 0.79% 0.79% 0.64%(5)
Total Annual Fund Operating
Expenses(6) 0.99% 1.74% 0.84%
Fee Waiver and/or Expense
Reimbursement (.15%) (.15%) (.05%)
Net Expenses(7) .84% 1.59% .79%
</TABLE>
(1) AmSouth Bank or other financial
institutions may change their customer account
fees for automatic investment and other cash
management services provided in connection
with investment in the Funds.
(2) Sales charges may be reduced depending
upon the amount invested or, in certain
circumstances, waived. Class A shares bought
as part of an investment of $1 million or more
are not subject to an initial sales charge,
but may be charged a CDSC of 1.00% if sold
within one year of purchase.
(3) For B Shares acquired in the combination
of AmSouth Funds with ISG Funds, waivers are
in place on the CDSC charged if such Class B
shares are sold within six years of purchase,
which will decline as follows: 4%, 3%, 3%, 2%,
2%, 1% to 0% in the seventh year. For all
other B Shares, the CDSC declines over a six
year period as follows: 5%, 4%, 3%, 3%, 2%, 1%
to 0% in the seventh and eighth year.
Approximately eight years after purchase
(seven years in the case of Shares acquired in
the ISG combination), Class B shares
automatically convert to Class A shares.
(4) A wire transfer fee of $7.00 will be
deducted from the amount of your redemption if
you request a wire transfer.
(5) The above amount includes a shareholder
servicing fee that will become effective on
March 13, 2000.
(6) Other expenses for each class are based on
estimated amounts for the current fiscal year.
The expenses noted above do not reflect any
fee waivers or expense reimbursement
arrangements that are or were in effect. Any
fee waiver or expense reimbursement
arrangement is voluntary and may be
discontinued at any time.
(7) The above amounts reflect a reduction in
shareholder servicing fees required by NASD
rules. As reduced, the shareholder servicing
fees are .10% for each class. Absent such
reduction, the shareholder servicing fees
would be: Class A, .25%; Class B, .25%; Trust
Class, .15%.
AMSOUTH STRATEGIC PORTFOLIOS: GROWTH AND
INCOME PORTFOLIO
<TABLE>
<S> <C>
CLASS A SHARES 2.19%
CLASS B SHARES 2.94%
TRUST SHARES 2.19%
</TABLE>
Actual expenses will differ depending on the
actual allocation of investments in the
Underlying Fund in effect from time to time.
If you purchase and hold
shares of the AmSouth
Strategic Portfolios: Growth
and Income Portfolio, you will
pay certain fees and expenses,
which are described in the
tables. Shareholder
transaction fees are paid from
your account. Annual Fund
operating expenses are paid
out of Fund assets, and are
reflected in the share price.
In addition to the expenses shown
above, if you buy and hold shares
of the AmSouth Strategic
Portfolios: Growth and Income
Portfolio you will indirectly bear
your pro rata share of fees and
expenses incurred by the
Underlying Funds in which the Fund
invests, so that the investment
returns of the Fund will be net of
the expenses of the Underlying
Funds. After combining the total
operating expenses of the Fund
with those of the Underlying
Funds, the estimated average
weighted expense ratio is as
follows:
31
<PAGE> 33
AMSOUTH STRATEGIC PORTFOLIOS:
DESCRIPTION OF THE FUNDS -- OBJECTIVES, RISK/RETURN AND
EXPENSES GROWTH AND INCOME PORTFOLIO
EXPENSE EXAMPLE
<TABLE>
<S> <C> <C>
1 3
YEAR YEARS
CLASS A SHARES $662 $1,104
CLASS B SHARES
Assuming Redemption $797 $1,210
Assuming No Redemption $297 $ 910
TRUST SHARES $217 $ 670
</TABLE>
Use the example at right to
help you compare the cost of
investing in the Fund with the
cost of investing in other
mutual funds. It illustrates
the amount of fees and
expenses you would pay,
assuming the following:
- $10,000 investment
- 5% annual return
- no changes in the Fund's
operating expenses
- redemption at the end of
each time period
Because actual returns and
operating expenses will be
different, this example is for
comparison only.
32
<PAGE> 34
AMSOUTH STRATEGIC PORTFOLIOS: MODERATE
DESCRIPTION OF THE FUNDS -- OBJECTIVES, RISK/RETURN AND
EXPENSES GROWTH AND INCOME PORTFOLIO
<TABLE>
<S> <C>
INVESTMENT OBJECTIVE The Fund seeks to provide investors with current income and
a moderate level of capital growth.
PRINCIPAL INVESTMENT STRATEGIES The Fund allocates its assets among the Underlying Funds
within Funds within predetermined strategy ranges, as set
forth below. The Adviser will make allocation decisions
according to its outlook for the economy, financial markets
and relative market valuation of the Underlying Funds.
The Fund will invest 0% to 80% of its total assets in three
Underlying Funds which invest primarily in equity
securities, 0% to 100% of its total assets in two Underlying
Funds which invest primarily in fixed income securities and
up to 20% of its total assets in one Underlying Fund which
invests in money market instruments. The Fund will invest
its assets in the following Underlying Funds within the
strategy ranges (expressed as a percentage of the Fund's
total assets) indicated below:
</TABLE>
<TABLE>
<S> <C>
UNDERLYING FUND STRATEGY RANGE
AmSouth Government Income Fund 0%-70%
AmSouth Limited Term Bond Fund 0%-45%
AmSouth Large Cap Fund 0%-50%
AmSouth Capital Growth Fund 0%-15%
AmSouth Equity Income Fund 0%-15%
AmSouth Prime Money Market Fund 0%-20%
</TABLE>
The Underlying Funds are described elsewhere in this
Prospectus.
<TABLE>
<S> <C>
PRINCIPAL INVESTMENT RISKS The Fund's investments are concentrated in the Underlying
Funds, so the Fund's investment performance is directly
related to the performance of those Underlying Funds. Before
investing in the Fund, investors should assess the risks
associated with the Underlying Funds in which the Fund
invests and the types of investments made by such Underlying
Funds. In addition, since the Fund must allocate its
investments among the Underlying Funds, the Fund does not
have the same flexibility to invest as a mutual fund without
such constraints. As a result, you could lose money by
investing in the Fund, particularly if there is a sudden
decline in the share prices of the Underlying Fund's
holdings.
The Fund invests in Underlying Funds that invest primarily
in fixed income securities, which are subject to interest
rate and credit risk. Interest rate risk is the potential
for a decline in bond prices due to rising interest rates.
Credit risk is the possibility that the issuer of a
fixed-income security will fail to make timely payments of
interest or principal, or that the security will have its
credit rating downgraded.
The Fund also invests in Underlying Funds that invest
primarily in equity securities. Stocks and other equity
securities fluctuate in price, often based on factors
unrelated to the issuers' value, and such fluctuations can
be pronounced.
</TABLE>
33
<PAGE> 35
AMSOUTH STRATEGIC PORTFOLIOS: MODERATE
DESCRIPTION OF THE FUNDS -- OBJECTIVES, RISK/RETURN AND
EXPENSES GROWTH AND INCOME PORTFOLIO
FEES AND EXPENSES
<TABLE>
<S> <C> <C> <C>
SHAREHOLDER TRANSACTION EXPENSES CLASS A CLASS B TRUST
(FEES PAID BY YOU DIRECTLY)(1) SHARES SHARES SHARES
Maximum sales charge (load) on
purchases as a % of offering price 4.50%(2) None None
Maximum deferred sales charge
(CDSC) None 5.00%(3) None
Redemption Fee(4) 0.00% 0.00% 0.00%
ANNUAL FUND OPERATING EXPENSES CLASS A CLASS B TRUST
(FEES PAID FROM FUND ASSETS) SHARES SHARES SHARES
Management Fee 0.20% 0.20% 0.20%
Distribution (12b-1) Fee 0.00% 0.75% None
Other Expenses 0.79% 0.79% 0.64%(5)
Total Annual Fund Operating
Expenses(6) 0.99% 1.74% 0.84%
Fee Waiver and/or Expense
Reimbursement (.15%) (.15%) (.05%)
Net Expenses(7) .84% 1.59% .79%
</TABLE>
(1) AmSouth Bank or other financial
institutions may change their customer account
fees for automatic investment and other cash
management services provided in connection
with investment in the Funds.
(2) Sales charges may be reduced depending
upon the amount invested or, in certain
circumstances, waived. Class A shares bought
as part of an investment of $1 million or more
are not subject to an initial sales charge,
but may be charged a CDSC of 1.00% if sold
within one year of purchase.
(3) For B Shares acquired in the combination
of AmSouth Funds with ISG Funds, waivers are
in place on the CDSC charged if such Class B
shares are sold within six years of purchase,
which will decline as follows: 4%, 3%, 3%, 2%,
2%, 1% to 0% in the seventh year. For all
other B Shares, the CDSC declines over a six
year period as follows: 5%, 4%, 3%, 3%, 2%, 1%
to 0% in the seventh and eighth year.
Approximately eight years after purchase
(seven years in the case of Shares acquired in
the ISG combination), Class B shares
automatically convert to Class A shares.
(4) A wire transfer fee of $7.00 will be
deducted from the amount of your redemption if
you request a wire transfer.
(5) The above amount includes a shareholder
servicing fee that will become effective on
March 13, 2000.
(6) Other expenses for each class are based on
estimated amounts for the current fiscal year.
The expenses noted above do not reflect any
fee waivers or expense reimbursement
arrangements that are or were in effect. Any
fee waiver or expense reimbursement
arrangement is voluntary and may be
discontinued at any time.
(7) The above amounts reflect a reduction in
shareholder servicing fees required by NASD
rules. As reduced, the shareholder servicing
fees are .10% for each class. Absent such
reduction, the shareholder servicing fees
would be: Class A, .25%; Class B, .25%; Trust
Class, .15%.
AMSOUTH STRATEGIC PORTFOLIOS: MODERATE GROWTH
AND INCOME PORTFOLIO
<TABLE>
<S> <C>
CLASS A SHARES 2.05%
CLASS B SHARES 2.80%
TRUST SHARES 2.05%
</TABLE>
Actual expenses will differ depending on the
actual allocation of investments in the
Underlying Funds in effect from time to time.
If you purchase and hold
shares of the AmSouth
Strategic Portfolios: Moderate
Growth and Income Portfolio,
you will pay certain fees and
expenses, which are described
in the tables. Shareholder
transaction fees are paid from
your account. Annual Fund
operating expenses are paid
out of Fund assets, and are
reflected in the share price.
In addition to the expenses shown
above, if you buy and hold shares
of the AmSouth Strategic
Portfolios: Moderate Growth and
Income Portfolio you will
indirectly bear your pro rata
share of fees and expenses
incurred by the Underlying Funds
in which the Fund invests, so that
the investment returns of the Fund
will be net of the expenses of the
Underlying Funds. After combining
the total operating expenses of
the Fund with those of the
Underlying Funds, the estimated
average weighted expense ratio is
as follows:
34
<PAGE> 36
AMSOUTH STRATEGIC PORTFOLIOS: MODERATE
DESCRIPTION OF THE FUNDS -- OBJECTIVES, RISK/RETURN AND
EXPENSES GROWTH AND INCOME PORTFOLIO
EXPENSE EXAMPLE
<TABLE>
<S> <C> <C>
1 3
YEAR YEARS
CLASS A SHARES $649 $1,064
CLASS B SHARES
Assuming Redemption $783 $1,168
Assuming No Redemption $283 $ 868
TRUST SHARES $203 $ 627
</TABLE>
Use the example at right to
help you compare the cost of
investing in the Fund with the
cost of investing in other
mutual funds. It illustrates
the amount of fees and
expenses you would pay,
assuming the following:
- $10,000 investment
- 5% annual return
- no changes in the Fund's
operating expenses
- redemption at the end of
each time period
Because actual returns and
operating expenses will be
different, this example is for
comparison only.
35
<PAGE> 37
AMSOUTH STRATEGIC PORTFOLIOS:
DESCRIPTION OF THE FUNDS -- OBJECTIVES, RISK/RETURN AND
EXPENSES CURRENT INCOME PORTFOLIO
<TABLE>
<S> <C>
INVESTMENT OBJECTIVE The Fund seeks to provide investors with current income.
PRINCIPAL INVESTMENT STRATEGIES The Fund allocates its assets among the Underlying Funds
within predetermined strategy ranges, as set forth below.
The Adviser will make allocation decisions according to its
outlook for the economy, financial markets and relative
market valuation of the Underlying Funds.
The Fund will invest 75% to 100% of its total assets in two
Underlying Funds which invest primarily in fixed income
securities and up to 30% of its total assets in one
Underlying Fund which invests in money market instruments.
The Fund will invest its assets in the following Underlying
Funds within the strategy ranges (expressed as a percentage
of the Fund's total assets) indicated below:
</TABLE>
<TABLE>
<S> <C>
UNDERLYING FUND STRATEGY RANGE
AmSouth Limited Term Bond Fund 40%-60%
AmSouth Bond Fund 35%-55%
AmSouth Prime Money Market Fund 0%-30%
</TABLE>
The Underlying Funds are described elsewhere in this
Prospectus.
<TABLE>
<S> <C>
PRINCIPAL INVESTMENT RISKS The Fund's investments are concentrated in the Underlying
Funds, so the Fund's investment performance is directly
related to the performance of those Underlying Funds. Before
investing in the Fund, investors should assess the risks
associated with the Underlying Funds in which the Fund
invests and the types of investments made by such Underlying
Funds. In addition, since the Fund must allocate its
investments among the Underlying Funds, the Fund does not
have the same flexibility to invest as a mutual fund without
such constraints. As a result, you could lose money by
investing in the Fund, particularly if there is a sudden
decline in the share prices of the Underlying Fund's
holdings.
The Fund invests in Underlying Funds that invest primarily
in fixed income securities, which are subject to interest
rate, credit and prepayment risk.
Prices of fixed income securities tend to move inversely
with changes in interest rates. The most immediate effect of
a rise in rates is usually a drop in the prices of such
securities, and therefore in the Underlying Fund's share
price as well. Interest rate risk is usually greater for
fixed-income securities with longer maturities or durations.
To the extent the Underlying Funds maintain a comparatively
long duration, their share prices will react more to
interest rate movements.
The Underlying Funds' investments also are subject to credit
risk, which is the risk that the issuer of the security will
fail to make timely payments of interest or principal, or to
otherwise honor its obligations. Credit risk includes the
possibility that any of the Underlying Funds' investments
will have its credit rating downgraded or will default.
Mortgage-related and asset-backed securities, which are
derivative instruments, are subject to both credit and
prepayment risk, and may be more volatile and less liquid
than more traditional debt securities. If the borrowers
prepay some or all of the principal owed to the issuer much
earlier than expected, the Underlying Fund may have to
replace the security by investing the proceeds in a less
attractive security which could reduce the Underlying Fund's
share price or yield.
</TABLE>
36
<PAGE> 38
AMSOUTH STRATEGIC PORTFOLIOS:
DESCRIPTION OF THE FUNDS -- OBJECTIVES, RISK/RETURN AND
EXPENSES CURRENT INCOME PORTFOLIO
FEES AND EXPENSES
<TABLE>
<S> <C> <C> <C>
SHAREHOLDER TRANSACTION EXPENSES CLASS A CLASS B TRUST
(FEES PAID BY YOU DIRECTLY)(1) SHARES SHARES SHARES
Maximum sales charge (load) on
purchases as a % of offering price 4.00%(2) None None
Maximum deferred sales charge
(CDSC) None 5.00%(3) None
Redemption Fee(4) 0.00% 0.00% 0.00%
ANNUAL FUND OPERATING EXPENSES CLASS A CLASS B TRUST
(FEES PAID FROM FUND ASSETS) SHARES SHARES SHARES
Management Fee 0.20% 0.20% 0.20%
Distribution (12b-1) Fee 0.00% 0.75% None
Other Expenses 0.79% 0.79% 0.64%(5)
Total Annual Fund Operating
Expenses(6) 0.99% 1.74% 0.84%
Fee Waiver and/or Expense
Reimbursement (.15%) (.15%) (.05%)
Net Expenses(7) .84% 1.59% .79%
</TABLE>
(1) AmSouth Bank or other financial
institutions may change their customer account
fees for automatic investment and other cash
management services provided in connection
with investment in the Funds.
(2) Sales charges may be reduced depending
upon the amount invested or, in certain
circumstances, waived. Class A shares bought
as part of an investment of $1 million or more
are not subject to an initial sales charge,
but may be charged a CDSC of 1.00% if sold
within one year of purchase.
(3) For B Shares acquired in the combination
of AmSouth Funds with ISG Funds, waivers are
in place on the CDSC charged if such Class B
shares are sold within six years of purchase,
which will decline as follows: 4%, 3%, 3%, 2%,
2%, 1% to 0% in the seventh year. For all
other B Shares, the CDSC declines over a six
year period as follows: 5%, 4%, 3%, 3%, 2%, 1%
to 0% in the seventh and eighth. Approximately
eight years after purchase (seven years in the
case of Shares acquired in the ISG
combination), Class B shares automatically
convert to Class A shares.
(4) A wire transfer fee of $7.00 will be
deducted from the amount of your redemption if
you request a wire transfer.
(5) The above amount includes a shareholder
servicing fee that will become effective on
March 13, 2000.
(6) Other expenses for each class are based on
estimated amounts for the current fiscal year.
The expenses noted above do not reflect any
fee waivers or expense reimbursement
arrangements that are or were in effect. Any
fee waiver or expense reimbursement
arrangement is voluntary and may be
discontinued at any time.
(7) The above amounts reflect a reduction in
shareholder servicing fees required by NASD
rules. As reduced, the shareholder servicing
fees are .10% for each class. Absent such
reduction, the shareholder servicing fees
would be: Class A, .25%; Class B, .25%; Trust
Class, .15%.
AMSOUTH STRATEGIC PORTFOLIOS: CURRENT
INCOME PORTFOLIO
<TABLE>
<S> <C>
CLASS A SHARES 1.91%
CLASS B SHARES 2.66%
TRUST SHARES 1.91%
</TABLE>
Actual expenses will differ depending on the
actual allocation of investments in the
Underlying Fund in effect from time to time.
If you purchase and hold
shares of the AmSouth
Strategic Portfolios: Current
Income Portfolio, you will pay
certain fees and expenses,
which are described in the
tables. Shareholder
transaction fees are paid from
your account. Annual Fund
operating expenses are paid
out of Fund assets, and are
reflected in the share price.
In addition to the expenses shown
above, if you buy and hold shares
of the AmSouth Strategic
Portfolios: Current Income
Portfolio you will indirectly bear
your pro rata share of fees and
expenses incurred by the
Underlying Funds in which the Fund
invests, so that the investment
returns of the Fund will be net of
the expenses of the Underlying
Funds. After combining the total
operating expenses of the Fund
with those of the Underlying
Funds, the estimated average
weighted expense ratio is as
follows:
37
<PAGE> 39
AMSOUTH STRATEGIC PORTFOLIOS:
DESCRIPTION OF THE FUNDS -- OBJECTIVES, RISK/RETURN AND
EXPENSES CURRENT INCOME PORTFOLIO
EXPENSE EXAMPLE
<TABLE>
<S> <C> <C>
1 3
YEAR YEARS
CLASS A SHARES $586 $ 976
CLASS B SHARES
Assuming Redemption $769 $1,126
Assuming No Redemption $269 $ 826
TRUST SHARES $189 $ 585
</TABLE>
Use the example at right to
help you compare the cost of
investing in the Fund with the
cost of investing in other
mutual funds. It illustrates
the amount of fees and
expenses you would pay,
assuming the following:
- $10,000 investment
- 5% annual return
- no changes in the Fund's
operating expenses
- redemption at the end of
each time period
Because actual returns and
operating expenses will be
different, this example is for
comparison only.
38
<PAGE> 40
[LOGO]
ADDITIONAL INVESTMENT STRATEGIES AND RISKS
AMSOUTH CAPITAL APPRECIATION FUNDS
AMSOUTH INTERNATIONAL EQUITY FUND -- The Fund will invest at least 65% of its
total assets in equity securities of non-United States companies (i.e.,
incorporated or organized outside the United States). Under normal market
conditions, the Fund will invest at least 80% of the value of its total
assets in the equity securities of companies within not less than three
different countries (not including the United States).
Foreign securities held by the Fund may trade on days when the Fund does not
calculate its NAV and thus affect the Fund's NAV on days when investors have
no access to the Fund.
The Fund is not required to invest exclusively in common stocks or other
equity securities, and, if deemed advisable, the Fund may invest, to a
limited extent, in fixed income securities and money market instruments. The
Fund will not invest in fixed income securities rated lower than A by a
credit rating agency, such as Moody's, S&P, Fitch or Duff, or, if unrated,
deemed to be of comparable quality by the Adviser.
The Fund may engage in foreign currency transactions to hedge the Fund's
portfolio or increase returns. The Fund's success in these transactions will
depend principally on the Sub-Adviser's ability to predict accurately the
future exchange rates between foreign currencies and the U.S. dollar.
The Fund also may engage in short-selling, which involves selling a security
it does not own in anticipation of a decline in the market price of the
security. To complete the transaction, the Fund must borrow the security to
make delivery to the buyer. The Fund is obligated to replace the security
borrowed by purchasing it later in the market. The price at such time may be
more or less than the price at which the security was sold by the Fund, which
would result in a loss or gain, respectively.
AMSOUTH MID CAP FUND -- The Fund will invest at least 65% of its total assets
in equity securities of companies publicly traded on U.S. exchanges that are
either included in the Russell Mid-Cap Growth Index or have market
capitalizations within the range of such included companies. The Fund may
invest up to 20% of its total assets in securities of foreign issuers traded
on the New York or American Stock Exchange or in the over-the-counter market
in the form of depositary receipts, such as ADRs. The Fund also may invest in
debt securities of domestic issuers rated no lower than investment grade
(Baa/BBB) by a credit rating agency, or, if unrated, deemed to be of
comparable quality by the Adviser.
Securities of foreign issuers (including ADRs) fluctuate in price, often
based on factors unrelated to the issuers' value, and such fluctuations can
be pronounced. Foreign securities tend to be more volatile than U.S.
securities because they include special risks such as exposure to currency
fluctuations, a lack of comprehensive company information, potential
instability, and differing auditing and legal standards.
AMSOUTH CAPITAL GROWTH FUND -- The Fund will invest at least 65% of its total
assets in equity securities. The Fund also may invest in debt securities of
domestic and foreign issuers when the Adviser believes that such securities
offer opportunities for capital growth. The Fund may invest up to 10% of its
total assets in foreign securities which are not publicly traded in the
United States.
At least 65% of the Fund's total assets invested in debt securities must
consist of debt securities which are rated no lower than investment grade
(Baa/BBB) by a credit rating agency, or, if unrated, deemed to be of
comparable quality by the Adviser. The remainder of such assets may be
invested in debt securities which are rated no lower than Ba by Moody's and
BB by S&P, Fitch and Duff or, if unrated, deemed to be of comparable quality
by the Adviser. Debt securities rated Ba by Moody's and BB by S&P, Fitch and
Duff are considered speculative grade debt (also known as junk bonds) and the
payment of principal and interest may be affected at any time by adverse
economic changes.
AMSOUTH LARGE CAP FUND -- The Fund will invest at least 70% of its total
assets in equity securities. The Fund also may invest in debt securities of
domestic issuers rated no lower than investment grade (Baa/BBB) by a credit
rating agency, or, if unrated, deemed to be of comparable quality by the
Adviser.
APPLICABLE TO AMSOUTH INTERNATIONAL EQUITY, MID CAP, CAPITAL GROWTH AND LARGE
CAP FUNDS -- While the Capital Appreciation Funds typically invest primarily
in common stocks, the equity securities in which they may invest also include
convertible securities and preferred stocks. Convertible securities are
exchangeable for a certain amount of another form of an issuer's securities,
usually common stock, at a prestated price. Convertible securities generally
are subordinated to other similar but non-convertible securities of the same
issuer and, thus, typically have lower credit ratings than similar
non-convertible securities. Preferred stock pays dividends at a specified
rate and has preference over common stock in the payment of dividends and the
liquidation of assets. Preferred stock ordinarily does not carry voting
rights.
39
<PAGE> 41
ADDITIONAL INVESTMENT STRATEGIES AND RISKS
To a limited extent, each Fund may invest in debt securities. These
securities will be subject primarily to interest rate and credit risks.
Interest rate risk is the potential for a decline in bond prices due to
rising interest rates. In general, the prices of debt securities are
inversely affected by changes in interest rates and, therefore, are subject
to the risk of market price fluctuations. Credit risk is the possibility that
the issuer of the security will fail to make timely payments of interest or
principal to the Fund. The credit risk of a Fund depends on the quality of
its investments. Certain debt securities that may be purchased by the Funds,
such as those rated Baa by Moody's and BBB by S&P, Fitch and Duff, may be
subject to such risk with respect to the issuing entity and to greater market
fluctuations than certain lower yielding, higher rated securities.
Under adverse market conditions, each Fund may invest some or all of its
assets in money market instruments. Although the Fund would do this to avoid
losses, it could reduce the benefit from any upswing in the market. During
such periods, the Fund may not achieve its investment objective.
Each Fund may invest, to a limited extent, in securities issued by other
investment companies which principally invest in securities of the type in
which the Fund invests. Such investments will involve duplication of advisory
fees and certain other expenses.
Each Fund may invest some assets in derivative securities, such as options
and futures. These instruments are used primarily to hedge the Fund's
portfolio but may be used to increase returns; however, they sometimes may
reduce returns or increase volatility. In addition, derivatives can be
illiquid and highly sensitive to changes in their underlying security,
interest rate or index, and as a result can be highly volatile. A small
investment in certain derivatives could have a potentially large impact on
the Fund's performance.
Each Fund may lend its portfolio securities to brokers, dealers and other
financial institutions, which could subject the Fund to risk of loss if the
institution breaches it agreement with the Fund. In connection with such
loans, the Fund will receive collateral consisting of cash or U.S. Government
securities which will be maintained at all times in an amount equal to 100%
of the current market value of the loaned securities.
AMSOUTH INCOME FUNDS
AMSOUTH LIMITED TERM U.S. GOVERNMENT FUND -- The Fund will invest at least
65% of its total assets in securities issued or guaranteed by the U.S.
Government or its agencies or instrumentalities and repurchase agreements in
respect of such securities.
Repurchase agreements are contracts in which a U.S. commercial bank or
securities dealer sells U.S. Government securities to the Fund and agrees to
repurchase them on a specific date (usually the next day) and at a specific
price. These agreements offer the Fund a means of investing money for a short
period of time. If the seller defaults, the Fund could be delayed in selling
the securities which could affect the Fund's yield.
The Fund's controlled duration strategy may limit its ability to take
advantage of investment opportunities.
U.S. Government securities are bonds or other debt obligations issued or
guaranteed as to principal and interest by the U.S. Government or one of its
agencies or instrumentalities. U.S. Treasury securities and some obligations
of U.S. Government agencies and instrumentalities are supported by the "full
faith and credit" of the United States Government. Other U.S. Government
securities are backed by the right of the issuer to borrow from the U.S.
Treasury. Still others are supported only by the credit of the issuer or
instrumentality. While the U.S. Government provides financial support to U.S.
Government-sponsored agencies or instrumentalities, no assurance can be given
that it will always do so.
The Fund may invest, to a limited extent, in securities issued by other
investment companies which principally invest in securities of the type in
which the Fund invests. Such investments will involve duplication of advisory
fees and certain other expenses.
The Fund may lend its portfolio securities to brokers, dealers and other
financial institutions, which could subject the Fund to risk of loss if the
institution breaches its agreement with the Fund. In connection with such
loans, the Fund will receive collateral consisting of cash or U.S. Government
securities which will be maintained at all times in an amount equal to 100%
of the current market value of the loaned securities.
40
<PAGE> 42
ADDITIONAL INVESTMENT STRATEGIES AND RISKS
AMSOUTH TENNESSEE TAX-EXEMPT FUND AND AMSOUTH LIMITED TERM TENNESSEE
TAX-EXEMPT FUND -- The AmSouth Tennessee Tax-Exempt Fund and AmSouth Limited
Term Tennessee Tax-Exempt Fund (each a "Tennessee Fund") will each invest, as
a fundamental policy, at least 80% of its net assets (except when maintaining
a temporary defensive position) in municipal obligations. Under normal
circumstances, each Tennessee Fund will invest at least 65% of its total
assets in bonds, debentures, and other debt securities of the State of
Tennessee, its political subdivisions, authorities and corporations, the
interest from which is, in the opinion of bond counsel to the issuer, exempt
from Federal and Tennessee personal income taxes. The remainder of each
Tennessee Fund's assets may be invested in securities that are not Tennessee
municipal obligations and therefore may be subject to Tennessee income tax.
Each Tennessee Fund intends to invest in such securities when their return to
investors, taking into account applicable Tennessee income taxes, would be
greater than comparably rated Tennessee municipal obligations. In addition,
to the extent acceptable Tennessee municipal obligations are at any time
unavailable for investment by each Tennessee Fund, the Fund will invest
temporarily in other municipal obligations. When the Fund has adopted a
temporary defensive position, including when acceptable Tennessee municipal
obligations are unavailable for investment by the Fund, in excess of 35% of
the Fund's total assets may be invested in securities that are not exempt
from Tennessee State income tax.
Each Tennessee Fund may invest up to 10% of its total assets in industrial
development bonds backed only by the assets and revenues of non-governmental
users. Each Tennessee Fund may invest up to 10% of its net assets in
municipal obligations which provide income subject to the alternative minimum
tax.
From time to time, on a temporary basis other than for temporary defensive
purposes (but not to exceed 20% of the Fund's net assets) or for temporary
defensive purposes, each Tennessee Fund may invest in taxable money market
instruments having, at the time of purchase, a quality rating in the two
highest grades of Moody's, S&P or Fitch or, if unrated, deemed to be of
comparable quality by the Adviser. Except for temporary defensive purposes,
at no time will more than 20% of each Tennessee Fund's net assets be invested
in taxable money market instruments and municipal obligations which provide
income subject to the alternative minimum tax.
The AmSouth Limited Term Tennessee Tax-Exempt Fund's controlled duration
strategy may limit its ability to take advantage of investment opportunities.
Each Tennessee Fund may invest some assets in derivative securities, such as
options and futures, which may give rise to taxable income. These instruments
are used primarily to hedge the Fund's portfolio but may be used to increase
returns; however, they sometimes may reduce returns or increase volatility.
In addition, derivatives can be illiquid and highly sensitive to changes in
their underlying security, interest rate or index, and as a result can be
highly volatile. A small investment in certain derivatives could have a
potentially large impact on the Fund's performance.
Municipal obligations in which each Tennessee Funds may invest are debt
obligations typically divided into two types:
- GENERAL OBLIGATION BONDS, which are secured by the full faith and
credit of the issuer and its taxing power; and
- REVENUE BONDS, which are payable from the revenues derived from a
specific revenue source, such as charges for water and sewer service
or highway tolls.
To the extent described above, each Tennessee Fund may invest in industrial
development bonds which, although nominally issued by municipal authorities,
are in most cases revenue bonds that are not secured by the taxing power of
the municipality, but by the revenues derived from payments by the
non-governmental users. Certain industrial development bonds, while exempt
from Federal income tax, provide income subject to the alternative minimum
tax.
Each Tennessee Fund may invest, to a limited extent, in securities issued by
other investment companies which principally invest in securities of the type
in which the Fund invests. Such investments will involve duplication of
advisory fees and certain other expenses.
Each Tennessee Fund may lend its portfolio securities to brokers, dealers and
other financial institutions, which could subject the Fund to risk of loss if
the institution breaches its agreement the Fund and may give rise to taxable
income. In connection with such loans, the Fund will receive collateral
consisting of cash or U.S. Government securities which will be maintained at
all times in an amount equal to 100% of the current market value of the
loaned securities.
41
<PAGE> 43
ADDITIONAL INVESTMENT STRATEGIES AND RISKS
AMSOUTH MONEY MARKET FUND
AMSOUTH TREASURY RESERVE MONEY MARKET FUND -- The Fund will invest, as a
fundamental policy, at least 65% of its total assets in securities issued by
the U.S. Treasury and repurchase agreements in respect thereof. The remainder
of its assets may be invested in other securities guaranteed as to payment of
principal and interest by the U.S. Government and repurchase agreements in
respect thereof.
Repurchase agreements are contracts in which a U.S. commercial bank or
securities dealer sells a security to the Fund and agrees to repurchase the
security on a specific date (usually the next day) and at a specific price.
These agreements offer the Fund a means of investing money for a short period
of time. If the seller defaults, the Fund could be delayed in selling the
securities which could affect the Fund's yield.
The Fund will not invest in securities issued or guaranteed by U.S.
Government agencies, instrumentalities or government-sponsored enterprises
that are not backed by the full faith and credit of the United States.
As a money market fund, the AmSouth Treasury Reserve Money Market Fund is
subject to maturity, quality and diversification requirements designed to
help it maintain a stable price of $1.00 per share. The Fund must do the
following:
- maintain an average dollar weighted portfolio maturity of 90 days or less
- buy individual securities that have remaining maturities of 397 days or
less
- buy only high quality U.S. dollar denominated obligations
The Fund may lend its portfolio securities to brokers, dealers and other
financial institutions, which could subject the Fund to risk of loss if the
institution breaches its agreement with the Fund. In connection with such
loans, the Fund will receive collateral consisting of cash or U.S. Government
securities which will be maintained at all times in an amount equal to 100%
of the current market value of the loaned securities.
The Fund may enter into reverse repurchase agreements with banks, brokers or
dealers. In these transactions, the Fund sells a portfolio security to
another party in return for cash and agrees to repurchase the security
generally at a particular price and time. The Fund will use the cash to make
investments which either mature or have a demand feature to resell to the
issuer at a date simultaneous with or prior to the time the Fund must
repurchase the security. Reverse repurchase agreements may be preferable to a
regular sale and later repurchase of the securities because it avoids certain
market risks and transaction costs. Such transactions, however, may increase
the risk of potential fluctuations in the market value of the Fund's assets.
In addition, interest costs on the cash received may exceed the return on the
securities purchased.
The Fund expects to maintain a net asset value of $1.00 per share, but there
is no assurance that the Fund will be able to do so on a continuous basis.
The Fund's performance per share will change daily based on many factors,
including fluctuation in interest rates.
AMSOUTH STRATEGIC PORTFOLIOS
The AmSouth Strategic Portfolios invest in other funds of the Trust
(underlying funds). The specific underlying funds held by each Strategic
Portfolio are identified in "Description of the Funds -- Objectives,
Risk/Return and Expenses." A number of those underlying funds are described
earlier in this Prospectus. The remaining underlying funds are described
below.
AMSOUTH SMALL CAP FUND
INVESTMENT OBJECTIVES
The Fund seeks capital appreciation by investing primarily in a diversified
portfolio of securities consisting of common stocks and securities
convertible into common stocks such as convertible bonds and convertible
preferred stocks. Any current income generated from these securities is
incidental.
INVESTMENT STRATEGIES
To pursue this goal, the Fund invests primarily in common stocks of companies
with market capitalizations at the time of purchase in the range of companies
in the Russell 2000(R) Growth Index (currently between $50 million and $2
billion).
42
<PAGE> 44
ADDITIONAL INVESTMENT STRATEGIES AND RISKS
In managing the Fund's portfolio, the manager seeks smaller companies with
above-average growth potential. Factors the portfolio manager typically
considers in selecting individual securities include positive changes in
earnings estimates for future growth, higher than market average
profitability, a strategic position in a specialized market, earnings growth
consistently above market, and fundamental value.
The Fund will normally invest at least 80% of its total assets in common
stocks and securities convertible into common stocks such as convertible
bonds and convertible preferred stock of companies with market capitalization
that are equivalent to the capitalization of the companies in the Russell
2000(R) Growth Index at the time of purchase. The Fund may invest up to 20%
of the value of its total assets in common stocks and securities convertible
into common stocks of companies with a market capitalization of greater than
$2 billion determined at the time of the purchase, preferred stocks,
corporate bonds, notes, and warrants, and short-term money market
instruments.
PRINCIPAL INVESTMENT RISKS
Your investment in the Fund may be subject to the following principal risks:
MARKET RISK: The possibility that the Fund's stock holdings will decline in
price because of a broad stock market decline. Markets generally move in
cycles, with periods of rising prices followed by periods of falling prices.
The value of your investment will tend to increase or decrease in response to
these movements.
SMALL COMPANY RISK: Investing in smaller, lessor-known companies involves
greater risk than investing in those that are more established. A small
company's financial well-being may, for example, depend heavily on just a few
products or services. In addition, investors may have limited flexibility to
buy or sell small company stocks, which tend to trade less frequently than
those of larger firms.
INVESTMENT STYLE RISK: The possibility that the market segment on which this
Fund focuses -- small company growth stocks -- will underperform other kinds
of investments or market averages.
The Fund may trade securities actively, which could increase its transaction
costs (thereby lowering its performance) and may increase the amount of taxes
that you pay. If the Fund invests in securities with additional risks, its
share price volatility accordingly could be greater and its performance
lower.
AMSOUTH EQUITY INCOME FUND
INVESTMENT OBJECTIVE
The Fund seeks above average income and capital appreciation by investing
primarily in a diversified portfolio of common stocks, preferred stocks, and
securities that are convertible into common stocks, such as convertible bonds
and convertible preferred stock.
INVESTMENT STRATEGIES
To pursue this goal, the Fund invests primarily in income-producing equity
securities such as common stocks, ADRs, and securities convertible into
common stocks, including convertible bonds and convertible preferred stocks.
In managing the Fund's portfolio, the manager seeks equity securities which
he believes to represent investment value. In choosing individual securities,
the portfolio manager emphasizes those common stocks in each sector that have
good value, attractive yield, and dividend growth potential. The portfolio
manager will also consider higher valued companies that show the potential
for growth. Factors that the portfolio manager considers in selecting equity
securities include industry and company fundamentals, historical price
relationships, and/or underlying asset value. The Fund also utilizes
convertible securities because these securities typically offer higher yields
and good potential for capital appreciation as well as some downside
protection.
The Fund will normally invest at least 65% of its total assets in income
producing equity securities such as common stocks, preferred stocks, and
securities convertible into common stocks, such as convertible bonds and
convertible preferred stocks. The Fund may also invest up to 35% of the value
of its total assets in corporate bonds, notes, and warrants, and short-term
money market instruments or conducting substantial business.
43
<PAGE> 45
ADDITIONAL INVESTMENT STRATEGIES AND RISKS
PRINCIPAL INVESTMENT RISKS
Your investment in the Fund may be subject to the following principal risks:
MARKET RISK: The possibility that the Fund's stock holdings will decline in
price because of a broad stock market decline. Markets generally move in
cycles, with periods of rising prices followed by periods of falling prices.
The value of your investment will tend to increase or decrease in response to
these movements.
INVESTMENT STYLE RISK: The possibility that this Fund's blended investment
style will underperform other Funds or market averages that focus exclusively
on either growth or value.
The Fund may trade securities actively, which could increase its transaction
costs (thereby lowering its performance) and may increase the amount of taxes
that you pay. If the Fund invests in securities with additional risks, its
share price volatility accordingly could be greater and its performance
lower.
AMSOUTH BOND FUND
INVESTMENT OBJECTIVES
The Fund seeks current income consistent with the preservation of capital.
INVESTMENT STRATEGIES
To pursue this goal, the Fund invests in bonds and other fixed-income
securities. These investments include primarily U.S. corporate bonds and
debentures and notes or bonds issued or guaranteed by the U.S. government,
its agencies or instrumentalities. The Fund invests in debt securities only
if they are high grade (rated at time of purchase in one of the three highest
rating categories by a nationally recognized statistical rating organization
(an "NRSRO"), or are determined by the portfolio manager to be of comparable
quality). The Fund also invests in zero-coupon obligations which are
securities which do not provide current income but represent ownership of
future interest and principal payments on U.S. Treasury bonds.
The Fund may purchase fixed-income securities of any maturity and although
there is no limit on the Fund's average maturity, it is normally expected to
be between five and ten years. In managing the Fund's portfolio, the manager
uses a "top down" investment management approach focusing on a security's
maturity. The manager sets, and continually adjusts, a target for the
interest rate sensitivity of the Fund based upon expectations about interest
rates. The manager then selects individual securities whose maturities fit
this target and which the manager believes are the best relative values.
The Fund will invest at least 65% of its total assets in bonds (including
debentures). For temporary defensive purposes, the Fund may hold more than
35% of its total assets in cash and cash equivalents. "Cash equivalents" are
short-term, interest-bearing instruments or deposits known as money market
instruments.
PRINCIPAL INVESTMENT RISKS
Your investment in the Fund may be subject to the following principal risks:
INTEREST RATE RISK: The possibility that the value of the Fund's investments
will decline due to an increase in interest rates. Interest rate risk is
generally high for longer-term bonds and low for shorter-term bonds.
CREDIT RISK: The possibility that an issuer cannot make timely interest and
principal payments on its debt securities, such as bonds. The lower a
security's rating, the greater its credit risk.
INCOME RISK: The possibility that the Fund's income will decline due to a
decrease in interest rates. Income risk is generally high for shorter-term
bonds and low for longer-term bonds.
If the Fund invests in securities with additional risks, its share price
volatility accordingly could be greater and its performance lower.
44
<PAGE> 46
ADDITIONAL INVESTMENT STRATEGIES AND RISKS
AMSOUTH GOVERNMENT INCOME FUND
INVESTMENT OBJECTIVES
The Fund seeks current income consistent with the preservation of capital.
INVESTMENT STRATEGIES
To pursue this goal, the Fund invests primarily in securities issued or
guaranteed by the U.S. government, its agencies or instrumentalities. These
investments are principally mortgage-related securities, but may also include
U.S. Treasury obligations.
In managing the Fund's portfolio, the manager uses a "top down" investment
management approach focusing on a security's maturity. The manager sets, and
continually adjust, a target for the interest rate sensitivity of the Fund
based upon expectations about interest rates. The manager then selects
individual securities whose maturities fit this target and which the manger
believes are the best relative values.
The Fund may also invest in certain other debt securities in addition to
those described above. The Fund invests at least 65% of its total assets in
obligations issued or guaranteed by the U.S. government or its agencies and
instrumentalities. Up to 35% of the Fund's total assets may be invested in
other types of debt securities, preferred stocks and options. Under normal
market conditions, the Fund will invest up to 80% of its total assets in
mortgage-related securities issued or guaranteed by the U.S. government or
its agencies and instrumentalities, such as the Government National Mortgage
Association ("GNMA"), the Federal National Mortgage Association ("FNMA") and
the Federal Home Loan Mortgage Corporation ("FHLMC"), and in mortgage-related
securities issued by nongovernmental entities which are rated, at the time of
purchase, in one of the three highest rating categories by an NRSRO or, if
unrated, determined by its portfolio manager to be of comparable quality.
PRINCIPAL INVESTMENT RISKS
Your investment in the Fund may be subject to the following principal risks:
INTEREST RATE RISK: The possibility that the value of the Fund's investments
will decline due to an increase in interest rates. Interest rate risk is
generally high for longer-term bonds and low for shorter-term bonds.
PREPAYMENT RISK: If a significant number of mortgages underlying a mortgage
backed security are refinanced, the security may be "prepaid." In this case,
investors receive their principal back and are typically forced to reinvest
it in securities that pay lower interest rates. Rapid changes in prepayment
rates can cause bond prices and yields to be volatile.
INCOME RISK: The possibility that the Fund's income will decline due to a
decrease in interest rates. Income risk is generally high for shorter-term
bonds and low for longer-term bonds.
If the Fund invests in securities with additional risks, its share price
volatility accordingly could be greater and its performance lower.
AMSOUTH LIMITED TERM BOND FUND
INVESTMENT OBJECTIVES
The Fund seeks current income consistent with the preservation of capital.
INVESTMENT STRATEGIES
To pursue this goal, the Fund invests primarily in short-term fixed income
securities with maturities of five years or less, principally corporate bonds
and securities issued or guaranteed by the U.S. government, its agencies or
instrumentalities. The Fund invests in debt securities only if they are high-
grade (rated at the time of purchase in one of the three highest rating
categories by an NRSRO, or are determined by the portfolio manager to be of
comparable quality).
In managing the Fund's portfolio, the manager uses a "top down" investment
management approach focusing on a security's maturity. The manager sets, and
continually adjusts, a target for the interest rate sensitivity of the Fund
based upon expectations about interest rates and other economic factors. The
manager then selects individual securities whose maturities fit this target
and which the manager believes are the best relative values.
45
<PAGE> 47
ADDITIONAL INVESTMENT STRATEGIES AND RISKS
The Fund will normally invest at least 65% of its total assets in bonds
(including debentures), notes and other debt securities which have a stated
or remaining maturity of five years or less or which have an unconditional
redemption feature that will permit the Fund to require the issuer of the
security to redeem the security within five years from the date of purchase
by the Fund or for which the Fund has acquired an unconditional "put" to sell
the security within five years from the date of purchase by the Fund. The
remainder of the Fund's assets may be invested in bonds (including
debentures), notes and other debt securities which have a stated or remaining
maturity of greater than five years, cash, cash equivalents, and money-market
instruments. For temporary defensive purposes, the Fund may invest more than
35% of its total assets in cash, cash equivalents and corporate bonds with
remaining maturities of less than 1 year. If the Fund acquires a debt
security with a stated or remaining maturity in excess of five years, the
Fund may acquire a "put" with respect to the security. Under a "put", the
Fund would have the right to sell the debt security within a specified period
of time at a specified minimum price. The Fund will only acquire puts from
dealers, banks and broker-dealers which the Advisor has determined are
creditworthy. A put will be sold, transferred, or assigned by the Fund only
with the underlying debt security. The Fund will acquire puts solely to
shorten the maturity of the underlying debt security.
PRINCIPAL INVESTMENT RISKS
Your investment in the Fund may be subject to the following principal risks:
INCOME RISK: The possibility that the Fund's income will decline due to a
decrease in interest rates. Income risk is generally high for shorter-term
bonds and low for longer-term bonds.
INTEREST RATE RISK: The possibility that the value of the Fund's investments
will decline due to an increase in interest rates. Interest rate risk is
generally high for longer-term bonds and low for shorter-term bonds.
CREDIT RISK: The possibility that an issuer cannot make timely interest and
principal payments on its debt securities such as bonds. The lower a
security's rating, the greater its credit risk.
If the Fund invests in securities with additional risks, its share price
volatility accordingly could be greater and its performance lower.
AMSOUTH PRIME MONEY MARKET FUND
INVESTMENT OBJECTIVES
The Fund seeks current income with liquidity and stability of principal.
INVESTMENT STRATEGIES
To pursue this goal, the Fund invests only in U.S. dollar-denominated,
"high-quality' short-term debt securities, including the following:
- obligations issued or guaranteed by the U.S. government, its agencies or
instrumentalities
- certificates of deposit, time deposits, bankers' acceptances and other
short-term securities issued by domestic or foreign banks or their
subsidiaries or branches
- domestic and foreign commercial paper and other short-term corporate debt
obligations, including those with floating or variable rates of interest
- obligations issued or guaranteed by one or more foreign governments or
their agencies or instrumentalities, including obligations of supranational
entities
- asset-backed securities
- repurchase agreements collateralized by the types of securities listed
above
"High-quality" debt securities are those obligations which, at the time of
purchase, (i) possess the highest short-term rating from at least two
nationally recognized statistical rating organizations (an "NRSRO") (for
example, commercial paper rated "A-1" by Standard & Poor's Corporation and
"P-1" by Moody's Investors Service, Inc.) or one NRSRO if only rated by one
NRSRO or (ii) if unrated, are determined by the portfolio manager to be of
comparable quality.
When selecting securities for the Fund's portfolio, the manager first
considers safety of principal and the quality of an investment. The manager
then focuses on generating a high-level of income. The manager generally
evaluates investments based on interest rate sensitivity selecting those
securities whose maturities fit the Fund's interest rate sensitivity target
and which the manager believes to be the best relative values.
46
<PAGE> 48
ADDITIONAL INVESTMENT STRATEGIES AND RISKS
The Fund will maintain an average weighted portfolio maturity of 90 days or
less and will limit the maturity of each security in its portfolio to 397
days or less.
PRINCIPAL INVESTMENT RISKS
Your investment in the Fund may be subject to the following principal risks:
INTEREST RATE RISK: The possibility that the value of the Fund's investments
will decline due to an increase in interest rates or that the Fund's yield
will decrease due to a decrease in interest rates.
CREDIT RISK: The possibility that an issuer cannot make timely interest and
principal payments on its debt securities such as bonds. The lower a
security's rating, the greater its credit risk.
AN INVESTMENT IN THE FUND IS NOT A DEPOSIT OR AN OBLIGATION OF AMSOUTH BANK,
ITS AFFILIATES, OR ANY BANK, AND IT IS NOT INSURED OR GUARANTEED BY THE
FEDERAL DEPOSIT INSURANCE CORPORATION OR ANY OTHER GOVERNMENT AGENCY.
ALTHOUGH THE FUND SEEKS TO PRESERVE THE VALUE OF YOUR INVESTMENT AT $1 PER
SHARE, IT IS POSSIBLE TO LOSE MONEY BY INVESTING IN THE FUND.
APPLICABLE TO ALL AMSOUTH STRATEGIC PORTFOLIOS -- The Adviser will make
allocation decisions according to its outlook for the economy, financial
markets and relative market valuation of the Funds. Each Strategic Portfolio
has a "benchmark percentage" representing the asset class mix of the
Underlying Funds the Adviser expects to maintain when its assessment of
economic conditions and other factors indicate that the financial markets are
fairly valued relative to each other. The Adviser anticipates that each
AmSouth Strategic Portfolio's asset class benchmark percentage will be as
follows:
BENCHMARK PERCENTAGES
<TABLE>
<CAPTION>
MODERATE
AGGRESSIVE GROWTH AND GROWTH AND CURRENT
UNDERLYING FUND GROWTH GROWTH INCOME INCOME INCOME
ASSET CLASS PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO
--------------- ---------- --------- ---------- ---------- ---------
<S> <C> <C> <C> <C> <C>
Equity 95% 80% 60% 30% 0%
Fixed-Income 0% 15% 35% 65% 95%
Money Market Instruments 5% 5% 5% 5% 5%
</TABLE>
Under normal market conditions, the Adviser expects to adhere to the
benchmark percentages set forth above and the strategy ranges set forth
herein; however, the Adviser reserves the right to vary such percentages and
ranges as the risk/return characteristics of the financial markets or
Underlying Fund asset classes, as assessed by the Adviser, vary over time.
Each AmSouth Strategic Portfolio may invest, in anticipation of otherwise
investing cash positions, directly in U.S. Government securities and
short-term paper, such as bankers' acceptances. Under normal market
conditions, none of the Strategic Portfolios expects to have a substantial
portion of its assets invested in such securities. However, when the Adviser
determines that adverse market conditions exist, the Fund may adopt a
temporary defensive posture and invest entirely in such securities. Although
the Fund would do this to avoid losses, it could reduce the benefit of any
upswing in the market. During such periods, the Fund may not achieve its
investment objective.
Because the AmSouth Strategic Portfolios invest in the Underlying Funds,
there will be duplication of advisory fees and certain other expenses.
APPLICABLE TO ALL FUNDS
YEAR 2000 RISK. AmSouth Funds 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, AmSouth Funds could be adversely
affected if the computer systems used by its service providers do not
properly process dates on and after January 1, 2000 and distinguish between
the year 2000 and the year 1900. AmSouth Funds has made inquiry of its
service providers to determine whether they expect to have their computer
systems adjusted for the year 2000 transition, and is seeking assurances from
each service provider that it expects its system to accommodate the year 2000
transition without material adverse consequences to AmSouth Funds. While it
is likely that such assurances will be obtained, AmSouth Funds 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 custodians, banks, broker-dealers or others with
which AmSouth Funds does business.
47
<PAGE> 49
[LOGO]
FUND MANAGEMENT
INVESTMENT ADVISERS AND SUB-ADVISERS
AmSouth Bank, (AmSouth or the "Adviser"), is the adviser for the Funds.
AmSouth is the bank affiliate of AmSouth Bancorporation, one of the largest
banking institutions headquartered in the mid-south region. AmSouth
Bancorporation reported assets as of September 30, 1999 of $20 billion and
operated 276 banking offices in Alabama, Florida, Georgia and Tennessee.
AmSouth has provided investment management services through its Trust
Investment Department since 1915. As of June 30, 1999, AmSouth and its
affiliates had over $8 billion in assets under discretionary management and
provided custody services for an additional $21 billion in securities.
AmSouth is the largest provider of trust services in Alabama and its Trust
Natural Resources and Real Estate Department is a major manager of
timberland, mineral, oil and gas properties and other real estate interests.
Through its portfolio management team, AmSouth makes the day-to-day
investment decisions and continuously reviews, supervises and administers the
Funds' investment programs.
The Adviser has engaged Lazard Asset Management and Bennett Lawrence
Management, LLC to serve as sub-investment adviser to the International
Equity Fund and Mid Cap Fund, respectively. The Adviser pays each
sub-investment adviser from the advisory fee it receives from the Fund.
Lazard Asset Management, located at 30 Rockefeller Plaza, New York, New York
10112, serves as the sub-investment adviser to the International Equity Fund.
Lazard Asset Management, a division of Lazard Freres & Co. LLC, which is a
New York limited liability company, provides investment management services
to client discretionary accounts with assets totaling approximately $71
billion as of December 31, 1998.
Bennett Lawrence Management, LLC, located at 757 Third Avenue, New York, New
York 10017, serves as the sub-investment adviser to the Mid Cap Fund. Bennett
Lawrence Management provides discretionary investment management services to
client discretionary accounts with assets totaling approximately $950 million
as of December 31, 1998.
PRIMARY PORTFOLIO MANAGERS
The primary portfolio manager for each Fund, other than the Money Market
Funds, is as follows:
AMSOUTH INTERNATIONAL EQUITY FUND -- Herbert W. Gullquist and John R.
Reinsberg. Messrs. Gullquist and Reinsberg have been the International Equity
Fund's primary portfolio managers since its inception, and have been Managing
Directors of Lazard for over five years.
AMSOUTH MID CAP FUND -- S. Van Zandt Schreiber and Robert W. Deaton. Messrs.
Schreiber and Deaton have been the Mid Cap Fund's primary portfolio managers
since its inception. Mr. Schreiber has been the Chief Portfolio Manager at
Bennett Lawrence since its inception in August 1995. For more than five years
prior thereto, Mr. Schreiber was Managing Director and Senior Growth
Portfolio Manager with Deutsche Morgan Grenfell/C.J. Lawrence, Inc. Mr.
Deaton has been an Associate Portfolio Manager at Bennett Lawrence since its
inception in August 1995. From 1994 to August 1995, Mr. Deaton was a
portfolio manager and research analyst with Deutsche Morgan Grenfell/C.J.
Lawrence, Inc. Prior thereto, Mr. Deaton managed the Long-Term Growth Fund
for the Tennessee Consolidated Retirement System.
AMSOUTH CAPITAL GROWTH FUND -- Charles E. Winger, Jr. Mr. Winger has been the
Capital Growth Fund's primary portfolio manager since its inception. He has
been a Trust Officer of First American National Bank since 1988 and has been
employed by the Adviser since 1999.
AMSOUTH LARGE CAP FUND -- Ronald E. Lindquist. Mr. Lindquist, who has over 30
years' experience as a portfolio manager, has been the Large Cap Fund's
primary portfolio manager since its inception, and has been employed by First
American National Bank since May 1998 and has been employed by the Adviser
since December 1999. Prior to May 1998, he was employed since 1978 by Deposit
Guaranty National Bank and Commercial National Bank, affiliates of the
Adviser.
48
<PAGE> 50
FUND MANAGEMENT
AMSOUTH LIMITED TERM U.S. GOVERNMENT FUND -- John Mark McKenzie. Mr. McKenzie
has been a portfolio manager of the Limited Term U.S. Government Fund since
May 1998 and the Fund's primary portfolio manager since December 1998. He has
been employed by First American National Bank since May 1998 and has been
employed by the Adviser since December 1999. Prior to May 1998, he was
employed by Deposit Guaranty National Bank since 1984.
AMSOUTH TENNESSEE TAX-EXEMPT FUND -- Sharon S. Brown. She has been the
Tennessee Tax-Exempt Fund's primary portfolio manager since its inception and
has been a Trust Officer of First American National Bank since 1988 and has
been employed by the Adviser since December 1999.
AMSOUTH LIMITED TERM TENNESSEE TAX-EXEMPT FUND -- Sharon S. Brown. Ms. Brown
has been the Limited Term Tennessee Tax-Exempt Fund's primary portfolio
manager since its inception and has been a Trust Officer of First American
National Bank since 1988 and has been employed by the Adviser since December
1999.
AMSOUTH STRATEGIC PORTFOLIOS -- Investment decisions for each Strategic
Portfolio are made by a team of the Adviser's portfolio managers, and no
person is primarily responsible for making recommendations to the team.
ADMINISTRATOR AND DISTRIBUTOR
ASO Services Company ("ASC"), 3435 Stelzer Road, Columbus, Ohio 43219-3035,
serves as each Fund's administrator (the "Administrator"). The administrative
services of the Administrator include providing office space, equipment and
clerical personnel to the Funds and supervising custodial, auditing,
valuation, bookkeeping, legal and dividend disbursing services. ASC is a
wholly-owned subsidiary of BISYS Fund Services ("BISYS").
BISYS serves as the distributor of each Fund's shares (the "Distributor").
The Distributor may provide financial assistance in connection with
pre-approved seminars, conferences and advertising to the extent permitted by
applicable state or self-regulatory agencies, such as the National
Association of Securities Dealers.
49
<PAGE> 51
[LOGO]
SHAREHOLDER INFORMATION
CHOOSING A SHARE CLASS
Class A Shares, Class B Shares and Trust Shares have different expenses and
other characteristics, allowing you to choose the class that best suits your
needs. Trust Shares are only available to financial institutions, fiduciary
clients of AmSouth Bank and certain other qualified investors. Class A Shares
and Class B Shares are available to all other Shareholders. In choosing a
class, you should consider the amount you want to invest, how long you plan
to have it invested, and whether you plan to make additional investments.
Your financial representative can help you decide which share class is best
for you.
CLASS A SHARES
- Capital Appreciation and Income Funds: Front-end sales charges, as
described below.
- Money Market Funds: No sales charges
- Shareholder servicing fees of 0.25% of average daily net assets.
CLASS B SHARES
- No front-end sales charge; all your money goes to work for you right away.
- Distribution and service (12b-1) fees of .75% of average daily net assets.
- A deferred sales charge, as described below.
- Automatic conversion to Class A shares after eight years, thus reducing
future annual expenses.
- Maximum investment for all Class B purchases: $250,000.
TRUST SHARES
- No sales charge.
- Shareholder servicing fee of 0.15% of average daily net assets.
For actual past expenses of each share class, see the fund-by-fund
information earlier in this prospectus.
Because 12b-1 fees are paid on an ongoing basis, Class B shareholders could
end up paying more expenses over the long term than if they had paid a sales
charge.
50
<PAGE> 52
SHAREHOLDER INFORMATION
PRICING OF FUND SHARES
-------------------------------
HOW NAV IS CALCULATED
The NAV is calculated by adding
the total value of the Fund's
investments and other assets,
subtracting its liabilities and
then dividing that figure by
the number of outstanding
shares of the Fund:
NAV =
Total Assets - Liabilities
-------------------------------
Number of Shares
Outstanding
Generally, for other than the
Money Market Funds you can find
the Fund's NAV daily in The
Wall Street Journal and other
newspapers. NAV is calculated
separately for each class of
shares.
-------------------------------
TREASURY RESERVE MONEY MARKET FUND
Per share net asset value (NAV) for the
Treasury Reserve Money Market Fund is
determined and its shares are priced twice
a day. The NAV is determined at 1:00 p.m.
Eastern time and at the close of regular
trading on the New York Stock Exchange,
normally at 4:00 p.m. Eastern time on days
the Exchange and the Federal Reserve Bank
of Atlanta are open.
Your order for purchase, sale or exchange
of shares is priced at the next NAV
calculated after your order is received.
This is what is known as the offering
price.
The Treasury Reserve Money Market Fund
uses the amortized cost method of valuing
its investments, which does not take into
account unrealized gains or losses.
ALL OTHER FUNDS
Per share net asset value (NAV) for each
Fund is determined and its shares are
priced at the close of regular trading on
the New York Stock Exchange, normally at
4:00 p.m. Eastern time on days the
Exchange and the Federal Reserve Bank of
Atlanta are open.
Your order for purchase, sale or exchange
of shares is priced at the next NAV
calculated after your order is accepted by
the Fund less any applicable sales charge
as noted in the section on "Distribution
Arrangements/Sales Charges." This is what
is known as the offering price. For
further information regarding the methods
used in valuing the Fund's investments,
please see the SAI.
The Fund's securities are generally valued
at current market prices. If market
quotations are not available, prices will
be based on fair value as determined by
the Fund's Trustees.
51
<PAGE> 53
SHAREHOLDER INFORMATION
PURCHASING AND ADDING TO YOUR SHARES
<TABLE>
<CAPTION>
MINIMUM INITIAL MINIMUM
ACCOUNT TYPE INVESTMENT SUBSEQUENT
<S> <C> <C>
Class A or Class B
----------------------------------------------------------
Regular $1,000 $0
----------------------------------------------------------
Automatic Investment Plan $1,000 $50
</TABLE>
All purchases must be in U.S. dollars. A
fee will be charged for any checks that
do not clear. Third-party checks are not
accepted.
A Fund may waive its minimum purchase
requirement. The Distributor may reject
a purchase order if it considers it in
the best interest of the Fund and its
shareholders.
-----------------------------------------------------------------------------
AVOID 31% TAX WITHHOLDING
Each Fund is required to withhold 31% of taxable dividends, capital gains
distributions and redemptions paid to shareholders who have not provided the
Fund with their certified taxpayer identification number in compliance with
IRS rules. To avoid this, make sure you provide your correct Tax
Identification Number (Social Security Number for most investors) on your
account application.
-----------------------------------------------------------------------------
You may purchase Funds through
the Distributor or through
banks, brokers and other
investment representatives,
which may charge additional
fees and may require higher
minimum investments or impose
other limitations on buying
and selling shares. If you
purchase shares through an
investment representative,
that party is responsible for
transmitting orders by close
of business and may have an
earlier cut-off time for
purchase and sale requests.
Consult your investment
representative or institution
for specific information.
52
<PAGE> 54
SHAREHOLDER INFORMATION
PURCHASING AND ADDING TO YOUR SHARES
CONTINUED
INSTRUCTIONS FOR OPENING OR ADDING TO AN ACCOUNT
BY REGULAR MAIL
If purchasing through your financial advisor or brokerage account, simply
tell your advisor or broker that you wish to purchase shares of the Funds and
he or she will take care of the necessary documentation. For all other
purchases, follow the instructions below.
Initial Investment:
1. Carefully read and complete the application. Establishing your account
privileges now saves you the inconvenience of having to add them later.
2. Make check, bank draft or money order payable to "AmSouth Funds."
3. Mail to: AmSouth Funds
P.O. Box 182733, Columbus, OH 43218-2733
Subsequent:
1. Use the investment slip attached to your account statement.
Or, if unavailable,
2. Include the following information on a piece of paper:
- AmSouth Funds/Fund name
- Share class
- Amount invested
- Account name
- Account number
Include your account number on your check.
3. Mail to: AmSouth Funds
P.O. Box 182733, Columbus, OH 43218-2733
BY OVERNIGHT SERVICE
See instructions 1-2 above for subsequent investments.
4. Send to: AmSouth Funds
c/o BISYS Fund Services
Attn: T.A. Operations
3435 Stelzer Road, Columbus, OH 43219.
ELECTRONIC PURCHASES
Your bank must participate in the Automated Clearing House (ACH) and must be
a U. S. Bank. Your bank or broker may charge for this service.
Establish electronic purchase option on your account application or call
1-800-451-8382. Your account can generally be set up for electronic purchases
within 15 days.
Call 1-800-451-8382 to arrange a transfer from your bank account.
QUESTIONS?
Call 800-451-8382 or your
investment representative.
ELECTRONIC VS. WIRE TRANSFER
Wire transfers allow financial
institutions to send funds to
each other, almost
instantaneously. With an
electronic purchase or sale, the
transaction is made through the
Automated Clearing House (ACH)
and may take up to eight days to
clear. There is generally no fee
for ACH transactions.
53
<PAGE> 55
SHAREHOLDER INFORMATION
PURCHASING AND ADDING TO YOUR SHARES
CONTINUED
BY WIRE TRANSFER
Note: Your bank may charge a wire transfer fee.
For initial investment:
Fax the completed application, along with a request for a confirmation number
to 1-800-451-8382. Follow the instructions below after receiving your
confirmation number.
For initial and subsequent investments:
Instruct your bank to wire transfer your investment to:
AMSOUTH BANK
Routing Number: ABA #044000024
DDA#
Include:
Your name
Your confirmation number
AFTER INSTRUCTING YOUR BANK TO WIRE THE FUNDS, CALL 800-451-8382 TO ADVISE US
OF THE AMOUNT BEING TRANSFERRED AND THE NAME OF YOUR BANK
--------------------------------------
YOU CAN ADD TO YOUR ACCOUNT BY USING
THE CONVENIENT OPTIONS DESCRIBED
BELOW. THE FUND RESERVES THE RIGHT TO
CHANGE OR ELIMINATE THESE PRIVILEGES
AT ANY TIME WITH 60 DAYS NOTICE.
--------------------------------------
AUTOMATIC INVESTMENT PLAN
You can make automatic investments in
the Funds from your bank account,
through payroll deduction or from your
federal employment, Social Security or
other regular government checks.
Automatic investments can be as little
as $50, once you've invested the
$1,000 minimum required to open the
account.
To invest regularly from your bank
account:
- Complete the Automatic Investment
Plan portion on your Account
Application.
Make sure you note:
- Your bank name, address and
account number
- The amount you wish to invest
automatically (minimum $50)
- How often you want to invest
(every month, 4 times year, twice
a year or once a year)
- Attach a voided personal check.
To invest regularly from your paycheck
or government check:
Call 1-800-451-8382 for an enrollment
form or consult the SAI for additional
information.
-----------------------------------------------------------------------------
DIVIDENDS AND DISTRIBUTIONS
All dividends and distributions will be automatically reinvested unless you
request otherwise. There are no sales charges for reinvested distributions.
Dividends are higher for Class A shares than for Class B shares, because
Class A shares have lower distribution expenses. Depending on the Fund,
income dividends are usually paid monthly or quarterly. Capital gains are
distributed at least annually.
Distributions are made on a per share basis regardless of how long you've
owned your shares. Therefore, if you invest shortly before the distribution
date, some of your investment will be returned to you in the form of a
distribution.
-----------------------------------------------------------------------------
DIRECTED DIVIDEND OPTION
By selecting the appropriate box
in the Account Application, you
can elect to receive your
distributions in cash (check) or
have distributions (capital gains
and dividends) reinvested in
another AmSouth Mutual Fund
without a sales charge. You must
maintain the minimum balance in
each Fund into which you plan to
reinvest dividends or the
reinvestment will be suspended
and your dividends paid to you.
The Fund may modify or terminate
this reinvestment option without
notice. You can change or
terminate your participation in
the reinvestment option at any
time.
54
<PAGE> 56
SHAREHOLDER INFORMATION
SELLING YOUR SHARES
You may sell your shares at
any time. Your sales price
will be the next NAV after
your sell order is received by
the Fund, its transfer agent,
or your investment
representative. Normally you
will receive your proceeds
within a week after your
request is received. See
section on "General Policies
on Selling Shares" below.
BY TELEPHONE (UNLESS YOU HAVE DECLINED TELEPHONE SALES PRIVILEGES)
1. Call 1-800-451-8382 with instructions as to how you wish to receive your
funds (mail, wire, electronic transfer). (See "General Policies on
Selling Shares -- Verifying Telephone Redemptions" below)
BY MAIL
1. Call 1-800-451-8382 to request redemption forms or write a letter of
instruction indicating:
- your Fund and account number
- amount you wish to redeem
- address where your check should be sent
- account owner signature
2. Mail to: AmSouth Funds P.O. Box 182733 Columbus, OH 43218-2733
BY OVERNIGHT SERVICE (SEE "GENERAL POLICIES ON SELLING SHARES - REDEMPTIONS
IN WRITING REQUIRED" BELOW)
1. See instruction 1 above.
2. Send to AmSouth Funds c/o BISYS Fund Services Attn: T.A. Operations 3435
Stelzer Road Columbus, OH 43219
WITHDRAWING MONEY FROM YOUR FUND INVESTMENT
As a mutual fund shareholder, you are
technically selling shares when you request a
withdrawal in cash. This is also known as
redeeming shares or a redemption of shares.
CONTINGENT DEFERRED SALES CHARGE
When you sell Class B shares, you will be
charged a fee for any shares that have not
been held for a sufficient length of time.
These fees will be deducted from the money
paid to you. See the section on "Distribution
Arrangements/Sales Charges" below for
details.
INSTRUCTIONS FOR SELLING SHARES
If selling your shares through your financial
adviser or broker, ask him or her for
redemption procedures. Your adviser and/or
broker may have transaction minimums and/or
transaction times which will affect your
redemption. For all other sales transactions,
follow the instructions below.
55
<PAGE> 57
SHAREHOLDER INFORMATION
SELLING YOUR SHARES
CONTINUED
WIRE TRANSFER
You must indicate this option on your application.
The Fund will charge a $7 wire transfer fee for each wire transfer request.
Note: Your financial institution may also charge a separate fee.
Call 1-800-451-8382 to request a wire transfer.
If you call by 4 p.m. Eastern time, your payment will normally be wired to
your bank on the next business day.
ELECTRONIC REDEMPTIONS
Your bank must participate in the Automated Clearing House (ACH) and must be
a U.S. bank.
Your bank may charge for this service.
Call 1-800-451-8382 to request an electronic redemption.
If you call by 4 p.m. Eastern time, the NAV of your shares will normally be
determined on the same day and the proceeds credited within 7 days.
SYSTEMATIC WITHDRAWAL PLAN
You can receive automatic payments from you account on a monthly, quarterly,
semi-annual or annual basis. The minimum withdrawal is $25. To activate this
feature:
- Make sure you've checked the appropriate box on the account application. Or
call 1-800-451-8382.
- Include a voided personal check.
- Your account must have a value of $5,000 or more to start withdrawals.
- If the value of your account falls below $500, you may be asked to add
sufficient funds to bring the account back to $500, or the Fund may close
your account and mail the proceeds to you.
56
<PAGE> 58
SHAREHOLDER INFORMATION
SELLING YOUR SHARES
CONTINUED
GENERAL POLICIES ON SELLING SHARES
REDEMPTIONS IN WRITING REQUIRED
You must request redemption in writing and obtain a signature guarantee if:
- The check is not being mailed to the address on your account; or
- The check is not being made payable to the owner of the account.
A signature guarantee can be obtained from a financial institution, such as a
bank, broker-dealer, or credit union, or from members of the STAMP
(Securities Transfer Agents Medallion Program), MSP (New York Stock Exchange
Medallion Signature Program) or SEMP (Stock Exchanges Medallion Program).
Members are subject to dollar limitations which must be considered when
requesting their guarantee. The Transfer Agent may reject any signature
guarantee if it believes the transaction would otherwise be improper.
VERIFYING TELEPHONE REDEMPTIONS
The Fund makes every effort to insure that telephone redemptions are only
made by authorized shareholders. All telephone calls are recorded for your
protection and you will be asked for information to verify your identity.
Given these precautions, unless you have specifically indicated on your
application that you do not want the telephone redemption feature, you may be
responsible for any fraudulent telephone orders. If appropriate precautions
have not been taken, the Transfer Agent may be liable for losses due to
unauthorized transactions.
REDEMPTIONS WITHIN 15 DAYS OF INITIAL INVESTMENT
When you have made your initial investment by check, the proceeds of your
redemption may be held up to 15 business days until the Transfer Agent is
satisfied that the check has cleared. You can avoid this delay by purchasing
shares with a certified check.
REFUSAL OF REDEMPTION REQUEST
Payment for shares may be delayed under extraordinary circumstances or as
permitted by the Securities and Exchange Commission in order to protect
remaining shareholders.
REDEMPTION IN KIND
Each Fund reserves the right to make payment in securities rather than cash,
known as "redemption in kind." This could occur under extraordinary
circumstances, such as a very large redemption that could affect Fund
operations (for example, more than 1% of the Fund's net assets). If the Fund
deems it advisable for the benefit of all shareholders, redemption in kind
will consist of securities equal in market value to your shares. When you
convert these securities to cash, you will pay brokerage charges.
CLOSING OF SMALL ACCOUNTS
If your account falls below $50, the Fund may ask you to increase your
balance. If it is still below $50 after 60 days, the Fund may close your
account and send you the proceeds at the current NAV.
UNDELIVERABLE REDEMPTION CHECKS
For any shareholder who chooses to receive distributions in cash:
If distribution checks (1) are returned and marked as "undeliverable" or (2)
remain uncashed for six months, your account will be changed automatically so
that all future distributions are reinvested in your account. Checks that
remain uncashed for six months will be canceled and the money reinvested in
the appropriate Fund.
57
<PAGE> 59
SHAREHOLDER INFORMATION
DISTRIBUTION ARRANGEMENTS/SALES CHARGES
CALCULATION OF SALES CHARGES
CLASS A SHARES
Shareholders who beneficially acquired Class A shares of a Fund in connection
with the reorganization of a corresponding DG Investor Series fund in
December 1998 may be eligible for lower sales charges; consult your
investment representative or see the Statement of Additional Information.
Class A shares are sold at their public offering price. This price equals NAV
plus the initial sales charge, if applicable. Therefore, part of the money
you invest will be used to pay the sales charge. The remainder is invested in
Fund shares. The sales charge decreases with larger purchases. There is no
sales charge on reinvested dividends and distributions.
The current sales charge rates are as follows:
FOR THE AMSOUTH INTERNATIONAL EQUITY, MID CAP, CAPITAL GROWTH AND LARGE CAP
FUNDS, AGGRESSIVE GROWTH PORTFOLIO, GROWTH PORTFOLIO, GROWTH AND INCOME
PORTFOLIO AND MODERATE GROWTH AND INCOME PORTFOLIO
<TABLE>
<CAPTION>
SALES CHARGE SALES CHARGE
YOUR AS A % OF AS A % OF
INVESTMENT OFFERING PRICE YOUR INVESTMENT
<S> <C> <C>
Up to $49,999 4.50% 4.71%
------------------------------------------------------------------------
$50,000 up to $99,999 4.00% 4.17%
------------------------------------------------------------------------
$100,000 up to $249,999 3.00% 3.09%
------------------------------------------------------------------------
$250,000 up to $499,999 2.00% 2.04%
------------------------------------------------------------------------
$500,000 up to $999,999 1.00% 1.01%
------------------------------------------------------------------------
$1,000,000 and above(1) 0.00% 0.00%
</TABLE>
FOR THE AMSOUTH LIMITED TERM U.S. GOVERNMENT, AMSOUTH TENNESSEE TAX-EXEMPT
AND AMSOUTH LIMITED TERM TENNESSEE TAX-EXEMPT FUNDS AND CURRENT INCOME
PORTFOLIO
<TABLE>
<CAPTION>
SALES CHARGE SALES CHARGE
YOUR AS A % OF AS A % OF
INVESTMENT OFFERING PRICE YOUR INVESTMENT
<S> <C> <C>
Up to $99,999 4.00% 4.17%
------------------------------------------------------------------------
$100,000 up to $249,999 3.00% 3.09%
------------------------------------------------------------------------
$250,000 up to $499,999 2.00% 2.04%
------------------------------------------------------------------------
$500,000 up to $999,999 1.00% 1.01%
------------------------------------------------------------------------
$1,000,000 and above(1) 0.00% 0.00%
</TABLE>
(1) There is no initial sales charge on purchases of $1 million or more.
However, a contingent deferred sales charge (CDSC) of up to 1.00% of the
purchase price will be charged to the shareholder if shares are redeemed in
the first year after purchase. This charge will be based on the lower of your
cost for the shares or their NAV at the time of redemption. There will be no
CDSC on reinvested distributions. The Distributor will provide additional
compensation in an amount up to 1.00% of the offering price of Class A Shares
of the Funds for sales of $1 million to $3 million. For sales over $3
million, the amount of additional compensation will be negotiated.
58
<PAGE> 60
SHAREHOLDER INFORMATION
DISTRIBUTION ARRANGEMENTS/SALES CHARGES
CONTINUED
<TABLE>
<CAPTION>
YEARS CDSC AS A % OF
SINCE DOLLAR AMOUNT
PURCHASE SUBJECT TO CHARGE*
<S> <C>
0-1 5.00%
1-2 4.00%
2-3 3.00%
3-4 3.00%
4-5 2.00%
5-6 1.00%
more than 6 None
</TABLE>
* For B Shares acquired in the
combination of AmSouth Funds with ISG
Funds, waivers are in place on the
CDSC, charged if such Class B shares
are sold within six years of purchase,
which will decline as follows: 4%, 3%,
3%, 2%, 2%, 1% to 0% in the seventh
year. These shares will automatically
convert to Class A shares of the same
Fund after seven years from the end of
the month of purchase.
If you sell some but not all of your Class shares, certain shares not subject
to the CDSC (i.e., shares purchased with reinvested dividends) will be
redeemed first, followed by shares subject to the lowest CDSC (typically
shares held for the longest time).
CONVERSION FEATURE -- CLASS B SHARES
- Class B shares automatically convert to Class A shares of the same Fund
after eight years from the end of the month of purchase.
- After conversion, your shares will be subject to the lower distribution
and shareholder servicing fees charged on Class A shares which will
increase your investment return compared to the Class B shares.
- You will not pay any sales charge or fees when your shares convert, nor
will the transaction be subject to any tax.
- If you purchased Class B shares of one Fund which you exchanged for Class
B shares of another Fund, your holding period will be calculated from the
time of your original purchase of Class B shares.
- The dollar value of Class A shares you receive will equal the dollar value
of the Class B shares converted.
FOR THE MONEY MARKET FUNDS
No sales charge.
CLASS B SHARES
Class B shares are offered at NAV,
without any up-front sales charge.
Therefore, all the money you
invest is used to purchase Fund
shares. However, if you sell your
Class B shares of the Fund before
the sixth anniversary, you will
have to pay a contingent deferred
sales charge at the time of
redemption. The CDSC will be based
upon the lower of the NAV at the
time of purchase or the NAV at the
time of redemption according to
the schedule below. There is no
CDSC on reinvested dividends or
distributions.
59
<PAGE> 61
SHAREHOLDER INFORMATION
DISTRIBUTION ARRANGEMENTS/SALES CHARGES
CONTINUED
SALES CHARGE REDUCTIONS
Reduced sales charges for Class A shares are available to shareholders with
investments of $50,000 or more. In addition, you may qualify for reduced
sales charges under the following circumstances.
- LETTER OF INTENT. You inform the Fund in writing that you intend to
purchase enough shares over a 13-month period to qualify for a reduced
sales charge. You must include a minimum of 5% of the total amount you
intend to purchase with your letter of intent.
- RIGHTS OF ACCUMULATION. When the value of shares you already own plus the
amount you intend to invest reaches the amount needed to qualify for
reduced sales charges, your added investment will qualify for the reduced
sales charge.
- COMBINATION PRIVILEGE. Combine accounts of multiple Funds (excluding the
Money Market Fund) or accounts of immediate family household members
(spouse and children under 21) to achieve reduced sales charges.
SALES CHARGE WAIVERS
CLASS A SHARES
The following qualify for waivers of sales charges:
- Shares purchased by investment representatives through fee-based
investment products or accounts.
- Shares purchased with proceeds from redemptions from another mutual fund
complex within 30 days after redemption, if you paid a front end sales
charge for those shares.
- Shares purchased upon the reinvestment of dividend and capital gain
distributions.
- Shares purchased by investors through a payroll deduction plan.
- Shares purchased by officers, directors, trustees, employees, retired
employees, and their immediate family members of AmSouth Bancorporation,
its affiliates and BISYS Fund Services and its affiliates and the
sub-advisers of the Funds and their affiliates.
- Shares purchased by employees and their immediate family members of
dealers who have an agreement with the Distributor.
- Shares obtained through exchange of Trust Class Shares.
The Distribution may also waive the sales charge at anytime in its own
discretion. Consult the SAI for more details concerning sales charges
waivers.
REINSTATEMENT PRIVILEGE
If you have sold Class A shares and decide to reinvest in the Fund
within a 90 day period, you will not be charged the applicable sales
charge on amounts up to the value of the shares you sold. You must
provide a written request for reinstatement and payment within 90 days
of the date your instructions to sell were processed.
60
<PAGE> 62
SHAREHOLDER INFORMATION
DISTRIBUTION ARRANGEMENTS/SALES CHARGES
CONTINUED
CLASS B SHARES
The CDSC will be waived under certain circumstances, including the following:
- Redemptions from accounts following the death or disability of the
shareholder.
- Returns of excess contributions to retirement plans.
- Distributions of less than 10% of the annual account value under a
Systematic Withdrawal Plan.
- Shares issued in a plan of reorganization sponsored by the Adviser, or
shares redeemed involuntarily in a similar situation.
DISTRIBUTION (12b-1) AND SERVICE FEES
12b-1 fees compensate the Distributor and other dealers and investment
representatives for services and expenses relating to the sale and
distribution of the Fund's shares and/or for providing shareholder services.
12b-1 fees are paid from Fund assets on an ongoing basis, and will increase
the cost of your investment.
- The 12b-1 and shareholder servicing fees vary by share class as follows:
- Trust shares pay a shareholder servicing fee of up to .15% of the
average daily net assets of a Fund.
- Class A shares pay a shareholder servicing fee of up to .25% of the
average daily net assets of a Fund.
- Class B shares pay a 12b-1 fee of up to .75% of the average daily net
assets of the applicable Fund. This will cause expenses for Class B
shares to be higher and dividends to be lower than for Class A shares.
- Class B Shares additionally pay a shareholder services fee of .25% of
the average daily net assets of the applicable fund.
- The higher 12b-1 fee on Class B shares, together with the CDSC, help the
Distributor sell Class B shares without an "up-front" sales charge. In
particular, these fees help to defray the Distributor's costs of advancing
brokerage commissions to investment representatives.
Over time shareholders will pay more than the equivalent of the maximum
permitted front-end sales charge because
12b-1 distribution and service fees are paid out of the Fund's assets on an
on-going basis.
61
<PAGE> 63
SHAREHOLDER INFORMATION
EXCHANGING YOUR SHARES
You can exchange your shares in
one Fund for shares of the same
class of another AmSouth Fund,
usually without paying additional
sales charges (see "Notes"
below). You must meet the minimum
investment requirements for the
Fund into which you are
exchanging. Exchanges from one
Fund to another are taxable.
Class A Shares may also be
exchanged for Institutional
Shares of the same Fund if you
become eligible to purchase
Institutional Shares. No
transaction fees are currently
charged for exchanges.
AUTOMATIC EXCHANGES
You can use the Funds' Automatic
Exchange feature to purchase
shares of the Funds at regular
intervals through regular,
automatic redemptions from the
AmSouth Prime Obligations Fund.
To participate in the Automatic
Exchange:
- Complete the appropriate
section of the Account
Application.
- Keep a minimum of $10,000 in
the AmSouth Prime Money
Market Fund and $1,000 in the
Fund whose shares you are
buying.
To change the Automatic Exchange
instructions or to discontinue
the feature, you must send a
written request to AmSouth Funds,
P.O. Box 182733, Columbus, Ohio
43218-2733.
INSTRUCTIONS FOR EXCHANGING SHARES
Exchanges may be made by sending a written
request to AmSouth Funds, P.O. Box 182733,
Columbus OH 43218-2733, or by calling
1-800-451-8382. Please provide the
following information:
- Your name and telephone number
- The exact name on your account and
account number
- Taxpayer identification number (usually
your Social Security number)
- Dollar value or number of shares to be
exchanged
- The name of the Fund from which the
exchange is to be made.
- The name of the Fund into which the
exchange is being made.
See "Selling your Shares" for important
information about telephone transactions.
To prevent disruption in the management of
the Funds, due to market timing strategies,
exchange activity may be limited to four
exchanges from a Fund during a calendar
year.
NOTES ON EXCHANGES
- When exchanging Trust Shares of a Fund
for Class A Shares of a Fund, you will
be exempt from any applicable sales
charge.
- For Class A Shares, when exchanging
from a Fund that has no sales charge or
a lower sales charge to a Fund with a
higher sales charge, you will pay the
difference.
- The registration and tax identification
numbers of the two accounts must be
identical.
- The Exchange Privilege (including
automatic exchanges) may be changed or
eliminated at any time upon a 60-day
notice to shareholders.
- Be sure to read carefully the
Prospectus of any Fund into which you
wish to exchange shares.
62
<PAGE> 64
SHAREHOLDER INFORMATION
DIVIDENDS, DISTRIBUTIONS AND TAXES
Please consult your tax adviser regarding your specific questions about
federal, state and local income taxes. Below we have summarized some
important tax issues that affect the Funds and their shareholders. This
summary is based on current tax laws, which may change.
Each Fund distributes any net investment income as noted below and any net
realized capital gains at least once a year. All distributions will be
automatically reinvested in additional Fund Shares unless you request to
receive all distributions in cash.
MONTHLY
- AmSouth Limited Term U.S. Government Fund
- AmSouth Tennessee Tax-Exempt Fund
- AmSouth Limited Term Tennessee Tax-Exempt Fund
- AmSouth Treasury Reserve Money Market Fund
- AmSouth Strategic Portfolios: Current Income Portfolio
QUARTERLY
- AmSouth Large Cap Fund
- AmSouth Capital Growth Fund
- AmSouth Mid Cap Fund
- AmSouth Strategic Portfolios: Aggressive Growth Portfolio
- AmSouth Strategic Portfolios: Growth Portfolio
- AmSouth Strategic Portfolios: Growth and Income Portfolio
- AmSouth Strategic Portfolios: Moderate Growth and Income Portfolio
ANNUALLY
- AmSouth International Equity
The Tennessee Tax-Exempt Fund and Limited Term Tennessee Tax-Exempt Fund
anticipate that, under normal conditions, substantially all of their income
dividends will be exempt from Federal and Tennessee personal income taxes.
However, any dividends from taxable investment are taxable as ordinary
income.
Generally, for federal income tax purposes, Fund distributions are taxable as
ordinary income, except that distributions of long-term capital gains will be
taxed as such regardless of how long you have held your shares. Distributions
are taxable whether you received them in cash or in additional shares.
Distributions are also taxable to you even if they are paid from income or
gains earned by the Fund before your investment (and thus were included in
the price you paid).
A Fund's investments in foreign securities may be subject to foreign
withholding taxes. In that case, a Fund's yield on those securities would be
decreased. Shareholders generally will not be entitled to claim a credit or
deduction with respect to foreign taxes. In addition, a Fund's investments in
foreign securities or foreign currencies may increase or accelerate a Fund's
recognition of ordinary income and may affect the timing or amount of a
Fund's distributions.
Any gain resulting from the sale or exchange of your Fund Shares (even if the
income from which is Tax-Exempt) will generally be subject to tax. You should
consult your tax adviser for more information on your own tax situation,
including possible state and local taxes.
AmSouth Funds will send you a statement each year showing the tax status of
all your distributions.
- For each Fund, other than the AmSouth Tennessee Tax-Exempt Fund and the
AmSouth Limited Term Tennessee Tax-Exempt Fund, the dividends and
short-term capital gains that you receive are considered ordinary income
for tax purposes. For the AmSouth Tennessee Tax-Exempt Fund and the AmSouth
Limited Term Tennessee Tax-Exempt Fund, any short-term capital gains that
you receive are taxable to you as ordinary dividend income for Federal
income tax purposes.
- Any distributions of net long-term capital gains by a Fund are taxable to
you as long-term capital gains for tax purposes, no matter how long you've
owned shares in the Fund.
63
<PAGE> 65
SHAREHOLDER INFORMATION
DIVIDENDS, DISTRIBUTIONS AND TAXES
CONTINUED
- Generally, the Funds' advisers do not consider taxes when deciding to buy
or sell securities. Capital gains are realized from time to time as
by-products of ordinary investment activities. Distributions may vary
considerably from year to year.
- If you sell or exchange shares, any gain or loss you have is a taxable
event. This means that you may have a capital gain to report as income, or
a capital loss to report as a deduction, when you complete your federal
income tax return.
- Distributions of dividends or capital gains, and capital gains or losses
from your sale or exchange of Fund shares, may be subject to state and
local income taxes as well.
The tax information in this prospectus is provided as general information and
will not apply to you if you are investing through a tax-deferred account
such as an IRA or a qualified employee benefit plan. (Non-U.S. investors may
be subject to U.S. withholding and estate tax.)
MORE INFORMATION ABOUT TAXES IS IN OUR STATEMENT OF ADDITIONAL INFORMATION.
64
<PAGE> 66
AMSOUTH FUNDS
3435 STELZER ROAD
COLUMBUS, OH 43219
For more information about the Funds, the following documents are available free
upon request:
ANNUAL/SEMI-ANNUAL REPORTS (REPORTS):
The Funds' annual and semi-annual reports to shareholders contain additional
information on the Funds' investments. In the annual report, you will find a
discussion of the market conditions and investment strategies that significantly
affected the Funds' performance during the last fiscal year.
STATEMENT OF ADDITIONAL INFORMATION (SAI):
The SAI provides more detailed information about the Funds, including their
operational and investment policies. It is incorporated by reference and is
legally considered a part of this prospectus.
You can get free copies of Reports and the SAI, prospectuses of other members of
the AmSouth Funds family, or request other information and discuss your
questions about the Funds by contacting a broker or bank that sells the Funds.
Or contact the Funds at:
AMSOUTH FUNDS
3435 STELZER ROAD
COLUMBUS, OHIO 43219
TELEPHONE: 1-800-451-8382
INTERNET: HTTP://WWW.AMSOUTHFUNDS.COM
You can review the Funds' reports and SAIs at the Public Reference Room of the
Securities and Exchange Commission. You can get text-only copies:
- - For a fee, by writing the Public Reference Section of the Commission,
Washington, D.C. 20549-6009 or by calling 1-800-SEC-0330.
- - Free from the Commission's Website at http://www.sec.gov.
Investment Company Act file no. 811-5551. ASOP12/99ABT
<PAGE> 67
AMSOUTH FUNDS
Statement of Additional Information
December 14, 1999
--------------------------
This Statement of Additional Information is not a prospectus, but should be read
in conjunction with the Prospectus of the AmSouth International Equity Fund, the
AmSouth Mid Cap Fund, the AmSouth Capital Growth Fund, the AmSouth Large Cap
Fund, the AmSouth Limited Term U.S. Government Fund, the AmSouth Tennessee
Tax-Exempt Fund, the AmSouth Limited Term Tennessee Tax-Exempt Fund, the AmSouth
Treasury Reserve Money Market Fund, the AmSouth Strategic Portfolios: Aggressive
Growth Portfolio, the AmSouth Strategic Portfolios: Growth Portfolio, the
AmSouth Strategic Portfolios: Growth and Income Portfolio, the AmSouth Strategic
Portfolios: Moderate Growth and Income Portfolio, and the AmSouth Strategic
Portfolios: Current Income Portfolio (each a "Fund" and collectively the
"Funds"), dated December 14, 1999. This Statement of Additional Information is
incorporated by reference in its entirety into that Prospectus. A copy of the
Prospectus may be obtained by writing to AmSouth Funds at P.O. Box 182733,
Columbus, Ohio 43218-2733, or by telephoning toll free (800) 451-8382.
<PAGE> 68
TABLE OF CONTENTS
PAGE
Description of the Trust and the Funds.............................. B-2
Management of the Trust............................................. B-38
Management Arrangements............................................. B-40
Purchase and Redemption of Shares................................... B-48
Determination of Net Asset Value.................................... B-53
Shareholder Services and Privileges................................. B-54
Performance Information............................................. B-55
Dividends, Distribution and Taxes................................... B-59
Portfolio Transactions.............................................. B-66
Information About the Trust and the Funds........................... B-69
Counsel and Independent Auditors.................................... B-48
Financial Statements................................................ B-N/A
Appendix ........................................................... B-72
<PAGE> 69
STATEMENT OF ADDITIONAL INFORMATION
AMSOUTH FUNDS
AmSouth Funds (the "Trust") is an open-end management investment
company. The Trust consists of thirty-one series of units of beneficial interest
("Shares"), each representing interests in one of thirty-one separate investment
portfolios. This Statement of additional information provides information with
respect to thirteen such investment portfolios (each a "Fund"): the AmSouth
International Equity Fund (the "International Equity Fund"), the AmSouth Mid Cap
Fund (the "Mid Cap Fund"), the AmSouth Capital Growth Fund (the "Growth
Opportunities Fund"), the AmSouth Large Cap Fund (the "Large Cap Fund," and
these four Funds being collectively referred to as the "Capital Appreciation
Funds"), the AmSouth Limited Term U.S. Government Fund (the "Limited Term U.S.
Government Fund"), the AmSouth Tennessee Tax-Exempt Fund (the "Tennessee
Tax-Exempt Fund"), the AmSouth Limited Term Tennessee Tax-Exempt Fund (the
"Limited Term Tennessee Tax-Exempt Fund," and these three Funds being
collectively referred to as the "Income Funds"), the AmSouth Treasury Reserve
Money Market Fund (the "Treasury Reserve Money Market Fund", and this Fund also
being referred to as the "Money Market Fund"), the AmSouth Strategic Portfolios:
Aggressive Growth Portfolio (the "Aggressive Growth Portfolio"), the AmSouth
Strategic Portfolios: Growth Portfolio (the "Growth Portfolio"), the AmSouth
Strategic Portfolios: Growth and Income Portfolio (the "Growth and Income
Portfolio"), the AmSouth Strategic Portfolios: Moderate Growth and Income
Portfolio (the "Moderate Growth and Income Portfolio"), and the AmSouth
Strategic Portfolios: Current Income Portfolio (the "Current Income Portfolio,"
and these five Funds being collectively referred to as the "Strategic
Portfolios"). The Limited Term U.S. Government Fund is also referred to herein
as the "Taxable Fund," and the Tennessee Tax-Exempt Fund and the Limited Term
Tennessee Tax-Exempt Fund are also collectively referred to herein as the
"Tax-Free Funds." The Funds, except for the Treasury Reserve Money Market Fund,
offer three classes of Shares: Trust Shares, Class A Shares, and Class B Shares.
The Treasury Reserve Money Market Fund offers two classes of Shares: Trust
Shares and Class A Shares. Much of the information contained in this Statement
of Additional Information expands on subjects discussed in the Prospectus.
Capitalized terms not defined herein are defined in the Funds' Prospectus. No
investment in Shares of a Fund should be made without first reading that Fund's
Prospectus.
<PAGE> 70
DESCRIPTION OF THE TRUST AND THE FUNDS
GENERAL
The Trust is an open-end management investment company, known as a
mutual fund. Each of the Mid Cap, Large Cap, Limited Term U.S. Government,
Treasury Reserve Money Market Funds and the Aggressive Growth, Growth, Growth
and Income, Moderate Growth and Income and Current Income Portfolios is a
diversified investment company, which means that, with respect to 75% of its
total assets, the Fund will not invest more than 5% of its assets in the
securities of any single issuer. Each of the International Equity, Capital
Growth, Tennessee Tax-Exempt and Limited Term Tennessee Tax Exempt Funds is a
non-diversified investment company, which means that the proportion of the
Fund's assets that may be invested in the securities of a single issuer is not
limited by the Investment Company Act of 1940, as amended (the "1940 Act").
AmSouth Bank (the "Adviser") serves as each Fund's investment adviser.
ASO Services Company (the "Administrator") serves as each Fund's
administrator.
BISYS Fund Services Limited Partnership (the "Distributor"), an
affiliate of the Administrator, serves as each Fund's distributor.
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<PAGE> 71
STRATEGIC PORTFOLIOS
Each of the Aggressive Growth Portfolio, Growth Portfolio, Growth and
Income Portfolio, Moderate Growth and Income Portfolio and Current Income
Portfolio (collectively, the "Strategic Portfolios") seeks to achieve its
investment objective by allocating its assets among other mutual funds
("Underlying Funds") advised by the Adviser, within predetermined strategy
ranges, as set forth below. The Adviser will make allocation decisions according
to its outlook for the economy, financial markets and relative market valuation
of the Underlying Funds.
Each Strategic Portfolio will invest its assets in the Underlying Funds
within the strategy ranges (expressed as a percentage of the Strategic
Portfolio's assets) indicated below:
<TABLE>
<CAPTION>
Strategy Ranges
---------------
Moderate
Aggressive Growth and Growth and Current
Growth Growth Income Income Income
Underlying Fund Portfolio Portfolio Portfolio Portfolio Portfolio
- --------------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Large Cap Fund 0-70% 0-65% 0-60% 0-50% 0%
Capital Growth Fund 0-45% 0-25% 0-25% 0-15% 0%
Equity Income Fund 0% 0-25% 0-25% 0-15% 0%
Mid Cap Fund 0-30% 0-25% 0-20% 0% 0%
Small Cap Fund 0-30% 0-25% 0-20% 0% 0%
International Equity Fund 0-20% 0-15% 0-15% 0% 0%
Bond Fund 0% 0% 0% 0% 35-55%
Limited Term Bond Fund 0% 0% 0-20% 0-45% 40-60%
Prime Money Market Fund 0-30% 0-20% 0-20% 0-20% 0-30%
Government Income Fund 0% 0-25% 0-60% 0-70% 0%
</TABLE>
The Strategic Portfolios' selection of the Underlying Funds in which to
invest, as well as the percentage of a Strategic Portfolio's assets which can be
invested in each Underlying Fund, are not fundamental investment policies and
can be changed without the approval of shareholders.
Changes in the net asset value of the Underlying Funds may affect cash
income, if any, derived from these investments and will affect a Strategic
Portfolio's net asset value. Because each Strategic Portfolio invests primarily
in other mutual funds, which fluctuate in value, the Strategic Portfolio's
shares will correspondingly fluctuate in value. Although the Strategic
Portfolios normally seek to remain substantially fully invested in the
Underlying Funds, each Strategic Portfolio may invest temporarily in certain
short-term obligations. Such obligations may be used to invest uncommitted cash
balances or to maintain liquidity to meet shareholder
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<PAGE> 72
redemptions. Each Strategic Portfolio also may borrow money for temporary or
emergency purposes.
The 1940 Act permits the Strategic Portfolios to invest without
limitation in other investment companies that are part of the same "group of
investment companies" (as defined in the 1940 Act), such as the Strategic
Portfolios and the Underlying Funds, provided that the Strategic Portfolios
observe certain limitations on the amount of sales loads and
distribution-related fees that are borne by shareholders and do not invest in
other funds of funds.
OTHER PORTFOLIO SECURITIES
U.S. TREASURY SECURITIES. (Capital Appreciation, Income and Money
Market Funds) Each Fund may invest in U.S. Treasury securities which include
Treasury Bills, Treasury Notes and Treasury Bonds that differ in their interest
rates, maturities and times of issuance. Treasury Bills have initial maturities
of one year or less; Treasury Notes have initial maturities of one to ten years;
and Treasury Bonds generally have initial maturities of greater than ten years.
U.S. GOVERNMENT SECURITIES. (Capital Appreciation, Income and Money
Market Funds) In addition to U.S. Treasury securities, each Fund may invest in
securities issued or guaranteed by the U.S. Government or its agencies or
instrumentalities. Some obligations issued or guaranteed by U.S. Government
agencies and instrumentalities, for example, Government National Mortgage
Association pass-through certificates, are supported by the full faith and
credit of the U.S. Treasury; others, such as those of the Federal Home Loan
Banks, by the right of the issuer to borrow from the Treasury; others, such as
those issued by the Federal National Mortgage Association, by discretionary
authority of the U.S. Government to purchase certain obligations of the agency
or instrumentality; and others, such as those issued by the Student Loan
Marketing Association, only by the credit of the agency or instrumentality.
These securities bear fixed, floating or variable rates of interest. Principal
and interest may fluctuate based on generally recognized reference rates or the
relationship of rates. While the U.S. Government provides financial support to
such U.S. Government-sponsored agencies or instrumentalities, no assurance can
be given that it will always do so, since it is not so obligated by law. Each
Fund will invest in such securities only when it is satisfied that the credit
risk with respect to the issuer is minimal. The U.S. Treasury Money Market Fund
will not invest in securities issued or guaranteed by U.S. Government agencies,
instrumentalities or government-sponsored enterprises that are not backed by the
full faith and credit of the United States.
BANK OBLIGATIONS. (Capital Appreciation and Tax-Free Funds) Each of
these Funds may invest in bank obligations (other than those issued by the
Adviser or its affiliates), including certificates of deposit ("CDs"), time
deposits ("TDs"), bankers' acceptances and other short-term obligations of
domestic banks, foreign subsidiaries or foreign branches of domestic banks, and
domestic branches of foreign banks, domestic savings and loan
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<PAGE> 73
associations and other banking institutions. Domestic commercial banks organized
under Federal law are supervised and examined by the Comptroller of the Currency
and are required to be members of the Federal Reserve System and to have their
deposits insured by the Federal Deposit Insurance Corporation (the "FDIC").
Domestic banks organized under state law are supervised and examined by state
banking authorities but are members of the Federal Reserve System only if they
elect to join. In addition, state banks whose CDs may be purchased by the Fund
are insured by the Bank Insurance Fund administered by the FDIC (although such
insurance may not be of material benefit to the Fund, depending upon the
principal amount of the CDs of each bank held by the Fund) and are subject to
Federal examination and to a substantial body of Federal law and regulation. As
a result of Federal and state laws and regulations, domestic branches of
domestic banks, among other things, are generally required to maintain specified
levels of reserves, and are subject to other supervision and regulation designed
to promote financial soundness.
Obligations of foreign branches of domestic banks, foreign subsidiaries
of domestic banks and domestic branches of foreign banks, such as CDs and TDs,
may be general obligations of the parent banks in addition to the issuing
branch, or may be limited by the terms of a specific obligation or governmental
regulation. Such obligations are subject to different risks than are those of
domestic banks. These risks include foreign economic and political developments,
foreign governmental restrictions that may adversely affect payment of principal
and interest on the obligations, foreign exchange controls and foreign
withholding and other taxes on interest income. Foreign branches and
subsidiaries are not necessarily subject to the same or similar regulatory
requirements that apply to domestic banks, such as mandatory reserve
requirements, loan limitations, and accounting, auditing and financial
recordkeeping requirements. In addition, less information may be publicly
available about a foreign branch of a domestic bank or about a foreign bank than
about a domestic bank. If a domestic bank with deposits insured by the FDIC
becomes insolvent, unsecured deposits and other general obligations of such
bank's foreign branches will be subordinated to the receivership expenses of the
FDIC and such bank's domestic deposits and would be subject to the loss of
principal to a greater extent than such bank's domestic branch deposits.
Obligations of United States branches of foreign banks may be general
obligations of the parent bank in addition to the issuing branch, or may be
limited by the terms of a specific obligation and by Federal and state
regulation as well as governmental action in the country in which the foreign
bank has its head office. In addition, Federal branches licensed by the
Comptroller of the Currency and branches licensed by certain states ("State
Branches") may be required to: (1) pledge to the regulator, by depositing assets
with a designated bank within the state, a certain percentage of their assets as
fixed from time to time by the appropriate regulatory authority; and (2)
maintain assets within the state in an amount equal to a specified percentage of
the aggregate amount of liabilities of the foreign bank payable at or through
all of its agencies or branches within the state. The deposits of Federal and
State Branches generally must be insured by the FDIC if such branches take
deposits of less than $100,000.
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In view of the foregoing factors associated with the purchase of CDs
and TDs issued by foreign branches of domestic banks, by foreign subsidiaries of
domestic banks, or by domestic branches of foreign banks, the Adviser carefully
evaluates such investments on a case-by-case basis.
Each of these Funds may purchase CDs issued by banks, savings and loan
associations and similar thrift institutions with less than $1 billion in
assets, which are members of the FDIC, provided the Fund purchases any such CD
in a principal amount of not more than $100,000, which amount would be fully
insured by the Bank Insurance Fund or the Savings Association Insurance Fund
administered by the FDIC. Interest payments on such a CD are not insured by the
FDIC. No Fund will own more than one such CD per such issuer.
Each of these Funds may invest in short-term U.S. dollar denominated
corporate obligations that are originated, negotiated and structured by a
syndicate of lenders ("Co-Lenders") consisting of commercial banks, thrift
institutions, insurance companies, finance companies or other financial
institutions one or more of which administers the security on behalf of the
syndicate (the "Agent Bank"). Co-Lenders may sell such securities to third
parties called "Participants." The Fund may invest in such securities either by
participating as a Co-Lender at origination or by acquiring an interest in the
security from a Co-Lender or a Participant (collectively, "participation
interests"). Co-Lenders and Participants interposed between the Fund and the
corporate borrower (the "Borrower"), together with Agent Banks, are referred
herein as "Intermediate Participants." The Fund also may purchase a
participation interest in a portion of the rights of an Intermediate
Participant, which would not establish any direct relationship between the Fund
and the Borrower. In such cases, the Fund would be required to rely on the
Intermediate Participant that sold the participation interest not only for the
enforcement of the Fund's rights against the Borrower but also for the receipt
and processing of payments due to the Fund under the security. Because it may be
necessary to assert through an Intermediate Participant such rights as may exist
against the Borrower, in the event the 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 be involved if the Fund could enforce its
rights directly against the Borrower. Moreover, under the terms of a
participation interest, the Fund may be regarded as a creditor of the
Intermediate Participant (rather than of the Borrower), so that the Fund also
may be subject to the risk that the Intermediate Participant may become
insolvent. Similar risks may arise with respect to the Agent Bank if, for
example, assets held by the Agent Bank for the benefit of the Fund were
determined by the appropriate regulatory authority or court to be subject to the
claims of the Agent Bank's creditors. In such cases, the Fund might incur
certain costs and delays in realizing payment in connection with the
participation interest or suffer a loss of principal and/or interest. Further,
in the event of the bankruptcy or insolvency of the Borrower, the obligation of
the Borrower to repay the loan may be subject to certain defenses that can be
asserted by such Borrower as a result of improper conduct by the Agent Bank or
Intermediate Participant.
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<PAGE> 75
COMMERCIAL PAPER AND OTHER SHORT-TERM CORPORATE OBLIGATIONS. (Capital
Appreciation and Tax-Free Funds) Each of these Funds may invest in commercial
paper, which consists of short-term, unsecured promissory notes issued to
finance short-term credit needs. The commercial paper purchased by the Funds
will consist only of direct obligations which, at the time of their purchase,
are (a) rated not lower than Prime-1 by Moody's Investors Service, Inc.
("Moody's"), A-1 by Standard & Poor's Ratings Group ("S&P"), F-1 by Fitch IBCA,
Inc. ("Fitch") or Duff-1 by Duff & Phelps Credit Rating Co. ("Duff"), or (b)
issued by companies having an outstanding unsecured debt issue currently rated
not lower than Aa3 by Moody's or AA- by S&P, Fitch or Duff, or (c) if unrated,
determined by the Adviser to be of comparable quality to those rated obligations
which may be purchased by the Fund.
REPURCHASE AGREEMENTS. (Capital Appreciation, Income and Money Market
Funds) Each Fund may enter into repurchase agreements which involve the
acquisition by a Fund of an underlying debt instrument, subject to an obligation
of the seller to repurchase, and such Fund to resell, the instrument at a fixed
price usually not more than one week after its purchase. The Fund's custodian or
sub-custodian employed in connection with third-party repurchase transactions
will have custody of, and will hold in a segregated account, securities acquired
by a Fund under a repurchase agreement. In connection with its third-party
repurchase transactions, the Fund will employ only eligible sub-custodians that
meet the requirements set forth in Section 17(f) of the 1940 Act. Repurchase
agreements are considered by the staff of the Securities and Exchange Commission
to be loans by the Fund entering into them. Certain costs may be incurred by a
Fund in connection with the sale of the securities if the seller does not
repurchase them in accordance with the repurchase agreement. In addition, if
bankruptcy or insolvency proceedings are commenced with respect to the seller of
the securities, realization on the securities by a Fund may be delayed or
limited. Each Fund will consider on an ongoing basis the creditworthiness of the
institutions with which it enters into repurchase agreements. In an attempt to
reduce the risk of incurring a loss on a repurchase agreement, each Fund will
enter into repurchase agreements only with registered or unregistered securities
dealers or banks with total assets in excess of one billion dollars or primary
government securities dealers reporting to the Federal Reserve Bank of New York,
with respect to securities of the type in which such Fund may invest or
government securities regardless of their remaining maturities, and will require
that additional securities be deposited with it if the value of the securities
purchased should decrease below resale price. The Adviser will monitor on an
ongoing basis the value of the collateral to assure that it always equals or
exceeds the repurchase price. Each Fund will consider on an ongoing basis the
creditworthiness of the institutions with which it enters into repurchase
agreements.
ZERO COUPON AND STRIPPED SECURITIES. (Capital Appreciation, Income and
Money Market Funds) Each Fund may invest in zero coupon U.S. Treasury
securities, which are Treasury Notes and Bonds that have been stripped of their
unmatured interest coupons, the coupons themselves and receipts or certificates
representing interests in such stripped debt obligations and coupons. Each Fund,
except the Limited Term U.S. Government Fund and U.S. Treasury Money Market
Fund, also may invest in zero coupon securities issued by
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<PAGE> 76
corporations and financial institutions which constitute a proportionate
ownership of the issuer's pool of underlying U.S. Treasury securities. A zero
coupon security pays no interest to its holder during its life and is sold at a
discount to its face value at maturity. The amount of the discount fluctuates
with the market price of the security. The market prices of zero coupon
securities generally are more volatile than the market prices of securities that
pay interest periodically and are likely to respond to a greater degree to
changes in interest rates than non-zero coupon securities having similar
maturities and credit qualities. The Tennessee Tax-Exempt Fund will invest no
more than 25% of the value of its net assets in zero coupon and stripped
securities.
FOREIGN GOVERNMENT OBLIGATIONS; SECURITIES OF SUPRANATIONAL ENTITIES.
(Capital Appreciation and Tax-Free Funds) Each of these Funds may invest in
obligations issued or guaranteed by one or more foreign governments or any of
their political subdivisions, agencies or instrumentalities that are determined
by the Adviser to be of comparable quality to the other obligations in which
such Fund may invest. Such securities also include debt obligations of
supranational entities. Supranational entities include international
organizations designated or supported by governmental entities to promote
economic reconstruction or development and international banking institutions
and related government agencies. Examples include the International Bank for
Reconstruction and Development (the World Bank), the European Coal and Steel
Community, the Asian Development Bank and the InterAmerican Development Bank.
The percentage of a Fund's assets invested in securities issued by foreign
governments will vary depending on the relative yields of such securities, the
economic and financial markets of the countries in which the investments are
made and the interest rate climate of such countries.
FLOATING AND VARIABLE RATE OBLIGATIONS. (Capital Appreciation and
Tax-Free Funds) Each of these Funds may purchase floating and variable rate
demand notes and bonds, which are obligations ordinarily having stated
maturities in excess of 397 days, but which permit the holder to demand payment
of principal at any time, or at specified intervals. Variable rate demand notes
include master demand notes which are obligations that permit the Fund to invest
fluctuating amounts, at varying rates of interest, pursuant to direct
arrangements between the Fund, as lender, and the borrower. These obligations
permit daily changes in the amount borrowed. Because these obligations are
direct lending arrangements between the lender and borrower, it is not
contemplated that such instruments generally will be traded, and there generally
is no established secondary market for these obligations, although they are
redeemable at face value. Accordingly, where these obligations are not secured
by letters of credit or other credit support arrangements, the Fund's right to
redeem is dependent on the ability of the borrower to pay principal and interest
on demand. Such obligations frequently are not rated by credit rating agencies
and a Fund may invest in obligations which are not so rated only if the Adviser
determines that at the time of investment the obligations are of comparable
quality to the other obligations in which the Fund may invest. The Adviser, on
behalf of each Fund, will consider on an ongoing basis the creditworthiness of
the issuers of the floating and variable rate demand obligations purchased by
such Fund.
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<PAGE> 77
NOTES. (Capital Appreciation Funds and Tax-Free Funds) Each of these
Funds may purchase unsecured promissory notes ("Notes") which are not readily
marketable and have not been registered under the Securities Act of 1933, as
amended (the "1933 Act"), provided such investments are consistent with its
investment objective.
PARTICIPATION INTERESTS AND TRUST RECEIPTS. (Capital Appreciation and
Tax-Free Funds) Each of these Funds may purchase from financial institutions and
trusts created by such institutions participation interests and trust receipts
in securities in which it may invest and may enter into loan participation
agreements. A participation interest or receipt gives the Fund an undivided
interest in the security in the proportion that the Fund's participation
interest or receipt bears to the total principal amount of the security. These
instruments may have fixed, floating or variable rates of interest with
remaining maturities of 397 days or less. If the instrument is unrated, or has
been given a rating below that which is permissible for purchase by the Fund,
the instrument will be backed by an irrevocable letter of credit or guarantee of
a bank or other entity the debt securities of which are rated high quality, or
the payment obligation otherwise will be collateralized by U.S. Government
securities, or, in the case of unrated instruments, the Adviser, acting upon
delegated authority from the Trust's Board of Directors, must have determined
that the instrument is of comparable quality to those instruments in which the
Fund may invest. Participation interests or trust receipts with a rating below
high quality that are backed by an irrevocable letter of credit or guarantee as
described above will be purchased only if the Adviser, acting as described
above, determines after an analysis of, among other factors, the
creditworthiness of the guarantor that such instrument is high quality, and if
the rating agency did not include the letter of credit or guarantee in its
determination of the instrument's rating. If the rating of a participation
interest or trust receipt is reduced subsequent to its purchase by the Fund, the
Adviser will consider, in accordance with procedures established by the Board of
Directors, all circumstances deemed relevant in determining whether the Fund
should continue to hold the instrument. The guarantor of a participation
interest or trust receipt will be treated as a separate issuer. For certain
participation interests and trust receipts, the Fund will have the unconditional
right to demand payment, on not more than seven days' notice, for all or any
part of the Fund's interest in the security, plus accrued interest. As to these
instruments, the Fund intends to exercise its right to demand payment only upon
a default under the terms of the security, as needed to provide liquidity to
meet redemptions, or to maintain or improve the quality of its investment
portfolio.
GUARANTEED INVESTMENT CONTRACTS. (Capital Appreciation and Tax-Free
Funds) Each of these Funds may make limited investments in guaranteed investment
contracts ("GICs") issued by highly rated U.S. insurance companies. Pursuant to
such a contract, the Fund would make cash contributions to a deposit fund of the
insurance company's general account. The insurance company would then credit to
the Fund on a monthly basis interest which is based on an index (in most cases
the Salomon Smith Barney CD Index), but is guaranteed not to be less than a
certain minimum rate.
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ILLIQUID SECURITIES. (Capital Appreciation, Income and Money Market
Funds) Each Fund may invest up to 15% (10% in the case of the Capital Growth,
Limited Term U.S. Government, Tennessee Tax-Exempt, Limited Term Tennessee
Tax-Exempt and Treasury Reserve Money Market Fund) of the value of its net
assets in illiquid securities. As to these securities, the Fund is subject to a
risk that should the Fund desire to sell them when a ready buyer is not
available at a price the Fund deems representative of their value, the value of
the Fund's net assets could be adversely affected. The term "illiquid
securities" for this purpose means securities that cannot be disposed of within
seven days in the ordinary course of business at approximately the amount at
which the Fund has valued the securities and includes, among other things,
restricted securities other than those the Adviser has determined to be liquid
pursuant to guidelines established by the Trust's Board and repurchase
agreements maturing in more than seven days. Commercial paper issues include
securities issued by major corporations without registration under the 1933 Act,
in reliance on the exemption from such registration afforded by Section 3(a)(3)
thereof and commercial paper and medium term notes issued in reliance on the
so-called "private placement" exemption from registration which is afforded by
Section 4(2) of the 1933 Act ("Section 4(2) paper"). Section 4(2) paper is
restricted as to disposition under the Federal securities laws in that any
resale must similarly be made in an exempt transaction. Section 4(2) paper
ordinarily is resold to other institutional investors through or with the
assistance of investment dealers who make a market in Section 4(2) paper, thus
providing liquidity.
In recent years a large institutional market has developed for certain
securities that are not registered under the 1933 Act, including private
placements, repurchase agreements, commercial paper, foreign securities and
corporate bonds and notes. These instruments are often restricted securities
because the securities are sold in transactions not requiring registration.
Institutional investors generally will not seek to sell these instruments to the
general public, but instead will often depend either on an efficient
institutional market in which such unregistered securities can be readily resold
or on an issuer's ability to honor a demand for repayment. Therefore, the fact
that there are contractual or legal restrictions on resale to the general public
or certain institutions is not dispositive of the liquidity of such investments.
To facilitate the increased size and liquidity of the institutional
markets for unregistered securities, the Securities and Exchange Commission
adopted Rule 144A under the 1933 Act. Rule 144A establishes a "safe harbor" from
the registration requirements of the 1933 Act for resales of certain securities
to qualified institutional buyers. Section 4(2) paper that is issued by a
company that files reports under the Securities Exchange Act of 1934, as
amended, generally is eligible to be sold in reliance on the safe harbor of Rule
144A. Pursuant to Rule 144A, the institutional restricted securities markets may
provide both readily ascertainable values for restricted securities and the
ability to liquidate an investment in order to satisfy share redemption orders
on a timely basis. Where a substantial market of qualified institutional buyers
has developed for certain restricted securities purchased by the Fund pursuant
to Rule 144A under the 1933 Act, the Fund intends to treat such securities as
liquid securities in accordance with procedures approved by the Trust's Board.
Because it is not possible to
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predict with assurance how the market for specific restricted securities sold
pursuant to Rule 144A will develop, the Trust's Board has directed the Adviser
to monitor carefully each Fund's investments in such securities with particular
regard to trading activity, availability of reliable price information and other
relevant information. To the extent that, for a period of time, qualified
institutional buyers cease purchasing restricted securities pursuant to Rule
144A, a Fund's investing in such securities may have the effect of increasing
the level of illiquidity in its investment portfolio during such period.
FORWARD COMMITMENTS. (Capital Appreciation, Income and Money Market
Funds) Each Fund may purchase securities on a when-issued or forward commitment
basis, which means that the price is fixed at the time of commitment, but
delivery and payment ordinarily take place a number of days after the date of
the commitment to purchase. Each Fund will make commitments to purchase such
securities only with the intention of actually acquiring the securities, but the
Fund may sell these securities before the settlement date if it is deemed
advisable. The Fund will not accrue income in respect of a security purchased on
a forward commitment basis prior to its stated delivery date.
Securities purchased on a forward commitment or when-issued basis are
subject to changes in value (generally changing in the same way, i.e.,
appreciating when interest rates decline and depreciating when interest rates
rise) based upon the public's perception of the creditworthiness of the issuer
and changes, real or anticipated, in the level of interest rates. Securities
purchased on a forward commitment or when-issued basis may expose the Fund to
risks because they may experience such fluctuations prior to their actual
delivery. Purchasing securities on a when-issued basis can involve the
additional risk that the yield available in the market when the delivery takes
place actually may be higher than that obtained in the transaction itself.
Purchasing securities on a forward commitment or when-issued basis when the Fund
is fully or almost fully invested may result in greater potential fluctuation in
the value of the Fund's net assets and its net asset value per share.
INVESTMENT COMPANY SECURITIES. (Capital Appreciation, Income and Money
Market Funds) Each Fund may invest in securities issued by other investment
companies which principally invest in securities of the type in which such Fund
invests. Under the 1940 Act, a Fund's investment in such securities currently is
limited to, subject to certain exceptions, (i) 3% of the total voting stock of
any one investment company, (ii) 5% of such Fund's total assets with respect to
any one investment company and (iii) 10% of such Fund's total assets in the
aggregate. Investments in the securities of other investment companies will
involve duplication of advisory fees and certain other expenses.
CONVERTIBLE SECURITIES. (Large Cap, Capital Growth, Mid Cap and
International Equity Funds) Convertible securities may be converted at either a
stated price or stated rate into underlying shares of common stock. Convertible
securities have characteristics similar to both fixed income and equity
securities. Convertible securities generally are subordinated to other similar
but non-convertible securities of the same issuer, although convertible bonds,
as
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corporate debt obligations, enjoy seniority in right of payment to all equity
securities, and convertible preferred stock is senior to common stock of the
same issuer. Because of the subordination feature, however, convertible
securities typically have lower ratings than similar non-convertible securities.
Although to a lesser extent than with fixed income securities, the
market value of convertible securities tends to decline as interest rates
increase and, conversely, tends to increase as interest rates decline. In
addition, because of the conversion feature, the market value of convertible
securities tends to vary with fluctuations in the market value of the underlying
common stock. A unique feature of convertible securities is that as the market
price of the underlying common stock declines, convertible securities tend to
trade increasingly on a yield basis, and so may not experience market value
declines to the same extent as the underlying common stock. When the market
price of the underlying common stock increases, the prices of the convertible
securities tend to rise as a reflection of the value of the underlying common
stock. While no securities investments are without risk, investments in
convertible securities generally entail less risk than investments in common
stock of the same issuer.
Convertible securities are investments that provide for a stable stream
of income with generally higher yields than common stocks. There can be no
assurance of current income because the issuers of the convertible securities
may default on their obligations. A convertible security, in addition to
providing fixed income, offers the potential for capital appreciation through
the conversion feature, which enables the holder to benefit from increases in
the market price of the underlying common stock. There can be no assurance of
capital appreciation, however, because securities prices fluctuate. Convertible
securities, however, generally offer lower interest or dividend yields than
non-convertible securities of similar quality because of the potential for
capital appreciation.
WARRANTS. (Large Cap Equity, Capital Growth, Mid Cap and International
Equity Funds) A warrant is an instrument issued by a corporation which gives the
holder the right to subscribe to a specified amount of the corporation's capital
stock at a set price for a specified period of time. A Fund may invest up to 5%
of its net assets in warrants, except that this limitation does not apply to
warrants purchased by the Fund that are sold in units with, or attached to,
other securities.
MORTGAGE-RELATED SECURITIES. Mortgage-related securities are a form of
derivative collateralized by pools of commercial or residential mortgages. Pools
of mortgage loans are assembled as securities for sale to investors by various
governmental, government-related and private organizations. These securities may
include complex instruments such as collateralized mortgage obligations and
stripped mortgage-backed securities, mortgage pass-through securities, interests
in real estate mortgage investment conduits ("REMICs"), adjustable rate
mortgages, real estate investment trusts ("REITs"), including debt and preferred
stock issued by REITs, as well as other real estate-related securities.
Mortgage-related securities include those with fixed, floating and variable
interest rates, those with interest rates that change based
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on multiples of changes in a specified index of interest rates and those with
interest rates that change inversely to changes in interest rates.
Mortgages eligible for inclusion in a mortgage pool can include
adjustable rate mortgage loans ("ARMs"). Arms will generally provide for a fixed
initial mortgage interest rate for a specified period of time, generally for
either the first three, six, twelve, thirteen, thirty-six, or sixty scheduled
monthly payments. Thereafter, the interest rates are subject to periodic
adjustment based on changes in an index. ARMs typically have minimum and maximum
rates beyond which the mortgage interest rate may not vary over the lifetime of
the loans. Certain ARMs provide for additional limitations on the maximum amount
by which the mortgage interest rate may adjust for any single adjustment period.
Negatively amortizing ARMs may provide limitations on changes in the required
monthly payment. Limitations on monthly payments can result in monthly payments
that are greater or less than the amount necessary to amortize a negatively
amortizing ARM by its maturity at the interest rate in effect during any
particular month.
Mortgage-related securities include securities other than those
described above that directly or indirectly represent a participation in, or are
secured by and payable from, mortgage loans on real property, including CMO
residuals. Other mortgage-related securities may be equity or debt securities
issued by agencies or instrumentalities of the U.S. Government or by private
originators of, or investors in, mortgage loans, including savings and loan
associations, homebuilders, mortgage banks, commercial banks, investment banks,
partnerships, trusts and special purpose entities of the foregoing.
GOVERNMENT AGENCY SECURITIES. (Capital Growth and Limited Term U.S.
Government Funds) Mortgage-related securities issued by the Government National
Mortgage Association ("GNMA") include GNMA Mortgage Pass-Through Certificates
(also known as "Ginnie Maes") which are guaranteed as to the timely payment of
principal and interest by GNMA and such guarantee is backed by the full faith
and credit of the United States. GNMA is a wholly-owned U.S. Government
corporation within the department of Housing and Urban Development. GNMA
certificates also are supported by the authority of GNMA to borrow funds from
the U.S. Treasury to make payments under its guarantee.
GOVERNMENT RELATED SECURITIES. (Capital Growth and Limited Term U.S.
Government Funds) Mortgage-related securities issued by the Federal National
Mortgage Association ("FNMA") include FNMA Guaranteed Mortgage Pass-Through
Certificates (also known as "Fannie Maes") which are solely the obligations of
the FNMA and are not backed by or entitled to the full faith and credit of the
United States. The FNMA is a government-sponsored organization owned entirely by
private stockholders. Fannie Maes are guaranteed as to timely payment of
principal and interest by FNMA.
Mortgage-related securities issued by the Federal Home Loan Mortgage
Corporation ("FHLMC") include FHLMC Mortgage Participation Certificates (also
known as "Freddie
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Macs" or "PCs"). The FHLMC is a corporate instrumentality of the United States
created pursuant to an Act of Congress, which is owned entirely by Federal Home
Loan Banks. Freddie Macs are not guaranteed by the United States or by any
Federal Home Loan Bank and do not constitute a debt or obligation of the United
States or of any Federal Home Loan Bank. Freddie Macs entitle the holder to
timely payment of interest, which is guaranteed by the FHLMC. The FHLMC
guarantees either ultimate collection or timely payment of all principal
payments on the underlying mortgage loans. When the FHLMC does not guarantee
timely payment of principal, FHLMC may remit the amount due on account of its
guarantee of ultimate payment of principal at any time after default on an
underlying mortgage, but in no event later than one year after it becomes
payable.
PRIVATE ENTITY SECURITIES. (Capital Growth Fund) These mortgage-related
securities are issued by commercial banks, savings and loan institutions,
mortgage bankers, private mortgage insurance companies and other
non-governmental issuers. Timely payment of principal and interest on
mortgage-related securities backed by pools created by non-governmental issuers
often is supported partially by various forms of insurance or guarantees,
including individual loan, title, pool and hazard insurance. The insurance and
guarantees are issued by government entities, private insurers and the mortgage
poolers. There can be no assurance that the private insurers or mortgage poolers
can meet their obligations under the policies, so that if the issuers default on
their obligations the holders of the security could sustain a loss. No insurance
or guarantee covers the Fund or the price of the Fund's shares. Mortgage-related
securities issued by non-governmental issuers generally offer a higher rate of
interest than government-agency and government-related securities because there
are no direct or indirect government guarantees of payment.
COMMERCIAL MORTGAGE-RELATED SECURITIES. (Capital Growth Fund)
Commercial mortgage-related securities generally are multi-class debt or
pass-through certificates secured by mortgage loans on commercial properties.
These mortgage-related securities generally are structured to provide protection
to the senior classes investors against potential losses on the underlying
mortgage loans. This protection generally is provided by having the holders of
subordinated classes of securities ("Subordinated Securities") take the first
loss if there are defaults on the underlying commercial mortgage loans. Other
protection, which may benefit all of the classes or particular classes, may
include issuer guarantees, reserve funds, additional Subordinated Securities,
cross-collateralization and over-collateralization.
The Fund may invest in Subordinated Securities issued or sponsored by
commercial banks, savings and loan institutions, mortgage bankers, private
mortgage insurance companies and other non-governmental issuers. Subordinated
Securities have no governmental guarantee, and are subordinated in some manner
as to the payment of principal and/or interest to the holders of more senior
mortgage-related securities arising out of the same pool of mortgages. The
holders of Subordinated Securities typically are compensated with a higher
stated yield than are the holders of more senior mortgage-related securities. On
the other hand, Subordinated Securities typically subject the holder to greater
risk than senior mortgage-related
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securities and tend to be rated in a lower rating category, and frequently a
substantially lower rating category, than the senior mortgage-related securities
issued in respect of the same pool of mortgage. Subordinated Securities
generally are likely to be more sensitive to changes in prepayment and interest
rates and the market for such securities may be less liquid than is the case for
traditional fixed-income securities and senior mortgage-related securities.
The market for commercial mortgage-related securities developed more
recently and in terms of total outstanding principal amount of issues is
relatively small compared to the market for residential single-family
mortgage-related securities. In addition, commercial lending generally is viewed
as exposing the lender to a greater risk of loss than one- to four-family
residential lending. Commercial lending, for example, typically involves larger
loans to single borrowers or groups of related borrowers than residential one-to
four-family mortgage loans. In addition, the repayment of loans secured by
income producing properties typically is dependent upon the successful operation
of the related real estate project and the cash flow generated therefrom.
Consequently, adverse changes in economic conditions and circumstances are more
likely to have an adverse impact on mortgage-related securities secured by loans
on commercial properties than on those secured by loans on residential
properties.
COLLATERALIZED MORTGAGE OBLIGATIONS ("CMOS"). (Capital Growth Fund) A
CMO is a multiclass bond backed by a pool of mortgage pass-through certificates
or mortgage loans. CMOs may be collateralized by (a) Ginnie Mae, Fannie Mae, or
Freddie Mac pass-through certificates, (b) unsecuritized mortgage loans insured
by the Federal Housing Administration or guaranteed by the Department of
Veterans' Affairs, (c) unsecuritized conventional mortgages, (d) other
mortgage-related securities, or (e) any combination thereof. Each class of CMOs,
often referred to as a "tranche," is issued at a specific coupon rate and has a
stated maturity or final distribution date. Principal prepayments on collateral
underlying a CMO may cause it to be retired substantially earlier than the
stated maturities or final distribution dates. The principal and interest on the
underlying mortgages may be allocated among the several classes of a series of a
CMO in many ways. One or more tranches of a CMO may have coupon rates which
reset periodically at a specified increment over an index, such as the London
Interbank Offered Rate ("LIBOR") (or sometimes more than one index). These
floating rate CMOs typically are issued with lifetime caps on the coupon rate
thereon. Each of these Funds also may invest in inverse floating rate CMOs.
Inverse floating rate CMOs constitute a tranche of a CMO with a coupon rate that
moves in the reverse direction to an applicable index such a LIBOR. Accordingly,
the coupon rate thereon will increase as interest rates decrease. Inverse
floating rate CMOs are typically more volatile than fixed or floating rate
tranches of CMOs.
Many inverse floating rate CMOs have coupons that move inversely to a
multiple of the applicable indexes. The effect of the coupon varying inversely
to a multiple of an applicable index creates a leverage factor. Inverse floaters
based on multiples of a stated index are designed to be highly sensitive to
changes in interest rates and can subject the holders thereof to extreme
reductions of yield and loss of principal. The markets for inverse floating rate
CMOs with highly leveraged characteristics at times may be very thin. The Fund's
ability to
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dispose of its positions in such securities will depend on the degree of
liquidity in the markets for such securities. It is impossible to predict the
amount of trading interest that may exist in such securities, and therefore the
future degree of liquidity.
STRIPPED MORTGAGE-BACKED SECURITIES. (Capital Growth and Limited Term
U.S. Government Funds) Each of these Funds also may invest in mortgage-backed
securities otherwise eligible for investment when those securities are in
"stripped" form. Stripped mortgage-backed securities are created by segregating
the cash flows from underlying mortgage loans or mortgage securities to create
two or more new securities, each with a specified percentage of the underlying
security's principal or interest payments. Mortgage securities may be partially
stripped so that each investor class receives some interest and some principal.
When securities are completely stripped, however, all of the interest is
distributed to holders of one type of security, known as an interest-only
security, or IO, and all of the principal is distributed to holders of another
type of security known as a principal-only security, or PO. Strips can be
created in a pass-through structure or as tranches of a CMO. The yields to
maturity on IOs and POs are very sensitive to the rate of principal payments
(including prepayments) on the related underlying mortgage assets. If the
underlying mortgage assets experience greater than anticipated prepayments of
principal, the Fund may not fully recoup its initial investment in IOs.
Conversely, if the underlying mortgage assets experience less than anticipated
prepayments of principal, the yield on POs could be materially and adversely
affected.
REAL ESTATE INVESTMENT TRUSTS. (Capital Growth Fund) A REIT is a
corporation, or a business trust that would otherwise be taxed as a corporation,
which meets the definitional requirements of the Internal Revenue Code of 1986,
as amended (the "Code"). The Code permits a qualifying REIT to deduct dividends
paid, thereby effectively eliminating corporate level Federal income tax and
making the REIT a pass-through vehicle for Federal income tax purposes. To meet
the definitional requirements of the Code, a REIT must, among other things,
invest substantially all of its assets in interests in real estate (including
mortgages and other REITs) or cash and government securities, derive most of its
income from rents from real property or interest on loans secured by mortgages
on real property, and distribute to shareholders annually a substantial portion
of its otherwise taxable income.
REITs are characterized as equity REITs, mortgage REITs and hybrid
REITs. Equity REITs, which may include operating or finance companies, own real
estate directly and the value of, and income earned by, the REITs depends upon
the income of the underlying properties and the rental income they earn. Equity
REITs also can realize capital gains (or losses) by selling properties that have
appreciated (or depreciated) in value. Mortgage REITs can make construction,
development or long-term mortgage loans and are sensitive to the credit quality
of the borrower. Mortgage REITs derive their income from interest payments on
such loans. Hybrid REITs combine the characteristics of both equity and mortgage
REITs, generally by holding both ownership interests and mortgage interests in
real estate. The value of securities issued by REITs are affected by tax and
regulatory requirements and by
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perceptions of management skill. They also are subject to heavy cash flow
dependency, defaults by borrowers or tenants, self-liquidation and the
possibility of failing to qualify for tax-free status under the Code or to
maintain exemption from the 1940 Act.
ASSET-BACKED SECURITIES. (Capital Growth Fund) Asset-backed securities
are a form of derivative. The securitization techniques used for asset-backed
securities are similar to those used for mortgage-related securities. These
securities include debt securities and securities with debt-like
characteristics. The collateral for these securities has included home equity
loans, automobile and credit card receivables, boat loans, computer leases,
airplane leases, mobile home loans, recreational vehicle loans and hospital
account receivables. Each of these Funds may invest in these and other types of
asset-backed securities that may be developed in the future.
Asset-backed securities present certain risks that are not presented by
mortgage-backed securities. Primarily, these securities may provide the Fund
with a less effective security interest in the related collateral than do
mortgage-backed securities. Therefore, there is the possibility that recoveries
on the underlying collateral may not, in some cases, be available to support
payments on these securities.
AMERICAN DEPOSITARY RECEIPTS. (Large Cap, Capital Growth, Mid Cap and
International Equity Funds) Each of these Funds may invest in the securities of
foreign issuers in the form of American Depositary Receipts ("ADRs") and other
forms of depositary receipts. These securities may not necessarily be
denominated in the same currency as the securities into which they may be
converted. ADRs are receipts typically issued by a United States bank or trust
company which evidence ownership of underlying securities issued by a foreign
corporation. Generally, ADRs in registered form are designed for use in the
United States securities markets. Each of these Funds may invest in ADRs through
"sponsored" or "unsponsored" facilities. A sponsored facility is established
jointly by the issuer of the underlying security and a depositary, whereas a
depositary may establish an unsponsored facility without participation by the
issuer of the deposited security. Holders of unsponsored depositary receipts
generally bear all the costs of such facilities and the depositary of an
unsponsored facility frequently is under no obligation to distribute shareholder
communications received from the issuer of the deposited security or to pass
through voting rights to the holders of such receipts in respect of the
deposited securities.
STANDARD & POOR'S DEPOSITARY RECEIPTS. (Capital Growth Fund) These
securities, commonly referred to as "spiders," represent an interest in a fixed
portfolio of common stocks designed to track the price and dividend yield
performance of the Standard & Poor's 500 Index or the Standard & Poor's MidCap
400 Index, as the case may be.
MUNICIPAL OBLIGATIONS. (Limited Term Tennessee Tax-Exempt and Tennessee
Tax-Exempt Funds) The term "Municipal Obligations" generally includes debt
obligations issued to obtain funds for various public purposes, including the
construction of a wide range of public
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facilities such as airports, bridges, highways, housing, hospitals, mass
transportation, schools, streets and water and sewer works. Other public
purposes for which Municipal Obligations may be issued include refunding
outstanding obligations, obtaining funds for general operating expenses and
lending such funds to other public institutions and facilities. In addition,
certain types of industrial development bonds are issued by or on behalf of
public authorities to obtain funds to provide for the construction, equipment,
repair or improvement of privately operated housing facilities, sports
facilities, convention or trade show facilities, airport, mass transit,
industrial, port or parking facilities, air or water pollution control
facilities and certain local facilities for water supply, gas, electricity, or
sewage or solid waste disposal; the interest paid on such obligations may be
exempt from Federal income tax, although current tax laws place substantial
limitations on the size of such issues. There are, of course, variations in the
security of Municipal Obligations, both within a particular classification and
between classifications.
Municipal Obligations bear fixed, floating or variable rates of
interest, which are determined in some instances by formulas under which the
Municipal Obligation's interest rate will change directly or inversely to
changes in interest rates or an index, or multiples thereof, in many cases
subject to a maximum and minimum. Certain Municipal Obligations are subject to
redemption at a date earlier than their stated maturity pursuant to call
options, which may be separated from the related Municipal Obligations and
purchased and sold separately.
Floating and variable rate demand notes and bonds are tax exempt
obligations ordinarily having stated maturities in excess of one year, but which
permit the holder to demand payment of principal at any time, or at specified
intervals. The issuer of such obligations ordinarily has a corresponding right,
after a given period, to prepay in its discretion the outstanding principal
amount of the obligations plus accrued interest upon a specified number of days'
notice to the holders thereof. The interest rate on a floating rate demand
obligation is based on a known lending rate, such as a bank's prime rate, and is
adjusted automatically each time such rate is adjusted. The interest rate on a
variable rate demand obligation is adjusted automatically at specified
intervals.
The yields on Municipal Obligations are dependent on a variety of
factors, including general economic and monetary conditions, money market
factors, conditions in the Municipal Obligations market, size of a particular
offering, maturity of the obligation and rating of the issue. The imposition of
the advisory and administration fees, as well as other Fund operating expenses,
will have the effect of reducing the yield to investors.
Each of these Funds may invest up to 5% of the value of its total
assets in municipal lease obligations or installment purchase contract
obligations (collectively, "lease obligations"). Lease obligations have special
risks not ordinarily associated with Municipal Obligations. Although lease
obligations do not constitute general obligations of the municipality for which
the municipality's taxing power is pledged, a lease obligation ordinarily is
backed by the municipality's covenant to budget for, appropriate and make the
payments due under the lease obligation. Certain lease obligations in which
these Funds may invest may contain
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"non-appropriation" clauses which provide that the municipality has no
obligation to make lease payments in future years unless money is appropriated
for such purpose on a yearly basis. Although "non-appropriation" lease
obligations are secured by the leased property, disposition of the leased
property in the event of foreclosure might prove difficult. In addition, no
assurance can be given as to the liquidity of certain lease obligations. The
staff of the Securities and Exchange Commission currently considers certain
lease obligations to be illiquid. The Trust's Board of Directors has established
guidelines for the Adviser to determine the liquidity and appropriate valuation
of lease obligations based on factors which include: (1) the frequency of trades
and quotes for the lease obligation or similar securities; (2) the number of
dealers willing to purchase or sell the lease obligation or similar securities
and the number of other potential buyers; (3) the willingness of dealers to
undertake to make a market in the security or similar securities; and (4) the
nature of the marketplace trades, including the time needed to dispose of the
security, the method of soliciting offers, and the mechanics of transfer.
Each of these Funds may purchase tender option bonds and similar
securities. A tender option bond is a Municipal Obligation (generally held
pursuant to a custodial arrangement) having a relatively long maturity and
bearing interest at a fixed rate substantially higher than prevailing short-term
tax exempt rates, that has been coupled with the agreement of a third party,
such as a bank, broker-dealer or other financial institution, pursuant to which
such institution grants the security holders the option, at periodic intervals,
to tender their securities to the institution and receive the face value
thereof. As consideration for providing the option, the financial institution
receives periodic fees equal to the difference between the Municipal
Obligation's fixed coupon rate and the rate, as determined by a remarketing or
similar agent at or near the commencement of such period, that would cause the
securities, coupled with the tender option, to trade at par on the date of such
determination. Thus, after payment of this fee, the security holder effectively
holds a demand obligation that bears interest at the prevailing short-term tax
exempt rate. The Adviser, on behalf of the Fund, will consider on an ongoing
basis the creditworthiness of the issuer of the underlying Municipal Obligation,
of any custodian and of the third party provider of the tender option. In
certain instances and for certain tender option bonds, the option may be
terminable in the event of a default in payment of principal or interest on the
underlying Municipal Obligations and for other reasons.
Each Fund will purchase tender option bonds only when it is satisfied
that the custodial and tender option arrangements, including the fee payment
arrangements, will not adversely affect the tax exempt status of the underlying
Municipal Obligations and that payment of any tender fees will not have the
effect of creating taxable income for the Fund. Based on the tender option bond
agreement, each of these Funds expects to be able to value the tender option
bond at par; however, the value of the instrument will be monitored to assure
that it is valued at fair value.
RATINGS OF MUNICIPAL OBLIGATIONS. Subsequent to its purchase by a Fund,
an issue of rated Municipal Obligations may cease to be rated or its rating may
be reduced below the
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minimum required for purchase by the Fund. Neither event will require the sale
of such Municipal Obligations by the Fund, but the Adviser will consider such
event in determining whether the Fund should continue to hold the Municipal
Obligations. To the extent that the ratings given by Moody's, S&P or Fitch for
Municipal Obligations may change as a result of changes in such organizations or
their rating systems, the Fund will attempt to use comparable ratings as
standards for its investments in accordance with the investment policies
contained in the Fund's Prospectus and this Statement of Additional Information.
The ratings of Moody's, S&P and Fitch represent their opinions as to the quality
of the Municipal Obligations which they undertake to rate. It should be
emphasized, however, that ratings are relative and subjective and are not
absolute standards of quality. Although these ratings may be an initial
criterion for selection of portfolio investments, the Adviser also will evaluate
these securities and the creditworthiness of the issuers of such securities
based upon financial and other available information.
The average dollar-weighted credit rating of the Municipal Obligations
held by the Tennessee Tax-Exempt Fund and Limited Term Tennessee Tax-Exempt Fund
will be at least A- by Moody's, S&P or Fitch. To further limit risk, each
Municipal Obligation in which the Fund may invest must be rated, in the case of
bonds, at least Baa by Moody's or at least BBB by S&P and Fitch. Each Fund may
invest in short-term Municipal Obligations which are rated in the two highest
categories by Moody's, S&P or Fitch. The average dollar-weighted portfolio
credit rating will be measured on the basis of the dollar value of the Municipal
Obligations purchased and their credit rating without reference to rating
subcategories. The Tennessee Tax-Exempt Fund and Limited Term Tennessee
Tax-Exempt Fund also may invest in Municipal Obligations which, while not rated,
are determined by the Adviser to be of comparable quality to the rated
securities in which the Fund may invest.
POLICIES
INVESTMENT TECHNIQUES AND PORTFOLIO TURNOVER RATES. (Capital
Appreciation, Income and Money Market Funds) As discussed below, each Fund may
engage in various investment techniques the use of which involves risk.
Investors in the Tennessee Tax-Exempt or Limited Term Tennessee Tax-Exempt Funds
should be aware that the use of these techniques may give rise to taxable
income. Using these techniques may produce higher than normal portfolio turnover
for a Fund and may affect the degree to which its net asset value fluctuates.
Portfolio turnover may vary from year to year, as well as within a
year. No Fund will consider portfolio turnover to be a limiting factor in making
investment decisions. Under normal market conditions, the portfolio turnover
rate for the current fiscal year is anticipated to be less than 200% for the
Mid-Cap Fund, Growth Opportunities Fund, International Equity Fund, Tennessee
Tax-Exempt Fund and Limited Term Tennessee Tax-Exempt Fund, and is anticipated
to be less than 100% for the Large-Cap Equity Fund, Limited Term U.S. Government
Fund and each Strategic Portfolio. A portfolio turnover rate of 100% is
equivalent to the Fund buying and selling all of the securities in its portfolio
once in the course of a year.
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Higher portfolio turnover rates are likely to result in comparatively greater
brokerage commissions or transaction costs. In addition, short-term gains
realized from portfolio transactions are taxable to shareholders as ordinary
income. Each Money Market Fund will have a high portfolio turnover, but that
should not adversely affect the Fund since it usually does not pay brokerage
commissions when it purchases short-term debt obligations.
DURATION. (Limited Term Tennessee Tax-Exempt Fund) This Fund follows a
controlled duration strategy. As a measure of a fixed income security's cash
flow, duration is an alternative to the concept of "term to maturity" in
assessing the price volatility associated with changes in interest rates.
Generally, the longer the duration, the more volatility an investor should
expect. For example, the market price of a bond with a duration of three years
would be expected to decline 3% if interest rates rose 1%. Conversely, the
market price of the same bond would be expected to increase 3% if interest rates
fell 1%. The market price of a bond with a duration of six years would be
expected to increase or decline twice as much as the market price of a bond with
a three-year duration. Duration is a way of measuring a security's maturity in
terms of the average time required to receive the present value of all interest
and principal payments as opposed to its term to maturity. The maturity of a
security measures only the time until final payment is due; it does not take
account of the pattern of a security's cash flows over time, which would include
how cash flow is affected by prepayments and by changes in interest rates.
Incorporating a security's yield, coupon interest payments, final maturity and
option features into one measure, duration is computed by determining the
weighted average maturity of a bond's cash flows, where the present values of
the cash flows serve as weights. In computing the duration of the Fund, the
Adviser will estimate the duration of obligations that are subject to features
such as prepayment or redemption by the issuer, put options retained by the
investor or other imbedded options, taking into account the influence of
interest rates on prepayments and coupon flows.
LENDING PORTFOLIO SECURITIES. (Capital Appreciation Funds, Income Funds
and Money Market Funds) From time to time, each Fund may lend securities from
its investment portfolio to brokers, dealers and other financial institutions
needing to borrow securities to complete certain transactions. Such loans may
not exceed 33-1/3% of the value of the relevant Fund's total assets. In
connection with such loans, each Fund will receive collateral consisting of cash
or U.S. Government securities which will be maintained at all times in an amount
equal to at least 100% of the current market value of the loaned securities.
Each Fund can increase its income through the investment of such collateral.
Each Fund continues to be entitled to payments in amounts equal to the
dividends, interest and other distributions payable on the loaned security and
receives interest on the amount of the loan. Such loans will be terminable at
any time upon specified notice. A Fund might experience risk of loss if the
institution with which it has engaged in a portfolio loan transaction breaches
its agreement with such Fund. From time to time, a Fund may return to the
borrower or a third party which is unaffiliated with the Fund, and which is
acting as a "placing broker," a part of the interest earned from the investment
of collateral received for securities loaned.
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The Securities and Exchange Commission currently requires that the
following conditions must be met whenever portfolio securities are loaned: (1)
the Fund must receive at least 100% cash collateral from the borrower; (2) the
borrower must increase such collateral whenever the market value of the
securities rises above the level of such collateral; (3) the Fund must be able
to terminate the loan at any time; (4) the Fund must receive reasonable interest
on the loan, as well as any dividends, interest or other distributions payable
on the loaned securities, and any increase in market value; (5) the Fund may pay
only reasonable custodian fees in connection with the loan; and (6) while voting
rights on the loaned securities may pass to the borrower, the Trust's Board of
Directors must terminate the loan and regain the right to vote the securities if
a material event adversely affecting the investment occurs.
OPTIONS TRANSACTIONS. (Large Cap, Capital Growth, Mid Cap and
International Equity Funds) Each of these Funds may purchase call and put
options in respect of specific securities in which the Fund may invest and write
covered call and put option contracts. A call option gives the purchaser of the
option the right to buy, and obligates the writer to sell, the underlying
security at the exercise price at any time during the option period. Conversely,
a put option gives the purchaser of the option the right to sell, and obligates
the writer to buy, the underlying security at the exercise price at any time
during the option period. A covered call option sold by the Fund, which is a
call option with respect to which the Fund owns the underlying security, exposes
the Fund during the term of the option to possible loss of opportunity to
realize appreciation in the market price of the underlying security or to
possible continued holding of a security which might otherwise have been sold to
protect against depreciation in the market price of the security. A covered put
option sold by the Fund exposes the Fund during the term of the option to a
decline in price of the underlying security. A put option sold by the Fund is
covered when, among other things, permissible liquid assets are placed in a
segregated account to fulfill the obligation undertaken.
The principal reason for the Fund writing covered call options is to
realize, through the receipt of premiums, a greater return than would be
realized on its portfolio securities alone. In return for a premium, the writer
of a covered call option forfeits the right to any appreciation in the value of
the underlying security above the strike price for the life of the option (or
until a closing purchase transaction can be effected). Nevertheless, the call
writer retains the risk of a decline in the price of the underlying security.
Similarly, the principal reason for writing covered put options is to realize
income in the form of premiums. The writer of a covered put option accepts the
risk of a decline in the price of the underlying security. The size of the
premiums that the Fund may receive may be adversely affected as new or existing
institutions, including other investment companies, engage in or increase their
option-writing activities.
Options written ordinarily will have expiration dates between one and
nine months from the date written. The exercise price of the options may be
below, equal to or above the market values of the underlying securities at the
time the options are written. In the case of call options, these exercise prices
are referred to as "in-the-money," "at-the-money" and "out-of-the-money,"
respectively. The Fund may write (a) in-the-money call options when the
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Adviser expects that the price of the underlying security will remain stable or
decline moderately during the option period, (b) at-the-money call options when
the Adviser expects that the price of the underlying security will remain stable
or advance moderately during the option period and (c) out-of-the-money call
options when the Adviser expects that the premiums received from writing the
call option plus the appreciation in market price of the underlying security up
to the exercise price will be greater than the appreciation in the price of the
underlying security alone. In these circumstances, if the market price of the
underlying security declines and the security is sold at this lower price, the
amount of any realized loss will be offset wholly or in part by the premium
received. Out-of-the-money, at-the-money and in-the-money put options (the
reverse of call options as to the relation of exercise price to market price)
may be utilized in the same market environments that such call options are used
in equivalent transactions.
So long as the Fund's obligation as the writer of an option continues,
it may be assigned an exercise notice by the broker-dealer through which the
option was sold, requiring it to deliver, in the case of a call, or take
delivery of, in the case of a put, the underlying security against payment of
the exercise price. This obligation terminates when the option expires or the
Fund effects a closing purchase transaction. The Fund can no longer effect a
closing purchase transaction with respect to an option once it has been assigned
an exercise notice.
While it may choose to do otherwise, the Fund generally will purchase
or write only those options for which the Adviser believes there is an active
secondary market so as to facilitate closing transactions. There is no assurance
that sufficient trading interest to create a liquid secondary market on a
securities exchange will exist for any particular option or at any particular
time, and for some options no such secondary market may exist. A liquid
secondary market in an option may cease to exist for a variety of reasons. In
the past, for example, higher than anticipated trading activity or order flow,
or other unforeseen events, at times have rendered certain clearing facilities
inadequate and resulted in the institution of special procedures, such as
trading rotations, restrictions on certain types of orders or trading halts or
suspensions in one or more options. There can be no assurance that similar
events, or events that otherwise may interfere with the timely execution of
customers' orders, will not recur. In such event, it might not be possible to
effect closing transactions in particular options. If, as a covered call option
writer, the Fund is unable to effect a closing purchase transaction in a
secondary market, it will not be able to sell the underlying security until the
option expires or it delivers the underlying security upon exercise or it
otherwise covers its position.
The Fund intends to treat options in respect of specific securities
that are not traded on a national securities exchange and the securities
underlying covered call options written by the Fund as illiquid securities.
STOCK INDEX OPTIONS. (Large Cap, Capital Growth, Mid Cap and
International Equity Funds) Each of these Funds may purchase and write put and
call options
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on stock indexes listed on national securities exchanges or traded in the
over-the-counter market to the extent of 15% of the value of its net assets. A
stock index fluctuates with changes in the market values of the stocks included
in the index. Options on stock indexes are similar to options on stock except
that (a) the expiration cycles of stock index options are monthly, while those
of stock options are currently quarterly, and (b) the delivery requirements are
different. Instead of giving the right to take or make delivery of a stock at a
specified price, an option on a stock index gives the holder the right to
receive a cash "exercise settlement amount" equal to (i) the amount, if any, by
which the fixed exercise price of the option exceeds (in the case of a put) or
is less than (in the case of a call) the closing value of the underlying index
on the date of exercise, multiplied by (ii) a fixed "index multiplier." Receipt
of this cash amount will depend upon the closing level of the stock index upon
which the option is based being greater than, in the case of a call, or less
than, in the case of a put, the exercise price of the option. The amount of cash
received will be equal to such difference between the closing price of the index
and the exercise price of the option expressed in dollars times a specified
multiple. The writer of the option is obligated, in return for the premium
received, to make delivery of this amount. The writer may offset its position in
stock index options prior to expiration by entering into a closing transaction
on an exchange or it may let the option expire unexercised.
The effectiveness of the Fund's purchasing or writing stock index
options will depend upon the extent to which price movements in its portfolio
correlate with price movements of the stock index selected. Because the value of
an index option depends upon movements in the level of the index rather than the
price of a particular stock, whether the Fund will realize a gain or loss from
the purchase or writing of options on an index depends upon movements in the
level of stock prices in the stock market generally or, in the case of certain
indexes, in an industry or market segment, rather than movements in the price of
a particular stock. Accordingly, successful use by the Fund of options on stock
indexes will be subject to the Adviser's ability to predict correctly movements
in the direction of the stock market generally or of a particular industry. This
requires different skills and techniques than predicting changes in the price of
individual stocks.
When the Fund writes an option on a stock index, it will place in a
segregated account permissible liquid assets in an amount at least equal to the
market value of the underlying stock index and will maintain the account while
the option is open or will otherwise cover the transaction.
FUTURES CONTRACTS AND OPTIONS ON FUTURES CONTRACTS. (Large Cap, Capital
Growth, Mid Cap, International Equity, Tennessee Tax-Exempt and Limited Term
Tennessee Tax-Exempt Funds) None of these Funds will be a commodity pool.
However, as a substitute for a comparable market position in the underlying
securities or for hedging purposes, each of these Funds may engage in futures
and options on futures transactions, as described below.
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The commodities transactions of each of these Funds must constitute
bona fide hedging or other permissible transactions pursuant to regulations
promulgated by the Commodity Futures Trading Commission. In addition, none of
these Funds may engage in such transactions if the sum of the amount of initial
margin deposits and premiums paid for unexpired commodity options, other than
for bona fide hedging transactions, would exceed 5% of the liquidation value of
the Fund's total assets, after taking into account unrealized profits and
unrealized losses on such contracts it has entered into; provided, however, that
in the case of an option that is in-the-money at the time of purchase, the
in-the-money amount may be excluded in calculating the 5%. Pursuant to
regulations and/or published positions of the Securities and Exchange
Commission, each of these Funds may be required to segregate permissible liquid
assets in connection with its commodities transactions in an amount at least
equal to the value of the underlying commodity.
Initially, when purchasing or selling futures contracts, a Fund will be
required to deposit with the Trust's custodian in the broker's name an amount of
cash or cash equivalents up to approximately 10% of the contract amount. This
amount is subject to change by the exchange or board of trade on which the
contract is traded and members of such exchange or board of trade may impose
their own higher requirements. This amount is known as "initial margin" and is
in the nature of a performance bond or good faith deposit on the contract which
is returned to the Fund upon termination of the futures position, assuming all
contractual obligations have been satisfied. Subsequent payments, known as
"variation margin," to and from the broker will be made daily as the price of
the index or securities underlying the futures contract fluctuates, making the
long and short positions in the futures contract more or less valuable, a
process known as "marking-to-market." At any time prior to the expiration of a
futures contract, the Fund may elect to close the position by taking an opposite
position, at the then prevailing price, which will operate to terminate its
existing position in the contract.
Although each of these Funds intends to purchase or sell futures
contracts only if there is an active market for such contracts, no assurance can
be given that a liquid market will exist for any particular contract at any
particular time. Many futures exchanges and boards of trade limit the amount of
fluctuation permitted in futures contract prices during a single trading day.
Once the daily limit has been reached in a particular contract, no trades may be
made that day at a price beyond that limit or trading may be suspended for
specified periods during the trading day. Futures contract prices could move to
the limit for several consecutive trading days with little or no trading,
thereby preventing prompt liquidation of futures positions and potentially
subjecting the relevant Fund to substantial losses. If it is not possible, or
the Fund determines not, to close a futures position in anticipation of adverse
price movements, it will be required to make daily cash payments of variation
margin. In such circumstances, an increase in the value of the portion of the
portfolio being hedged, if any, may offset partially or completely losses on the
futures contract. However, no assurance can be given that the price of the
securities being hedged will correlate with the price movements in a futures
contract and thus provide an offset to losses on the futures contract.
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To the extent a Fund is engaging in a futures transaction as a hedging
device, because of the risk of an imperfect correlation between securities in a
portfolio that are the subject of a hedging transaction and the futures contract
used as a hedging device, it is possible that the hedge will not be fully
effective if, for example, losses on the portfolio securities exceed gains on
the futures contract or losses on the futures contract exceed gains on the
portfolio securities. For futures contracts based on indexes, the risk of
imperfect correlation increases as the composition of a Fund's investments
varies from the composition of the index. In an effort to compensate for the
imperfect correlation of movements in the price of the securities being hedged
and movements in the price of futures contracts, the Fund may buy or sell
futures contracts in a greater or lesser dollar amount than the dollar amount of
the securities being hedged if the historical volatility of the futures contract
has been less or greater than that of the securities. Such "over hedging" or
"under hedging" may adversely affect the Fund's net investment results if market
movements are not as anticipated when the hedge is established.
Successful use of futures by a Fund also is subject to the Adviser's
ability to predict correctly movements in the direction of the market or
interest rates. For example, if a Fund has hedged against the possibility of a
decline in the market adversely affecting the value of securities held in its
portfolio and prices increase instead, such Fund will lose part or all of the
benefit of the increased value of securities which it has hedged because it will
have offsetting losses in its futures positions. Furthermore, if in such
circumstances the Fund has insufficient cash, it may have to sell securities to
meet daily variation margin requirements. The Fund may have to sell such
securities at a time when it may be disadvantageous to do so.
An option on a futures contract gives the purchaser the right, in
return for the premium paid, to assume a position in a futures contract (a long
position if the option is a call and a short position if the option is a put) at
a specified exercise price at any time during the option exercise period. The
writer of the option is required upon exercise to assume an offsetting futures
position (a short position if the option is a call and a long position if the
option is a put). Upon exercise of the option, the assumption of offsetting
futures positions by the writer and holder of the option will be accompanied by
delivery of the accumulated cash balance in the writer's futures margin account
which represents the amount by which the market price of the futures contract,
at exercise, exceeds, in the case of a call, or is less than, in the case of a
put, the exercise price of the option on the futures contract.
Call options sold by a Fund with respect to futures contracts will be
covered by, among other things, entering into a long position in the same
contract at a price no higher than the strike price of the call option, or by
ownership of the instruments underlying, or instruments the prices of which are
expected to move relatively consistently with, the instruments underlying the
futures contract. Put options sold by a Fund with respect to futures contracts
will be covered in the same manner as put options on specific securities as
described above.
Upon exercise of an option, the writer of the option delivers to the
holder of the option the futures position and the accumulated balance in the
writer's futures margin account, which
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represents the amount by which the market price of the futures contract exceeds,
in the case of a call, or is less than, in the case of a put, the exercise price
of the option on the futures contract. The potential loss related to the
purchase of options on futures contracts is limited to the premium paid for the
option (plus transaction costs). Because the value of the option is fixed at the
time of sale, there are no daily cash payments to reflect changes in the value
of the underlying contract; however, the value of the option does change daily
and that change would be reflected in the net asset value of the Fund.
STOCK INDEX FUTURES AND OPTIONS ON STOCK INDEX FUTURES. (Large Cap,
Capital Growth, Mid Cap and International Equity Funds) Each of these Funds may
purchase and sell stock index futures contracts and options on stock index
futures contracts to the extent of 15% of the value of its net assets.
A stock index future obligates the seller to deliver (and the purchaser
to take) an amount of cash equal to a specific dollar amount times the
difference between the value of a specific stock index at the close of the last
trading day of the contract and the price at which the agreement is made. No
physical delivery of the underlying stocks in the index is made. With respect to
stock indexes that are permitted investments, each of these Funds intends to
purchase and sell futures contracts on the stock index for which it can obtain
the best price with consideration also given to liquidity.
Each of these Funds may use index futures as a substitute for a
comparable market position in the underlying securities.
INTEREST RATE FUTURES CONTRACTS AND OPTIONS ON INTEREST RATE FUTURES
CONTRACTS. (Tennessee Tax-Exempt and Limited Term Tennessee Tax-Exempt Funds)
Each of these Funds may invest in interest rate futures contracts and options on
interest rate futures contracts as a substitute for a comparable market position
and to hedge against adverse movements in interest rates to the extent of 15% of
the value of its net assets.
To the extent the Fund has invested in interest rate futures contracts
or options on interest rate futures contracts as a substitute for a comparable
market position, the Fund will be subject to the same investment risks had it
purchased the securities underlying the contract.
Each of these Funds may purchase call options on interest rate futures
contracts to hedge against a decline in interest rates and may purchase put
options on interest rate futures contracts to hedge its portfolio securities
against the risk of rising interest rates. The Fund may sell call options on
interest rate futures contracts to partially hedge against declining prices of
portfolio securities. The Fund may sell put options on interest rate futures
contracts to hedge against increasing prices of the securities which are
deliverable upon exercise of the futures contracts.
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Each of these Funds also may sell options on interest rate futures
contracts as part of closing purchase transactions to terminate its options
positions. No assurance can be given that such closing transactions can be
effected or the degree of correlation between price movements in the options on
interest rate futures and price movements in the Fund's investment securities
which are the subject of the hedge.
FUTURE DEVELOPMENTS. Each Fund may take advantage of opportunities in
the area of options and futures contracts and options on futures contracts and
any other derivative investments which are not presently contemplated for use by
such Fund or which are not currently available but which may be developed, to
the extent such opportunities are both consistent with its investment objective
and legally permissible for the Fund. Before entering into such transactions or
making any such investment, the Fund will provide appropriate disclosure in its
Prospectus or this Statement of Additional Information.
FOREIGN CURRENCY TRANSACTIONS. (International Equity Fund) Foreign
currency transactions may be entered into for a variety of purposes, including:
to fix in U.S. dollars, between trade and settlement date, the value of a
security the Fund has agreed to buy or sell; to hedge the U.S. dollar value of
securities the Fund already owns, particularly if it expects a decrease in the
value of the currency in which the foreign security is denominated; or to gain
exposure to the foreign currency in an attempt to realize gains.
Foreign currency transactions may involve, for example, the Fund's
purchase of foreign currencies for U.S. dollars or the maintenance of short
positions in foreign currencies, which would involve the Fund agreeing to
exchange an amount of a currency it did not currently own for another currency
at a future date in anticipation of a decline in the value of the currency sold
relative to the currency the Fund contracted to receive in the exchange. The
Fund's success in these transactions will depend principally on the ability of
the Fund's Sub-Adviser to predict accurately the future exchange rates between
foreign currencies and the U.S. dollar.
SHORT-SELLING. (International Equity Fund and, to a limited extent,
Capital Growth, Limited Term U.S. Government, Tennessee Tax-Exempt and Limited
Term Tennessee Tax-Exempt Funds) In these transactions the Fund sells a security
it does not own in anticipation of a decline in the market value of the
security. To complete the transaction, the Fund must borrow the security to make
delivery to the buyer. The Fund is obligated to replace the security borrowed by
purchasing it subsequently at the market price at the time of replacement. The
price at such time may be more or less than the price at which the security was
sold by the Fund, which would result in a loss or gain, respectively. Securities
will not be sold short if, after effect is given to any such short sale, the
total market value of all securities sold short would exceed 25% of the value of
the Fund's net assets. Each of these Funds, other than the International Equity
Fund, will limit its short sales to those that are "against the box," a
transaction in which the Fund enters into a short sale of a security which it
owns. The proceeds of the short sale will be held by a broker until the
settlement date at which time the
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Fund delivers the security to close the short position. The Fund receives the
net proceeds from the short sale. At no time will any of these Funds have more
than 15% of the value of its net assets in deposits on short sales against the
box.
BORROWING MONEY. (Capital Appreciation Funds, Income Funds and Money
Market Funds) As a fundamental policy, each Fund is permitted to borrow money in
an amount up to 33-1/3% of the value of its total assets. However, each Fund
currently intends to borrow money only for temporary or emergency (not
leveraging) purposes, in an amount up to 33-1/3% of the value of its total
assets (including the amount borrowed) valued at the lesser of cost or market,
less liabilities (not including the amount borrowed) at the time the borrowing
is made. While borrowings exceed 5% of a Fund's total assets, such Fund will not
make any investments. In addition, each Money Market Fund may borrow for
investment purposes on a secured basis through entering into reverse repurchase
agreements as described below.
REVERSE REPURCHASE AGREEMENTS. (Treasury Reserve Money Market Fund
only) This Fund may enter into reverse repurchase agreements with banks, brokers
or dealers. Reverse repurchase agreements involve the transfer by the Fund of an
underlying debt instrument in return for cash proceeds based on a percentage of
the value of the security. The Fund retains the right to receive interest and
principal payments on the security. The Fund will use the proceeds of reverse
repurchase agreements only to make investments which generally either mature or
have a demand feature to resell to the issuer at a date simultaneous with or
prior to the expiration of the reverse repurchase agreement. At an agreed upon
future date, the Fund repurchases the security at principal plus accrued
interest. In certain types of agreements, there is no agreed upon repurchase
date and interest payments are calculated daily, often based on the prevailing
overnight repurchase rate. As a result of these transactions, the Fund may be
exposed to greater potential fluctuations in the value of its assets and its net
asset value per share. Interest costs on the money borrowed may exceed the
return received on the securities purchased. The Trust's Directors have
considered the risks to each of these Funds and their shareholders which may
result from the entry into reverse repurchase agreements and have determined
that the entry into such agreements is consistent with such Fund's investment
objective and management policies. The Fund will maintain in a segregated
account permissible liquid assets equal to the aggregate amount of its reverse
repurchase obligations, plus accrued interest, in certain cases, in accordance
with releases promulgated by the Securities and Exchange Commission.
INVESTMENT CONSIDERATIONS AND RISK FACTORS
RISK OF INVESTING IN MUNICIPAL OBLIGATIONS. (Tennessee Tax-Exempt and
Limited Term Tennessee Tax-Exempt Funds) Each of these Funds may invest more
than 25% of the value of its total assets in Municipal Obligations which are
related in such a way that an economic, business or political development or
change affecting one such security also would affect the other securities; for
example, securities the interest upon which is paid from revenues of similar
types of projects or securities whose issuers are located in the same state. As
a result,
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the Fund may be subject to greater risk as compared to a fund that does not
follow this practice.
Certain provisions in the Code relating to the issuance of Municipal
Obligations may reduce the volume of Municipal Obligations qualifying for
Federal tax exemption. One effect of these provisions could be to increase the
cost of the Municipal Obligations available for purchase by the Fund and thus
reduce its available yield. Proposals that may restrict or eliminate the income
tax exemption for interest on Municipal Obligations may be introduced in the
future. If any such proposal were enacted that would reduce the availability of
Municipal Obligations for investment by the Fund so as to adversely affect its
shareholders, the Trust would reevaluate the Fund's investment objective and
policies and submit possible changes in the Fund's structure to shareholders for
their consideration. If legislation were enacted that would treat a type of
Municipal Obligation as taxable, the Fund would treat such security as a
permissible taxable investment within the applicable limits set forth in the
Prospectus.
RISK OF INVESTING IN TENNESSEE MUNICIPAL OBLIGATIONS. (Tennessee
Tax-Exempt Fund and Limited Term Tennessee Tax-Exempt Fund) Investors in the
Tennessee Tax-Exempt Fund and Limited Term Tennessee Tax-Exempt Fund should
consider carefully the special risks inherent in such Funds' investment in
Tennessee Municipal Obligations. These risks result from the financial condition
of the State of Tennessee. The following information constitutes only a brief
summary, does not purport to be a complete description, and is based on
information drawn from official statements relating to securities offerings of
the State of Tennessee (the "State") and various local agencies, available as of
the date of the Statement of Additional Information. While the Trust has not
independently verified such information, it has no reason to believe that such
information is not correct in all material respects.
The Constitution of the State of Tennessee requires a balanced budget.
In 1978, the voters of the State of Tennessee approved an amendment to the State
Constitution requiring that (1) the total expenditures of the State for any
fiscal year may not exceed the State's revenues and reserves, including the
proceeds of debt obligations issued to finance capital expenditures and (2) in
no year may the rate of growth of appropriations from State tax revenues exceed
the estimated rate of growth of the State's economy. In the past the Governor
and the General Assembly have had to restrict expenditures to comply with the
State Constitution.
Tennessee's fiscal year 1997-98 budget completed a six year plan for
funding of improvements in the Basic Education Program for public schools and of
teacher salary equalization, funded certain crime legislation aimed at juvenile
crime, and expanded TennCare enrollment to all children without access to health
insurance. The reduction in retirement contributions sufficient to fund
contingency appropriations for a compound cost-of-living retirement adjustment,
a 3.6% retirement adjustment, and a 1.5% salary increase for state employees,
teachers and higher education was confirmed effective January 1, 1998. The
General Assembly approved $60.8 million in general obligation bonds (excluding
highway
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bonds), of which $24.8 million was for higher education projects, to fund part
of the $93.1 million capital projects program.
A budget transfer of $43 million from the Tennessee Housing Development
Agency dedicated tax revenues, reserves and other funds was made as of June 30,
1998, to the State's General Fund. Such transfer did not impact the ratings on
the Agency's outstanding debt.
The Governor's $15.4 billion budget for fiscal year 1998-99 was amended
and approved April 29, 1998. The budget includes a 1,049 reduction in then
existing staff positions and an increase of 406 positions necessary for
recommended improvements. The base budget includes a $57.1 million reduction in
expenditures from General Fund taxes ($66.2 million from all tax sources). The
improvement budget of $370 million from General Fund taxes includes $66.3
million for the Basic Education Program for public schools; $20.3 million for
higher education operating budgets; $67.8 million for TennCare; $21 million for
new prison beds and operating requirements; and a 2% salary increase effective
January 1, 1999. The Governor recommended and the General Assembly passed $265.5
million in general obligation bonds (excluding highway bonds), of which $196.2
million is for higher education projects, to fund part of the $322.7 million
capital projects program.
On February 8, 1999, the Funding Board reported to the Governor and the
Chairmen of the Finance, Ways & Means Committees of the Tennessee General
Assembly its revised consensus revenue estimates for fiscal year 1998-99 and the
first estimates for fiscal year 1999-2000, which became the basis for the fiscal
year 1998-99 revised estimates and the estimates for fiscal year 1999-2000. The
growth estimates for fiscal year 1998-99 for the General Fund taxes range from
2.25% to 2.75% and for all tax collections range from 2.5% to 3.0%. The budget
document for fiscal year 1999-2000 estimates growth of 2.43% in 1998-99 which is
$69.8 million less than the budgeted estimate. The shortfall is offset by fiscal
year 1997-98's surplus and available reserves in the current year.
Revenue collections for the six months of August 1998 through January
1999 increased by 3.36% over the same period last year. General Fund collections
are $2.6 billion which is $20.2 million less than budgeted. The undercollection
was in the franchise and excise taxes.
The estimated financial effects of the Governor's proposed "Tax Relief
& Fairness Act of 1999", which repeals the sales tax on grocery food and
replaces the franchise and excise taxes with the "fair business tax" -a 2.5% tax
on business compensation and profits (with a $50,000 exemption on each), are
included in the 1999-2000 budget. The budget contemplates a net revenue increase
from the 1999 Tax Bill of $406 million in General Fund revenue consisting of
$40.6 million to the Reserve for Revenue Fluctuations and $365.4 million to fund
the 1999-2000 budget.
The $16.568 billion budget recommended for fiscal year 1999-2000
includes no growth in positions. The base budget includes $42.3 million to fund
supplemental appropriations. The
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improvement budget of $416 million from general fund taxes includes $68.9
million for the Basic Education Program for public schools; $25.6 million for
higher education operating budgets; $142.3 million for TennCare; $13.6 million
for new prison beds and local jail beds; $20 million for state employee
compensation issues; and $26 million for a 1.7% salary increase effective
January 1, 2000 for state employees, teachers and higher education employees.
The Governor recommended $166.5 million in general obligation bonds (excluding
highway bonds), of which $75.9 million is for higher education projects, to fund
part of the $246.9 million capital projects program.
LOWER RATED SECURITIES RISK. (Capital Growth Fund) The Capital Growth
Fund is permitted to invest, to a limited extent, in securities rated as low as
Ba by Moody's or BB by S&P, Fitch or Duff. Such securities, though higher
yielding, are characterized by risk. See the "Appendix" for a general
description of Moody's, S&P, Fitch and Duff ratings. Although ratings may be
useful in evaluating the safety of interest and principal payments, they do not
evaluate the market value risk of these securities. The Fund will rely on the
Adviser's judgment, analysis and experience in evaluating the creditworthiness
of an issuer.
Investors should be aware that the market values of many of these
securities tend to be more sensitive to economic conditions than are higher
rated securities and will fluctuate over time. These securities are considered
by S&P, Moody's, Fitch and Duff generally to be predominantly speculative with
respect to capacity to pay interest and repay principal in accordance with the
terms of the obligation and generally will involve more credit risk than
securities in the higher rating categories.
Companies that issue certain of these securities often are highly
leveraged and may not have available to them more traditional methods of
financing. Therefore, the risk associated with acquiring the securities of such
issuers generally is greater than is the case with the higher rated securities.
For example, during an economic downturn or a sustained period of rising
interest rates, highly leveraged issuers of these securities may not have
sufficient revenues to meet their interest payment obligations. The issuer's
ability to service its debt obligations also may be affected adversely by
specific corporate developments, forecasts, or the unavailability of additional
financing. The risk of loss because of default by the issuer is significantly
greater for the holders of these securities because such securities generally
are unsecured and often are subordinated to other creditors of the issuer.
Because there is no established retail secondary market for many of
these securities, the Fund anticipates that such securities could be sold only
to a limited number of dealers or institutional investors. To the extent a
secondary trading market for these securities does exist, it generally is not as
liquid as the secondary market for higher rated securities. The lack of a liquid
secondary market may have an adverse impact on market price and yield and the
Fund's ability to dispose of particular issues when necessary to meet its
liquidity needs or in response to a specific economic event such as a
deterioration in the creditworthiness of the issuer. The lack of a liquid
secondary market for certain securities also may make it more difficult for the
32
<PAGE> 101
Fund to obtain accurate market quotations for purposes of valuing its securities
and calculating its net asset value. Adverse publicity and investor perceptions,
whether or not based on fundamental analysis, may decrease the values and
liquidity of these securities. In such cases, judgment may play a greater role
in valuation because less reliable, objective data may be available.
These securities may be particularly susceptible to economic downturns.
It is likely that an economic recession could disrupt severely the market for
such securities and may have an adverse impact on the value of such securities.
In addition, it is likely that any such economic downturn could adversely affect
the ability of the issuers of such securities to repay principal and pay
interest thereon and increase the incidence of default for such securities.
This Fund may acquire these securities during an initial offering. Such
securities may involve special risks because they are new issues. The Fund does
not have any arrangement with any persons concerning the acquisition of such
securities, and the Adviser will review carefully the credit and other
characteristics pertinent to such new issues.
The credit risk factors pertaining to lower rated securities also apply
to lower rated zero coupon securities. Such zero coupon securities carry an
additional risk in that, unlike securities which pay interest throughout the
period to maturity, the Fund will realize no cash until the cash payment date
unless a portion of such securities are sold and, if the issuer defaults, the
Fund may obtain no return at all on its investment. See "Dividends,
Distributions and Taxes."
MORTGAGE-RELATED SECURITIES RISK. (Capital Growth and Limited Term U.S.
Government Funds) Mortgage-related securities in which these Funds may invest
are complex derivative instruments, subject to both credit and prepayment risk,
and may be more volatile and less liquid than more traditional debt securities.
Some mortgage-related securities have structures that make their reactions to
interest rate changes and other factors difficult to predict, making their value
highly volatile. No assurance can be given as to the liquidity of the market for
certain mortgage-backed securities, such as collateralized mortgage obligations
and stripped mortgage-backed securities. Determination as to the liquidity of
interest-only and principal-only fixed mortgage-backed securities issued by the
U.S. Government or its agencies and instrumentalities will be made in accordance
with guidelines established by the Trust's Board of Directors. In accordance
with such guidelines, the Adviser will monitor investments in such securities
with particular regard to trading activity, availability of reliable price
information and other relevant information. The Fund intends to treat other
stripped mortgage-backed securities as illiquid securities.
Mortgage-related securities are subject to credit risks associated with
the performance of the underlying mortgage properties. Adverse changes in
economic conditions and circumstances are more likely to have an adverse impact
on mortgage-related securities secured by loans on certain types of commercial
properties than on those secured by loans on residential properties. In
addition, these securities are subject to prepayment risk, although
33
<PAGE> 102
commercial mortgages typically have shorter maturities than residential
mortgages and prepayment protection features. In certain instances, the credit
risk associated with mortgage-related securities can be reduced by third party
guarantees or other forms of credit support. Improved credit risk does not
reduce prepayment risk which is unrelated to the rating assigned to the
mortgage-related security. Prepayment risk can lead to fluctuations in value of
the mortgage-related security which may be pronounced. If a mortgage-related
security is purchased at a premium, all or part of the premium may be lost if
there is a decline in the market value of the security, whether resulting from
changes in interest rates or prepayments in the underlying mortgage collateral.
Certain mortgage-related securities that may be purchased by the Fund, such as
inverse floating rate collateralized mortgage obligations, have coupons that
move inversely to a multiple of a specific index which may result in a form of
leverage. As with other interest-bearing securities, the prices of certain
mortgage-related securities are inversely affected by changes in interest rates.
However, though the value of a mortgage-related security may decline when
interest rates rise, the converse is not necessarily true, since in periods of
declining interest rates the mortgages underlying the security are more likely
to be prepaid. For this and other reasons, a mortgage-related security's stated
maturity may be shortened by unscheduled prepayments on the underlying
mortgages, and, therefore, it is not possible to predict accurately the
security's return to the Fund. Moreover, with respect to certain stripped
mortgage-backed securities, if the underlying mortgage securities experience
greater than anticipated prepayments of principal, the Fund may fail to fully
recoup its initial investment in these securities even if the securities are
rated in the highest rating category. During periods of rapidly rising interest
rates, prepayments of mortgage-related securities may occur at slower than
expected rates. Slower prepayments effectively may lengthen a mortgage-related
security's expected maturity which generally would cause the value of such
security to fluctuate more widely in response to changes in interest rates. Were
the prepayments on the Fund's mortgage-related securities to decrease
significantly, the Fund's effective duration, and thus sensitivity to interest
rate fluctuations, would increase.
SIMULTANEOUS INVESTMENTS. (Capital Appreciation, Income and Money
Market Funds) Investment decisions for each Fund are made independently from
those of the other investment companies, investment advisory accounts, custodial
accounts, individual trust accounts and commingled funds that may be advised by
the Adviser or, if applicable, sub-investment adviser. However, if such other
investment companies or managed accounts desire to invest in, or dispose of, the
same securities as the Fund, available investments or opportunities for sales
will be allocated equitably to each of them. In some cases, this procedure may
adversely affect the size of the position obtained for or disposed of by a Fund
or the price paid or received by a Fund.
INVESTMENT RESTRICTIONS
Each Fund's investment objective is a fundamental policy, which cannot
be changed without approval by the holders of a majority (as defined in the 1940
Act) of the Fund's outstanding voting shares. In addition, each Fund has adopted
investment restrictions
34
<PAGE> 103
numbered 1 through 5 as fundamental policies, and only the Funds so indicated
have adopted investment restrictions numbered 6 through 9 as additional
fundamental policies. These restrictions cannot be changed, as to a Fund,
without approval by the holders of a majority (as defined in the 1940 Act) of
such Fund's outstanding voting securities. Each Fund, except as otherwise
indicated, has adopted investment restrictions numbered 10 through 13 as
non-fundamental policies which may be changed by vote of a majority of the
Trust's Trustees at any time.
FUNDAMENTAL POLICIES
No Fund may:
1. Purchase or sell commodities, commodity contracts (including futures
contracts with respect to each Fund other than the International Equity, Mid
Cap, Capital Growth, Large Cap, Limited Term U.S. Government, Tennessee
Tax-Exempt, and Limited Term Tennessee Tax-Exempt Funds, which may purchase
futures contracts), oil, gas or mineral exploration or development programs, or
real estate (although investments by all of the Funds except the Treasury
Reserve Money Market Fund in marketable securities of companies engaged in such
activities and in securities secured by real estate or interests therein are not
hereby precluded and investment in real estate investment trusts are permitted
for the Mid Cap, Capital Growth, and Large Cap Funds).
2. Borrow money or issue senior securities, except that each Fund may
borrow from banks or enter into reverse repurchase agreements for temporary
emergency purposes in amounts up to 331/3% of the value of its total assets at
the time of such borrowing, or mortgage, pledge, or hypothecate any assets,
except in connection with any such borrowing and in amounts not in excess of the
lesser of the dollar amounts borrowed or 331/3% of the value of such Fund's
total assets at the time of its borrowing. A Fund will not purchase securities
while borrowings (including reverse repurchase agreements) in excess of 5% of
its total assets are outstanding.
3. Make loans, except that each Fund may purchase or hold debt
instruments in accordance with its investment objective and policies, may lend
Fund securities in accordance with its investment objective and policies, and
may enter into repurchase agreements.
4. Purchase securities on margin, sell securities short, participate on
a joint or joint and several basis in any securities trading account, or
underwrite the securities of other issuers, except to the extent that a Fund may
be deemed to be an underwriter under certain securities laws in the disposition
of "restricted securities" acquired in accordance with such Fund's investment
objectives, restrictions and policies.
5. Issue any senior security (as such term is defined in Section 18(f)
of the 1940 Act). A Fund's permitted borrowings and transactions in futures and
options, to the extent
35
<PAGE> 104
permitted under the 1940 Act, are not considered senior securities for purposes
of this investment restriction.
The following investment restriction numbered 6 is a fundamental policy
which applies only to the Treasury Reserve Money Market Fund. The Treasury
Reserve Money Market Fund may not:
6. Invest in securities other than those issued or guaranteed by the
U.S. Government or its agencies or instrumentalities or repurchase agreements
related thereto.
The following investment restriction numbered 7 is a fundamental policy
which applies to each of the Tennessee Tax-Exempt and Tennessee Limited Term
Tax-Exempt Funds. Neither of these Funds may:
7. Purchase any securities which would cause 25% or more of the Fund's
total assets at the time of purchase to be invested in the securities of one or
more issuers conducting their principal business activities in the same
industry; provided that this limitation shall not apply to Municipal Securities;
and provided, further, that for the purpose of this limitation only, private
activity bonds that are backed only by the assets and revenues of a
non-governmental user shall not be deemed to be Municipal Securities.
The following investment restriction numbered 8 is fundamental for the
Treasury Reserve Money Market, International Equity Fund, Mid Cap Fund, Capital
Growth Fund, Large Cap Fund, Limited Term U.S. Government Fund, Aggressive
Growth Portfolio, Growth Portfolio, Growth and Income Portfolio, Moderate Growth
and Income Portfolio, and Current Income Portfolio. None of these Funds may:
8. Purchase any securities which would cause more than 25% of the value
of such Fund's total assets at the time of purchase to be invested in securities
of one or more issuers conducting their principal business activities in the
same industry, provided that (a) there is no limitation with respect to
obligations issued or guaranteed by the U.S. government or its agencies or
instrumentalities, and repurchase agreements secured by obligations of the U.S.
government or its agencies or instrumentalities; (b) for the Aggressive Growth
Portfolio, Growth Portfolio, Growth and Income Portfolio, Moderate Growth and
Income Portfolio, and Current Income Portfolio, there is no limitation with
respect to registered investment companies; (c) wholly-owned finance companies
will be considered to be in the industries of their parents if their activities
are primarily related to financing the activities of their parents; and (d)
utilities will be divided according to their services. For example, gas, gas
transmission, electric and gas, electric, and telephone will each be considered
a separate industry.
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<PAGE> 105
The following investment restriction numbered 9 is fundamental for the
Mid Cap Fund, Large Cap Fund, Limited Term U.S. Government Fund, Treasury
Reserve Money Market Fund, Aggressive Growth Portfolio, Growth Portfolio, Growth
and Income Portfolio, Moderate Growth and Income Portfolio, and Current Income
Portfolio. No such fund may:
9. Purchase securities of any one issuer, other than obligations issued
or guaranteed by the U.S. government or its agencies or instrumentalities, if,
immediately after such purchase, more than 5% of the value of such Fund's total
assets would be invested in such issuer, or such Fund would hold more than 10%
of any class of securities of the issuer or more than 10% of the outstanding
voting securities of the issuer, except that up to 25% of the value of each
Fund's total assets may be invested without regard to such limitations. There is
no limit to the percentage of assets that may be invested in U.S. Treasury
bills, notes, or other obligations issued or guaranteed by the U.S. government
or its agencies or instrumentalities or securities of other investment
companies.
* * *
NONFUNDAMENTAL POLICIES
None of the Funds may:
10. Invest in the securities of a company for the purpose of exercising
management or control.
11. Enter into repurchase agreements providing for settlement in more
than seven days after notice or purchase securities which are illiquid, if, in
the aggregate, more than 15% of the value of the Fund's net assets would be so
invested.
12. Purchase securities of other investment companies, except to the
extent permitted under the 1940 Act.
None of the International Equity, Capital Growth, Tennessee Tax-Exempt,
and Limited Term Tennessee Tax-Exempt Funds will:
13. Purchase securities of any one issuer, other than obligations
issued or guaranteed by the U.S. government or its agencies or instrumentalities
if, immediately after such purchase, more than 5% of the value of its total
assets would be invested in such issuer (except that up to 50% of the value of
the Fund's total assets may be invested without regard to such 5% limitation).
For purposes of this limitation, a security is considered to be issued by the
government entity (or entities) whose assets and revenues back the security;
with respect to a private activity bond that is backed only by the assets and
revenues of a non-government user, a security is considered to be issued by such
non-governmental user.
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<PAGE> 106
MANAGEMENT OF THE TRUST
TRUSTEES
Overall responsibility for management of the Trust rests with the Board
of Trustees of the Trust, who are elected by the Shareholders of the Trust.
There are currently five Trustees, one of whom is an "interested person" of the
Trust within the meaning of that term under the Investment Company Act of 1940.
The Trustees, in turn, elect the officers of the Trust to supervise actively its
day-to-day operations. The Trustees of the Trust, their current addresses, and
principal occupations during the past five years are as follows (if no address
is listed, the address is 3435 Stelzer Road, Columbus, Ohio 43219):
<TABLE>
<CAPTION>
Position(s) Held Principal Occupation
Name And Address Age With The Trust During The Past 5 Years
- ---------------- --- ---------------- -----------------------
<S> <C> <C> <C>
J. David Huber* 53 Chairman From June 1987 to present,
3435 Stelzer Road employee of BISYS Fund
Columbus, Ohio 43219 Services Limited Partnership
Dick D. Briggs, Jr., M.D. 65 Trustee From September 1989 to present,
459 DER Building Emeritus Professor and Eminent Scholar
1808 7th Avenue South Chair, Univ. of Alabama at Birmingham;
UAB Medical Center from October 1979 to present, Physician,
Birmingham, Alabama 35294 University of Alabama Health Services
Foundation; from 1981 to 1995,
Professor and Vice Chairman, Dept. of
Medicine, Univ. of Alabama at
Birmingham School of Medicine; from
1988 to 1992, President, CEO and
Medical Director, Univ. of Alabama
Health Services Foundation
Wendell D. Cleaver 64 Trustee From September 3, 1993 to present,
209 Lakewood Drive, West retired; from December, 1988 to August,
Mobile, Alabama 36608 1993, Executive Vice President, Chief
Operating Officer and Director, Mobile
Gas Service Corporation
Homer H. Turner, Jr. 71 Trustee From June 1991 to present, retired; until
751 Cary Drive June 1991, Vice President, Birmingham
Auburn, Alabama 36830-2505 Division, Alabama Power Company
</TABLE>
38
<PAGE> 107
<TABLE>
<S> <C> <C> <C>
James H. Woodward, Jr. 59 Trustee From 1996 to present, Trustee, The Sessions
The University of North Group; from July 1989 to present, Chancellor,
Carolina at Charlotte The University of North Carolina at Charlotte;
Charlotte, North Carolina 28223 from April 1997 to present, Trustee, BISYS
Variable Insurance Funds; from August 1984
to July 1989, Senior Vice President, University
College, University of Alabama at Birmingham
</TABLE>
- --------------------------
* Indicates an "interested person" of the Trust as defined in the 1940
Act.
The Trustees receive fees and are reimbursed for expenses in connection
with each meeting of the Board of Trustees they attend. However, no officer or
employee of BISYS Fund Services, or BISYS Fund Services, Inc. receives any
compensation from the Trust for acting as a Trustee.
OFFICERS
The officers of each Fund, their current addresses, their age, and
principal occupation during the past five years are as follows (if no address is
listed, the address is 3435 Stelzer Road, Columbus, Ohio 43219):
<TABLE>
<CAPTION>
Position(s) Held Principal Occupation
Name And Address Age With The Trust During Past 5 Years
- ---------------- --- ---------------- --------------------
<S> <C> <C> <C>
John F. Calvano 39 President From October, 1994 to present, employee of
BISYS Fund Services Limited Partnership; from
July, 1992 to August, 1994, investment
representative, BA Investment Services; and
from October, 1986 to July, 1994, Marketing
Manager, Great Western Investment
Management.
Walter B. Grimm 53 Vice President From June, 1992 to present, employee of BISYS
Fund Services Limited Partnership; from 1990
to 1992, President and CEO, Security
Bancshares; from July, 1981 to present,
President of Leigh Investments Consulting
(investments firm).
Charles L. Booth 39 Treasurer From 1988 to present, employee of BISYS Fund
Services Limited Partnership.
Rodney L. Ruehle 31 Secretary From August 1990 to August 1995, Assistant Treasurer
of The Cardinal Group of Funds; from August 1995
to present, Director, Administration Services,
BISYS Fund Services, Inc.
</TABLE>
39
<PAGE> 108
<TABLE>
<S> <C> <C> <C>
Jeffrey C. Cusick 38 Assistant Secretary An employee of BISYS Fund Services, Inc.
since July 1995, and an officer of other
investment companies administered by the
Administrator or its affiliates. From September
1993 to July 1995, he was Assistant Vice
President of Federated Administrative Services.
Alaina V. Metz 32 Assistant Secretary From June, 1995 to present, Chief
Administrator, Administrative and Regulatory
Services, BISYS Fund Services Limited
Partnership; from May, 1989 to June, 1995,
Supervisor, Mutual Fund Legal Department,
Alliance Capital Management.
</TABLE>
The officers of the Trust receive no compensation directly from the
Trust for performing the duties of their offices. BISYS receives fees from the
Trust for acting as Administrator and BISYS Fund Services, Inc. receives fees
from the Trust for acting as Transfer Agent for and for providing fund
accounting services to the Trust. Messrs. Calvano, Cusick, Grimm, Booth and
Smith and Ms. Metz are employees of BISYS Fund Services Limited Partnership.
COMPENSATION TABLE(1)
------------------
<TABLE>
<CAPTION> Pension or
Retirement Total
Aggregate Benefits Estimated Compensation
Compensation Accrued Annual from AmSouth
Name of from AmSouth As Part of Benefits Upon Mutual Funds
Position Fund Expenses Fund Expenses Retirement paid to Trustee
- -------- ------------- ------------- ------------- ---------------
<S> <C> <C> <C> <C>
J. David Huber None None None None
James H. $14,000 None None $14,000
Woodward, Jr.
Homer H. Turner $14,000 None None $14,000
Wendell D. Cleaver $14,000 None None $14,000
Dick D. Briggs, Jr., - $14,000 None None $14,000
M.D.
</TABLE>
1 Figures are for the Trust's fiscal year ended July 31, 1999.
INVESTMENT ADVISER
Investment advisory and management services are provided to the Money
Market Funds, the Capital Appreciation Funds and the Income Funds by the Adviser
pursuant to the
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<PAGE> 109
Investment Advisory Agreement dated as of August 1, 1988, as amended (the "First
Investment Advisory Agreement").
In selecting investments for each of the Income Funds, the Adviser
attempts to anticipate interest rates, thereby capitalizing on cyclical
movements in the bond markets. The Adviser seeks to achieve this goal through
active management of the buying and selling of fixed-income securities in
anticipation of changes in yields.
Under the terms of the Agreement, the Trust has agreed to pay the
Adviser a monthly fee at the annual rate set forth below as a percentage of the
relevant Fund's average daily net assets.
<TABLE>
<CAPTION>
Annual Rate Of
Investment
Name Of Fund Advisory Fee Payable
- ------------ --------------------
<S> <C>
International Equity Fund 1.25%
Mid Cap Fund 1.00%
Capital Growth Fund .80%
Large Cap Fund .80%
Limited Term U.S. Government Fund .65%
Tennessee Tax-Exempt Fund .65%
Limited Term Tennessee Tax-Exempt Fund .65%
Treasury Reserve Money Market Fund .40%
Aggressive Growth Portfolio .20%
Growth Portfolio .20%
Growth and Income Portfolio .20%
Moderate Growth and Income Portfolio .20%
Current Income Portfolio .20%
</TABLE>
From time to time, the Adviser may waive receipt of its fees and/or
voluntarily assume certain expenses of a Fund, which would have the effect of
lowering the overall expense ratio of that Fund and increasing yield to its
investors. The Fund will not pay the Adviser at a later time for any amounts it
may waive, nor will the Fund reimburse the Adviser for any amounts it may
assume.
With respect to International Equity Fund, the Adviser has entered into
a Sub-Investment Advisory Agreement (the "Lazard Sub-Advisory Agreement") with
Lazard Asset Management ("Lazard") dated [_________] 1999. As to such Fund, the
Lazard Sub-Advisory Agreement is subject to annual approval by (i) the Board or
(ii) vote of a majority (as defined in the 1940 Act) of the Fund's outstanding
voting securities, provided that in either event the continuance also is
approved by a majority of the Board members who are not "interested persons" (as
defined in the 1940 Act) of the Fund or Lazard, by vote cast in
41
<PAGE> 110
person at a meeting called for the purpose of voting on such approval. The
Lazard Sub-Advisory Agreement is terminable without penalty, (i) by the Adviser
on 60 days' notice, (ii) by the Fund's Board or by vote of the holders of a
majority of the Fund's outstanding voting securities on 60 days' notice, or
(iii) upon not less than 90 days' notice, by Lazard. The Lazard Sub-Advisory
Agreement will terminate automatically in the event of its assignment (as
defined in the 1940 Act). Under the terms of the Lazard Sub-Advisory Agreement,
the Adviser has agreed to pay Lazard a monthly fee at the annual rate of [.50%]
of the value of the International Equity Fund's average daily net assets.
With respect to Mid-Cap Fund, the Adviser has entered into a
Sub-Investment Advisory Agreement (the "Bennett Lawrence Sub-Advisory
Agreement") with Bennett Lawrence Management, LLC ("Bennett Lawrence") dated
[__________] 1999. As to such Fund, the Bennett Lawrence Sub-Advisory Agreement
is subject to annual approval by (i) the Board or (ii) vote of a majority (as
defined in the 1940 Act) of the Fund's outstanding voting securities, provided
that in either event the continuance also is approved by a majority of the Board
members who are not "interested persons" (as defined in the 1940 Act) of the
Fund or Bennett Lawrence, by vote cast in person at a meeting called for the
purpose of voting on such approval. The Bennett Lawrence Sub-Advisory Agreement
is terminable without penalty, (i) by the Adviser on 60 days' notice, (ii) by
the Fund's Board or by vote of the holders of a majority of the Fund's
outstanding voting securities on 60 days' notice, or (iii) upon not less than 90
days' notice, by Bennett Lawrence. The Bennett Lawrence Sub-Advisory Agreement
will terminate automatically in the event of its assignment (as defined in the
1940 Act). Under the terms of the Bennett Lawrence Sub-Advisory Agreement, the
Adviser has agreed to pay Bennett Lawrence a monthly fee at the annual rate set
forth below as a percentage of the average daily net assets of the Mid-Cap Fund:
<TABLE>
<CAPTION>
Annual Rate of Sub-
Average Daily New Advisory Fee Payable
Assets of Mid-Cap Fund By the Adviser
<S> <C>
on the first $25 million [.75%]
on the next $50 million [.625%]
on assets in excess of $75 million [.50%]
</TABLE>
ADMINISTRATOR
ASO Services Company ("ASC") serves as administrator (the
"Administrator") to each Fund of the Trust pursuant to the Management and
Administration Agreement dated as of April 1, 1996 (the "Administration
Agreement"). ASC is a wholly-owned subsidiary of BISYS which is a wholly-owned
subsidiary of BISYS Group, Inc., a publicly held company which is a provider of
information processing, loan servicing and 401(k) administration and
record-keeping services to and through banking and other financial
organizations. The Administrator
42
<PAGE> 111
assists in supervising all operations of each Fund (other than those performed
by the Adviser under the Advisory Agreements, the Sub-Advisers under the
Sub-Advisory Agreements, those performed by AmSouth under its custodial services
agreement with the Trust and those performed by BISYS Fund Services, Inc. under
its transfer agency and fund accounting agreements with the Trust).
Under the Administration Agreement, the Administrator has agreed to
monitor the net asset value per Share of the Money Market Funds, to maintain
office facilities for the Trust, to maintain the Trust's financial accounts and
records, and to furnish the Trust statistical and research data and certain
bookkeeping services, and certain other services required by the Trust. The
Administrator prepares annual and semi-annual reports to the Securities and
Exchange Commission, prepares federal and state tax returns, prepares filings
with state securities commissions, and generally assists in supervising all
aspects of the Trust's operations (other than those performed by the Adviser
under the Advisory Agreements, the Sub-Advisers under the Sub-Advisory
Agreements, those by AmSouth under its custodial services agreement with the
Trust and those performed by BISYS Fund Services, Inc. under its fund accounting
agreement and BISYS Fund Services Ohio, Inc. under its transfer agency agreement
with the Trust). Under the Administration Agreement, the Administrator may
delegate all or any part of its responsibilities thereunder.
Under the Administration Agreement for expenses assumed and services
provided as manager and administrator, the Administrator receives a fee from
each Fund equal to the lesser of (a) a fee computed at the annual rate of twenty
one-hundredths of one percent (0.20%) of such Fund's average daily net assets;
or (b) such fee as may from time to time be agreed upon in writing by the Trust
and the Administrator. A fee agreed to from time to time by the Trust and the
Administrator may be significantly lower than the fee calculated at the annual
rate and the effect of such lower fee would be to lower a Fund's expenses and
increase the net income of such Fund during the period when such lower fee is in
effect. Each Fund also bears expenses incurred in pricing securities owned by
the Fund.
For its services as administrator and expenses assumed pursuant to the
Administration Agreement, the Administrator received the following fees:
The Administration Agreement shall, unless sooner terminated as
provided in the Administration Agreement (described below), continue until
December 31, 2000. Thereafter, the Administration Agreement shall be renewed
automatically for successive five-year terms, unless written notice not to renew
is given by the non-renewing party to the other party at least 60 days' prior to
the expiration of the then-current term. The Administration Agreement is
terminable with respect to a particular Fund only upon mutual agreement of the
parties to the Administration Agreement and for cause (as defined in the
Administration Agreement) by the party alleging cause, on not less than 60 days'
notice by the Trust's Board of Trustees or by the Administrator.
43
<PAGE> 112
The Administration Agreement provides that the Administrator shall not
be liable 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 in the performance of its duties, or
from the reckless disregard by the Administrator of its obligations and duties
thereunder.
EXPENSES
Each Fund bears the following expenses relating to its operations:
taxes, interest, any brokerage fees and commissions, fees of the Trustees of the
Trust, Securities and Exchange Commission fees, state securities qualification
fees, costs of preparing and printing Prospectuses for regulatory purposes and
for distribution to current Shareholders, outside auditing and legal expenses,
advisory and administration fees, fees and out-of-pocket expenses of the
custodian and the transfer agent, dividend disbursing agents fees, fees and
out-of-pocket expenses for fund accounting services, expenses incurred for
pricing securities owned by it, certain insurance premiums, costs of maintenance
of its existence, costs of Shareholders' and Trustees' reports and meetings, and
any extraordinary expenses incurred in its operation.
AmSouth and the Administrator each bear all expenses in connection with
the performance of their services as Adviser and Administrator, respectively,
other than the cost of securities (including brokerage commissions, if any)
purchased for a Fund. No Fund will bear, directly or indirectly, the cost of any
activity primarily intended to result in the distribution of Shares of such
Fund; such costs will be borne by the Distributor.
As a general matter, expenses are allocated to the Trust, Class A and
Class B Shares of a Fund on the basis of the relative net asset value of each
class. At present, the only expenses that will be borne solely by Class A and
Class B Shares, other than in accordance with the relative net asset value of
the class, are expenses under the Servicing Plan which relates only to the
Class A Shares and the Distribution Plan which relates only to the Class B
Shares.
SUB-ADMINISTRATORS
AmSouth is retained by BISYS as the Sub-Administrator to the Trust
pursuant to an agreement between the Administrator and AmSouth. On April 1,
1996, AmSouth entered into an Agreement with ASO as the Sub-Administrator of the
Trust. Pursuant to this agreement, AmSouth has assumed certain of the
Administrator's duties, for which AmSouth receives a fee, paid by the
Administrator, calculated at an annual rate of up to (0.10%) ten one-hundredths
of one percent of each Fund's average net assets.
BISYS is retained by the Administrator as a Sub-Administrator to the
Trust. Pursuant to its agreement with the Administrator, BISYS Fund Services is
entitled to compensation as mutually agreed upon from time to time by it and the
Administrator.
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DISTRIBUTOR
BISYS serves as distributor to each Fund of the Trust pursuant to the
Distribution Agreement dated as of July 16, 1997 (the "Distribution Agreement").
The Distribution Agreement provides that, unless sooner terminated it will
continue in effect until January 31, 2000, and from year to year thereafter if
such continuance is approved at least annually (i) by the Trust's Board of
Trustees or by the vote of a majority of the outstanding Shares of the Funds or
Fund subject to such Distribution Agreement, and (ii) by the vote of a majority
of the Trustees of the Trust who are not parties to such Distribution Agreement
or interested persons (as defined in the 1940 Act) of any party to such
Distribution Agreement, cast in person at a meeting called for the purpose of
voting on such approval. The Distribution Agreement may be terminated in the
event of any assignment, as defined in the 1940 Act.
Class A Shares of the Trust are subject to a Shareholder Servicing Plan
(the "Servicing Plan") permitting payment of compensation to financial
institutions that agree to provide certain administrative support services for
their customers or account holders. Each Fund has entered into a specific
arrangement with BISYS for the provision of such services by BISYS, and
reimburses BISYS for its cost of providing these services, subject to a maximum
annual rate of twenty-five one-hundredths of one percent (0.25%) of the average
daily net assets of the Class A Shares of each Fund.
The Servicing Plan was initially approved on December 6, 1995 by the
Trust's Board of Trustees, including a majority of the trustees who are not
interested persons of the Trust (as defined in the 1940 Act) and who have no
direct or indirect financial interest in the Servicing Plan (the "Independent
Trustees"). The Servicing Plan reflects the creation of the Class A Shares, and
provides for fees only upon that Class.
The Servicing Plan may be terminated with respect to any Fund by a vote
of a majority of the Independent Trustees, or by a vote of a majority of the
outstanding Class A Shares of that Fund. The Servicing Plan may be amended by
vote of the Trust's Board of Trustees, including a majority of the Independent
Trustees, cast in person at a meeting called for such purpose, except that any
change in the Servicing Plan that would materially increase the shareholder
servicing fee with respect to a Fund requires the approval of the holders of
that Fund's Classic Class. The Trust's Board of Trustees will review on a
quarterly and annual basis written reports of the amounts received and expended
under the Servicing Plan (including amounts expended by the Distributor to
Participating Organizations pursuant to the Servicing Agreements entered into
under the Servicing Plan) indicating the purposes for which such expenditures
were made.
Under the Trust's Distribution and Shareholder Services Plan (the
"Distribution Plan"), Class B Shares of a Fund will pay a monthly distribution
fee to the Distributor as compensation for its services in connection with the
Distribution Plan at an annual rate equal to one percent (1.00%) of the average
daily net assets of the Class B Shares of each Fund which includes a
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Shareholder Servicing fee of 0.25% of the average daily net assets of the Class
B Shares of each Fund. The Distributor may periodically waive all or a portion
of the fee with respect to a Fund in order to increase the net investment income
of the Fund available for distribution as dividends. The Distributor may apply
the Class B Share Fee toward the following: (i) compensation for its services or
expenses in connection with distribution assistance with respect to such Fund's
Class B Shares; (ii) payments to financial institutions and intermediaries (such
as banks, savings and loan associations, insurance companies, and investment
counselors) as brokerage commissions in connection with the sale of such Fund's
Class B Shares; and (iii) payments to financial institutions and intermediaries
(such as banks, savings and loan associations, insurance companies, and
investment counselors), broker-dealers, and the Distributor's affiliates and
subsidiaries as compensation for services and/or reimbursement of expenses
incurred in connection with distribution or shareholder services with respect to
such Fund's Class B Shares.
The Distribution Plan was initially approved on March 12, 1997 by the
Trust's Board of Trustees, including a majority of the trustees who are not
interested persons of the Fund (as defined in the 1940 Act) and who have no
direct or indirect financial interest in the Distribution Plan (the "Independent
Trustees").
In accordance with Rule 12b-1 under the 1940 Act, the Distribution Plan
may be terminated with respect to the Class B Shares of any Fund by a vote of a
majority of the Independent Trustees, or by a vote of a majority of the
outstanding Class B Shares of that Fund. The Distribution Plan may be amended by
vote of the Fund's Board of Trustees, including a majority of the Independent
Trustees, cast in person at a meeting called for such purpose, except that any
change in the Distribution Plan that would materially increase the distribution
fee with respect to the Class B Shares of a Fund requires the approval of the
holders of that Fund's Class B Shares. The Trust's Board of Trustees will review
on a quarterly and annual basis written reports of the amounts received and
expended under the Distribution Plan (including amounts expended by the
Distributor to Participating Organizations pursuant to the Servicing Agreements
entered into under the Distribution Plan) indicating the purposes for which such
expenditures were made.
All payments by the Distributor for distribution assistance or
shareholder services under the Distribution Plan will be made pursuant to an
agreement (a "Servicing Agreement") between the Distributor and such bank, other
financial institution or intermediary, broker-dealer, or affiliate or subsidiary
of the Distributor (hereinafter referred to individually as "Participating
Organizations"). A Servicing Agreement will relate to the provision of
distribution assistance in connection with the distribution of a Fund's Class B
Shares to the Participating Organization's customers on whose behalf the
investment in such Shares is made and/or to the provision of shareholder
services to the Participating Organization's customers owning a Fund's Class B
Shares. Under the Distribution Plan, a Participating Organization may include
AmSouth or a subsidiary bank or nonbank affiliates, or the subsidiaries or
affiliates of those banks. A Servicing Agreement entered into with a bank (or
any of its
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subsidiaries or affiliates) will contain a representation that the bank (or
subsidiary or affiliate) believes that it possesses the legal authority to
perform the services contemplated by the Servicing Agreement without violation
of applicable banking laws (including the Glass-Steagall Act) and regulations.
The distribution fee will be payable without regard to whether the
amount of the fee is more or less than the actual expenses incurred in a
particular year by the Distributor in connection with distribution assistance or
shareholder services rendered by the Distributor itself or incurred by the
Distributor pursuant to the Servicing Agreements entered into under the
Distribution Plan. If the amount of the distribution fee is greater than the
Distributor's actual expenses incurred in a particular year (and the Distributor
does not waive that portion of the distribution fee), the Distributor will
realize a profit in that year from the distribution fee. If the amount of the
distribution fee is less than the Distributor's actual expenses incurred in a
particular year, the Distributor will realize a loss in that year under the
Distribution Plan and will not recover from a Fund the excess of expenses for
the year over the distribution fee, unless actual expenses incurred in a later
year in which the Distribution Plan remains in effect were less than the
distribution fee paid in that later year.
The Glass-Steagall Act and other applicable laws prohibit banks
generally from engaging in the business of underwriting securities, but in
general do not prohibit banks from purchasing securities as agent for and upon
the order of customers. Accordingly, the Trust will require banks acting as
Participating Organizations to provide only those services which, in the banks'
opinion, are consistent with the then current legal requirements. It is
possible, however, that future legislative, judicial or administrative action
affecting the securities activities of banks will cause the Trust to alter or
discontinue its arrangements with banks that act as Participating Organizations,
or change its method of operations. It is not anticipated, however, that any
change in a Fund's method of operations would affect its net asset value per
share or result in financial loss to any customer.
CUSTODIAN
AmSouth serves as custodian of the Trust pursuant to a Custodial
Services Agreement with the Trust (the "Custodian"). The Custodian's
responsibilities include safeguarding and controlling the Trust's cash and
securities, handling the receipt and delivery of securities, and collecting
interest and dividends on the Trust's investments.
TRANSFER AGENT AND FUND ACCOUNTING SERVICES.
BISYS Fund Services Ohio, Inc. ("Transfer Agent") serves as transfer
agent to each Fund of the Trust pursuant to a Transfer Agency and Shareholder
Service Agreement with the Trust. The Transfer Agent is a wholly-owned
subsidiary of The BISYS Group, Inc.
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BISYS Fund Services, Inc. ("Fund Accountant") provides fund accounting
services to each of the Funds pursuant to a Fund Accounting Agreement with the
Trust. Under the Fund Accounting Agreement, the Fund Accountant receives a fee
from each Fund at the annual rate of 0.03% of such Fund's average daily net
assets, plus out-of-pocket expenses, subject to a minimum annual fee of $40,000
for each tax exempt fund and $30,000 for each taxable Fund and the Money Market
Funds may be subject to an additional fee of $10,000 for each Class.
LEGAL COUNSEL
Ropes & Gray, One Franklin Square, 1301 K Street, N.W., Suite 800 East,
Washington, DC 20005-3333, are counsel to the Trust.
ADDITIONAL PURCHASE AND REDEMPTION INFORMATION
Shares in each Fund are sold on a continuous basis by BISYS Fund
Services Limited Partnership ("BISYS"), and BISYS has agreed to use appropriate
efforts to solicit all purchase orders. In addition to purchasing Shares
directly from BISYS, Shares may be purchased through procedures established by
BISYS in connection with the requirements of accounts at AmSouth or financial
institutions that provide certain support services for their customers or
account holders ("Financial Institutions"). Customers purchasing Shares may
include officers, directors, or employees of AmSouth or AmSouth's correspondent
banks.
PURCHASE OF SHARES
As stated in the relevant Prospectuses, the public offering price of
Class A Shares of the Capital Appreciation Funds and the Income Funds is their
net asset value computed after the sale plus a sales charge which varies based
upon the quantity purchased. The public offering price of Class B and Trust
Shares is their net asset value computed after the sale. The public offering
price of such Shares is calculated by dividing net asset value by the difference
(expressed as a decimal) between 100% and the sales charge percentage of the
offering price applicable to the purchase (see "Shareholder Information -
Pricing of Fund Shares" in the relevant Prospectuses).
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SALES CHARGES. The offering price is rounded to two decimal places each
time a computation is made. The sales charge scale set forth in a Fund's
Prospectus applies to purchases of Shares of such a Fund made at one time by any
purchaser (a "Purchaser"), which includes: (i) an individual, his or her spouse
and children under the age of 18; (ii) a trustee or other fiduciary of a single
trust estate or single fiduciary account; or (iii) any other organized group of
persons, whether incorporated or not, provided that such organization has been
in existence for at least six months and has some purpose other than the
purchase of redeemable securities of a registered investment company. In order
to qualify for a lower sales charge, all orders from a Purchaser will have to be
placed through a single investment dealer and identified at the time of purchase
as originating from the same Purchaser, although such orders may be placed into
more than one discrete account which identifies the Purchasers.
A Purchaser may qualify for a reduced sales charge by combining
concurrent purchases of Class A Shares of a Capital Appreciation Fund or Income
Fund and one or more of the other Class A Shares of a Fund or by combining a
current purchase of Class A Shares of a Fund with prior purchases of Class A
Shares of any Fund. The applicable sales charge is based on the sum of (i) the
Purchaser's current purchase of shares of any Fund sold with a sales charge plus
(ii) the dollar amount of purchases of the Purchaser's combined holdings of all
Class A Shares in any Fund. The "Purchaser's combined holdings" described in the
preceding sentence shall include the combined holdings of the Purchaser, the
Purchaser's spouse, children under the age of 18, the Purchaser's retirement
plan accounts and sole proprietorship accounts that the Purchaser may own. To
receive the applicable public offering price pursuant to the right of
accumulation, Shareholders must at the time of purchase provide the Transfer
Agent or the Distributor with sufficient information to permit confirmation of
qualification. Accumulation privileges may be amended or terminated without
notice at any time by the Distributor.
Class A Shares of the Money Market Funds are sold at their net asset
value per share, as next computed after an order is received. However, as
discussed in the Classic and Class B Shares Prospectus, the Class B Shares are
subject to a Contingent Deferred Sales Charge if they are redeemed prior to the
seventh anniversary of purchase.
Certain sales of Class A Shares are made without a sales charge, as
described in the relevant Prospectuses under the caption "Sales Charge Waivers",
to promote goodwill with employees and others with whom BISYS, AmSouth and/or
the Trust have business relationships, and because the sales effort, if any,
involved in making such sales is negligible.
ADDITIONAL INFORMATION REGARDING BROKER COMPENSATION. As the Trust's
principal underwriter, BISYS acts as principal in selling Class A Shares and
Class B Shares of the Trust to dealers. BISYS re-allows a portion of the sales
charge as dealer discounts and brokerage commissions. Dealer allowances
expressed as a percentage of the offering price for all offering prices are set
forth in the relevant Class A Shares and Class B Shares Prospectuses (see
"Shareholder Information - Pricing of Fund Shares"). From time to time, BISYS
may
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make expense reimbursements for special training of a dealer's registered
representatives in group meetings or to help pay the expenses of sales contests.
In some instances, promotional incentives to dealers may be offered only to
certain dealers who have sold or may sell significant amounts of Group shares.
Neither BISYS nor dealers are permitted to delay the placement of orders to
benefit themselves by a price change.
From time to time dealers who receive dealer discounts and broker
commissions from the Distributor may reallow all or a portion of such dealer
discounts and broker commissions to other dealers or brokers.
The Distributor, at its expense, will also provide additional
compensation to dealers in connection with sales of Class A Shares and Class B
Shares of any of the Funds. Such compensation will include financial assistance
to dealers in connection with conferences, sales or training programs for their
employees, seminars for the public, advertising campaigns regarding one or more
Funds of the Trust, and/or other dealer-sponsored special events. In some
instances, this compensation will be made available only to certain dealers
whose representatives have sold a significant amount of such Shares.
Compensation will include payment for travel expenses, including lodging,
incurred in connection with trips taken by invited registered representatives
and members of their families to locations within or outside the United States
for meetings or seminars of a business nature. Dealers may not use sales of a
Fund's Shares to qualify for this compensation to the extent such may be
prohibited by the laws of any state or any self-regulatory agency, such as the
National Association of Securities Dealers, Inc. None of the aforementioned
compensation is paid for by any Fund or its Shareholders.
PURCHASES THROUGH FINANCIAL INSTITUTIONS. Shares of the Funds may be
purchased through procedures established by the Distributor in connection with
requirements of qualified accounts maintained by or on behalf of certain persons
("Customers") by AmSouth or financial institutions that provide certain
administrative support services for their customers or account holders
(collectively, "Financial Institutions"). These procedures may include
instructions under which a Customer's account is "swept" automatically no less
frequently than weekly and amounts in excess of a minimum amount agreed upon by
a Financial Institution and its Customer are invested by the Distributor in
Shares of a Money Market Fund. These procedures may also include transactions
whereby AmSouth as agent purchases Shares of the Funds in amounts that
correspond to the market value of securities sold to the Funds by AmSouth as
agent.
Shares of the Trust sold to Financial Institutions acting in a
fiduciary, advisory, custodial, agency, or other similar capacity on behalf of
Customers will normally be held of record by the Financial Institutions. With
respect to Shares so sold, it is the responsibility of the particular Financial
Institution to transmit purchase or redemption orders to the Distributor and to
deliver federal funds for purchase on a timely basis. Beneficial ownership of
the Shares
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will be recorded by the Financial Institutions and reflected in the account
statements provided by the Financial Institutions to Customers.
Depending upon the terms of a particular Customer account, the
Financial Institutions may charge a Customer's account fees for automatic
investment and other cash management services provided in connection with
investment in the Capital Appreciation Funds. Information concerning these
services and any charges can be obtained from the Financial Institutions.
If an Account Registration Form has been previously received by the
Distributor, investors may also purchase Class A Shares and Class B Shares
either by telephone or by wiring funds to the Trust's custodian. Telephone
orders may be placed by calling the Trust at (800) 451-8382. Payment for Shares
ordered by telephone may be made by check and must be received by the Trust's
custodian within three days of the telephone order. If payment is not received
within three days or a check timely received does not clear, the purchase will
be canceled and the investor could be liable for any losses or fees incurred. In
the case of purchases of Shares effected by wiring funds to the Trust's
custodian, investors must call the Trust at (800) 451-8382 to obtain
instructions regarding the bank account number into which the funds should be
wired and other pertinent information.
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AUTOMATIC INVESTMENT PLAN
To change the frequency or amount invested, written instructions must
be received by the Trust at least seven Business Days in advance of the next
transfer. If the bank or bank account number is changed, instructions must be
received by the Trust at least 20 Business Days in advance. In order to change a
bank or bank account number, investors also must have their signature guaranteed
by a bank, broker, dealer, credit union, securities exchange, securities
association, clearing agency or savings association, as those terms are defined
in Rule 17Ad-15 under the Securities Exchange Act of 1934 (an "Eligible
Guarantor Institution"). Signature guarantees are described more fully under
"REDEMPTION BY MAIL" below. If there are insufficient funds in the investor's
designated bank account to cover the Shares purchased using AIP, the investor's
bank may charge the investor a fee or may refuse to honor the transfer
instruction (in which case no Fund Shares will be purchased).
MATTERS AFFECTING REDEMPTION
The Trust may suspend the right of redemption or postpone the date of
payment for Shares during any period when (a) trading on the New York Stock
Exchange (the "Exchange") is restricted by applicable rules and regulations of
the Securities and Exchange Commission, (b) the Exchange is closed for other
than customary weekend and holiday closings, (c) the Securities and Exchange
Commission has by order permitted such suspension, or (d) an emergency exists as
determined by the Securities and Exchange Commission.
The Trust may redeem any class of Shares involuntarily if redemption
appears appropriate in light of the Trust's responsibilities under the 1940 Act.
See "Valuation of the Money Market Funds" above.
"SWEEP" PROGRAM. (Applicable to the Money Market Funds Only) Shares of
the Money Market Funds may be purchased or sold through the "sweep" program
established by certain financial institutions under which a portion of their
customers' accounts may be automatically invested in the Fund. The customer
becomes the beneficial owner of specific shares of the Fund which may be
purchased, redeemed and held by the financial institution in accordance with the
customer's instructions and may fully exercise all rights as a shareholder. The
shares will be held by the Transfer Agent in book-entry form. A statement with
regard to the customer's shares is generally supplied to the customer monthly,
and confirmations of all transactions for the account of the customer ordinarily
are available to the customer promptly on request. In addition, each customer is
sent proxies, periodic reports and other information from the Trust with regard
to shares of the Funds. The customer's shares are fully assignable and may be
encumbered by the customer. The "sweep" agreement can be terminated by the
customer at any time, without affecting its beneficial ownership of the shares.
To obtain the benefits of this service, a customer typically is
required to maintain a minimum balance subject to a monthly maintenance fee, or
a higher minimum balance for
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which no monthly fee would be imposed. In either case, a penalty fee is imposed
if the minimum should not be maintained. In general, the automatic investment in
the Fund's shares occurs on the same day that withdrawals are made by the
financial institution, at the next determined net asset value after the order is
received.
All agreements which relate to the service are with the financial
institution. Neither the Distributor nor the Trust is a party to any of those
agreements and no part of the compensation received by the financial institution
flows to the Trust or to BISYS or to any of their affiliates, either directly or
indirectly. Further information concerning this program and any related charges
or fees is provided by the financial institution prior to any purchase of the
Fund's shares. Any fees charged by the financial institution effectively reduces
the Fund's yield for those customers.
VALUATION
As indicated in the Prospectuses, the net asset value of each Fund is
determined and the Shares of each Fund are priced as of 4:00 p.m., (1:00 p.m.
and 4:00 p.m. for the Treasury Reserve Money Market Fund) Eastern time (the
"Valuation Time") on each Business Day of the Fund. As used herein a "Business
Day" constitutes any day on which the New York Stock Exchange (the "NYSE") is
open for trading and the Federal Reserve Bank of Atlanta is open, except days on
which there are not sufficient changes in the value of the Fund's portfolio
securities that the Fund's net asset value might be materially affected, or days
during which no Shares are tendered for redemption and no orders to purchase
Shares are received. Currently, either the NYSE or the Federal Reserve Bank of
Atlanta is closed on the customary national business holidays of New Year's Day,
Martin Luther King, Jr. Day, Presidents' Day, Good Friday, Memorial Day,
Independence Day, Labor Day, Columbus Day, Veteran's Day, Thanksgiving Day and
Christmas Day.
VALUATION OF THE TREASURY RESERVE MONEY MARKET FUND
The Treasury Reserve Money Market Fund has elected to use the amortized
cost method of valuation pursuant to Rule 2a-7 under the 1940 Act. This involves
valuing an instrument at its cost initially and thereafter assuming a constant
amortization to maturity of any discount or premium, regardless of the impact of
fluctuating interest rates on the market value of the instrument. This method
may result in periods during which value, as determined by amortized cost, is
higher or lower than the price the Fund would receive if it sold the instrument.
The value of securities in this Fund can be expected to vary inversely with
changes in prevailing interest rates.
Pursuant to Rule 2a-7, the Treasury Reserve Money Market Fund will
maintain a dollar-weighted average portfolio maturity appropriate to its
objective of maintaining a stable net asset value per Share, provided that the
Fund will not purchase any security with a remaining maturity of more than
thirteen months (securities subject to repurchase agreements may bear
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longer maturities) nor maintain a dollar-weighted average portfolio maturity
which exceeds 90 days. The Trust's Board of Trustees has also undertaken to
establish procedures reasonably designed, taking into account current market
conditions and the Fund's investment objective, to stabilize the net asset value
per Share of the Treasury Reserve Money Market Fund for purposes of sales and
redemptions at $1.00. These procedures include review by the Trustees, at such
intervals as they deem appropriate, to determine the extent, if any, to which
the net asset value per Share of the Fund calculated by using available market
quotations deviates from $1.00 per Share. In the event such deviation exceeds
one-half of one percent, Rule 2a-7 requires that the Board of Trustees promptly
consider what action, if any, should be initiated. If the Trustees believe that
the extent of any deviation from the Fund's $1.00 amortized cost price per Share
may result in material dilution or other unfair results to new or existing
investors, they will take such steps as they consider appropriate to eliminate
or reduce to the extent reasonably practicable any such dilution or unfair
results. These steps may include selling portfolio instruments prior to
maturity, shortening the dollar-weighted average portfolio maturity, withholding
or reducing dividends, reducing the number of the Fund's outstanding Shares
without monetary consideration, or utilizing a net asset value per Share
determined by using available market quotations.
VALUATION OF THE CAPITAL APPRECIATION FUNDS AND THE INCOME FUNDS
The value of the portfolio securities held by each of the Capital
Appreciation Funds and the Income Funds for purposes of determining such Fund's
net asset value per Share will be established on the basis of current valuations
provided by Muller Data Corporation or Kenny S&P Evaluation Services, whose
procedures shall be monitored by the Administrator, and which valuations shall
be the fair market value of such securities.
SHAREHOLDER SERVICES AND PRIVILEGES
The services and privileges described under this heading may not be
available to certain clients of the Adviser, its affiliates, certain Service
Organizations and Institutions, and the Adviser, its affiliates, some Service
Organizations and Institutions may impose certain conditions on their clients
which are different from those described in the Prospectus or this Statement of
Additional Information. Such investors should consult the Adviser, its
affiliates, their Service Organization or Institution in this regard.
DIRECTED DISTRIBUTION PLAN. The Directed Distribution Plan enables you
to invest automatically dividends and capital gain distributions, if any, paid
by a Fund in Class A or Class B Shares of another Fund of which you are a
shareholder. Class A or Class B Shares of the other Fund will be purchased at
the then-current net asset value. Minimum subsequent investments do not apply.
Investors desiring to participate in the Directed Distribution Plan should check
the appropriate box and supply the necessary information on the Account
Application. The Plan is available only for existing accounts and may not be
used to open new accounts. The Trust may modify or
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terminate the Directed Distribution Plan at any time or charge a service fee. No
such fee currently is contemplated.
AUTOMATIC WITHDRAWAL PLAN. The Automatic Withdrawal Plan permits you to
request withdrawal of a specified dollar amount (minimum of $50), with respect
to Class A or Class B Shares, on either a monthly, quarterly, semi-annual or
annual basis if you have a $5,000 minimum account. The automatic withdrawal will
be made on the first or fifteenth day, at your option, of the period selected.
To participate in the Automatic Withdrawal Plan, you must check the appropriate
box and supply the necessary information on the Account Application. The
Automatic Withdrawal Plan may be ended at any time by the investor, the Trust or
the Transfer Agent.
No CDSC with respect to Class B Shares will be imposed on withdrawals
made under the Automatic Withdrawal Plan, provided that the amounts withdrawn
under the plan do not exceed on an annual basis 10% of the account value at the
time the shareholder elects to participate in the Automatic Withdrawal Plan.
Withdrawals with respect to Class B Shares under the Automatic Withdrawal Plan
that exceed on an annual basis 10% of the value of the shareholder's account
will be subject to a CDSC on the amounts exceeding 10% of the initial account
value. Purchases of additional Class A Shares where the sales load is imposed
concurrently with withdrawals of Class A Shares generally are undesirable.
REINSTATEMENT PRIVILEGE. The Reinstatement Privilege enables investors
who have redeemed Class A or Class B Shares to repurchase, within 90 days of
such redemption, Class A or Class B Shares of a Fund in an amount not to exceed
the redemption proceeds received at a purchase price equal to the then-current
net asset value determined after a reinstatement request and payment are
received by the Transfer Agent. This privilege also enables such investors to
reinstate their account for the purpose of exercising the Exchange Privilege.
Upon reinstatement for Class B Shares, the investor's account will be credited
with an amount equal to the CDSC previously paid upon redemption of the Class B
Shares reinvested. To use the Reinstatement Privilege, you must submit a written
reinstatement request to the Transfer Agent. The reinstatement request and
payment must be received within 90 days of the trade date of the redemption.
There currently are no restrictions on the number of times an investor may use
this privilege.
PERFORMANCE INFORMATION
GENERAL
From time to time, the Trust may include the following types of
information in advertisements, supplemental sales literature and reports to
Shareholders: (1) discussions of general economic or financial principals (such
as the effects of inflation, the power of compounding and the benefits of
dollar-cost averaging); (2) discussions of general economic trends; (3)
presentations of statistical data to supplement such discussions; (4)
descriptions of
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past or anticipated portfolio holdings for one or more of the Funds within the
Trust; (5) descriptions of investment strategies for one or more of such Funds;
(6) descriptions or comparisons of various investment products, which may or may
not include the Funds; (7) comparisons of investment products (including the
Funds) with relevant market or industry indices or other appropriate benchmarks;
and (8) discussions of fund rankings or ratings by recognized rating
organizations.
Investors may also judge the performance of each Fund by comparing its
performance to the performance of other mutual funds with comparable investment
objectives and policies through various mutual fund or market indices and data
such as that provided by Lipper Analytical Services, Inc. and Donoghue's Money
Fund Report. Comparisons may also be made to indices or data published in Money
Magazine, Forbes, Barron's, The Wall Street Journal, The New York Times,
Business Week, American Banker, Fortune, Institutional Investor, Ibbotson
Associates, Inc., Morning Star, Inc., CDA/Wiesenberger, Pensions and
Investments, U.S.A. Today, and local newspapers and periodicals. In addition to
performance information, general information about these Funds that appears in a
publication such as those mentioned above may be included in advertisements,
sales literature and in reports to Shareholders. Additional performance
information is contained in the Trust's Annual Report, which is available free
of charge by calling the number on the front page of the Prospectus.
Information about the performance of a Fund is based on the Fund's
record up to a certain date and is not intended to indicate future performance.
Yield and total return are functions of the type and quality of instruments held
in a Fund, operating expenses, and marketing conditions. Any fees charged by a
Financial Institution with respect to customer accounts investing in Shares of a
Fund will not be included in performance calculations.
YIELDS OF THE MONEY MARKET FUNDS
The "yield" of each Money Market Funds for a seven-day period (a "base
period") will be computed by determining the "net change in value" (calculated
as set forth below) of a hypothetical account having a balance of one share at
the beginning of the period, dividing the net change in account value by the
value of the account at the beginning of the base period to obtain the base
period return, and multiplying the base period return by 365/7 with the
resulting yield figure carried to the nearest hundredth of one percent. Net
changes in value of a hypothetical account will include the value of additional
shares purchased with dividends from the original share and dividends declared
on both the original share and any such additional shares, but will not include
realized gains or losses or unrealized appreciation or depreciation on portfolio
investments. Yield may also be calculated on a compound basis (the "effective
yield") which assumes that net income is reinvested in Fund shares at the same
rate as net income is earned for the base period.
The yield and effective yield of each of the Money Market Funds will
vary in response to fluctuations in interest rates and in the expenses of the
Fund. For comparative purposes the
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current and effective yields should be compared to current and effective yields
offered by competing financial institutions for that base period only and
calculated by the methods described above.
YIELD OF THE CAPITAL APPRECIATION FUNDS, THE INCOME FUNDS AND THE TAX-FREE FUNDS
The yield of each of the Capital Appreciation Funds, the Income Funds
and the Tax- Free Funds will be computed by annualizing net investment income
per share for a recent 30- day period and dividing that amount by the maximum
offering price per share (reduced by any undeclared earned income expected to be
paid shortly as a dividend) on the last trading day of that period. Net
investment income will reflect amortization of any market value premium or
discount of fixed-income securities (except for obligations backed by mortgages
or other assets) and may include recognition of a pro rata portion of the stated
dividend rate of dividend paying portfolio securities. The yield of each of the
Capital Appreciation Funds and the Income Funds will vary from time to time
depending upon market conditions, the composition of the Fund's portfolios and
operating expenses of the Trust allocated to each Fund. These factors and
possible differences in the methods used in calculating yield should be
considered when comparing a Fund's yield to yields published for other
investment companies and other investment vehicles. Yield should also be
considered relative to changes in the value of the Fund's shares and to the
relative risks associated with the investment objectives and policies of the
Capital Appreciation Funds and the Income Funds.
The Tax-Free Funds may also advertise a "tax equivalent yield" and a
"tax equivalent effective yield." Tax equivalent yield will be computed by
dividing that portion of each Fund's yield which is tax-exempt by the difference
between one and a stated income tax rate and adding the product to that portion,
if any, of the yield of the Fund that is not tax-exempt. The tax equivalent
effective yield for the Tax-Free Funds is computed by dividing that portion of
the effective yield of the Fund which is tax-exempt by the difference between
one and a stated income tax rate and adding the product to that portion, if any,
of the effective yield of the Fund that is not tax-exempt.
At any time in the future, yields and total return may be higher or
lower than past yields and there can be no assurance that any historical results
will continue.
Investors in the Capital Appreciation Funds and the Income Funds are
specifically advised that share prices, expressed as the net asset values per
share, will vary just as yields will vary.
CALCULATION OF TOTAL RETURN
Total Return is a measure of the change in value of an investment in a
Fund over the period covered, assuming the investor paid the current maximum
applicable sales charge on the investment and that any dividends or capital
gains distributions were reinvested in the Fund
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immediately rather than paid to the investor in cash. The formula for
calculating Total Return includes four steps: (1) adding to the total number of
shares purchased by a hypothetical $1,000 investment in the Fund all additional
shares which would have been purchased if all dividends and distributions paid
or distributed during the period had been immediately reinvested; (2)
calculating the value of the hypothetical initial investment of $1,000 as of the
end of the period by multiplying the total number of shares owned at the end of
the period by the net asset value per share on the last trading day of the
period; (3) assuming redemption at the end of the period; and (4) dividing this
account value for the hypothetical investor by the initial $1,000 investment and
annualizing the result for periods of less than one year.
PERFORMANCE COMPARISONS
YIELD AND TOTAL RETURN. From time to time, performance information for
the Funds showing their average annual total return and/or yield may be included
in advertisements or in information furnished to present or prospective
Shareholders and the ranking of those performance figures relative to such
figures for groups of mutual funds categorized by Lipper Analytical Services as
having the same investment objectives may be included in advertisements.
Total return and/or yield may also be used to compare the performance
of the Funds against certain widely acknowledged standards or indices for stock
and bond market performance. The Standard & Poor's Composite Index of 500 Stocks
(the "S&P 500") is a market value-weighted and unmanaged index showing the
changes in the aggregate market value of 500 Stocks relative to the base period
1941-43. The S&P 500 is composed almost entirely of common stocks of companies
listed on the New York Stock Exchange, although the common stocks of a few
companies listed on the American Stock Exchange or traded over-the-counter are
included. The 500 companies represented include 400 industrial, 60
transportation and 40 financial services concerns. The S&P 500 represents about
80% of the market value of all issues traded on the New York Stock Exchange.
The NASDAQ-OTC Price Index (the "NASDAQ Index") is a market
value-weighted and unmanaged index showing the changes in the aggregate market
value of approximately 3,500 stocks relative to the base measure of 100.00 on
February 5, 1971. The NASDAQ Index is composed entirely of common stocks of
companies traded over-the-counter and often through the National Association of
Securities Dealers Automated Quotations ("NASDAQ") system. Only those
over-the-counter stocks having only one market maker or traded on exchanges are
excluded.
The Shearson Lehman Government Bond Index (the "SL Government Index")
is a measure of the market value of all public obligations of the U.S. Treasury;
all publicly issued debt of all agencies of the U.S. government and all
quasi-federal corporations; and all corporate debt guaranteed by the U.S.
government. Mortgage backed securities, flower bonds and foreign targeted issues
are not included in the SL Government Index.
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The Shearson Lehman Government/Corporate Bond Index (the "SL
Government/Corporate Index") is a measure of the market value of approximately
5,300 bonds with a face value currently in excess of $1.3 trillion. To be
included in the SL Government/Corporate Index, an issue must have amounts
outstanding in excess of $1 million, have at least one year to maturity and be
rated "Baa" or higher ("investment grade") by a nationally recognized
statistical rating agency.
ALL FUNDS. Current yields or performance will fluctuate from time to time and
are not necessarily representative of future results. Accordingly, a Fund's
yield or performance may not provide for comparison with bank deposits or other
investments that pay a fixed return for a stated period of time. Yield and
performance are functions of a quality, composition, and maturity, as well as
expenses allocated to the Fund. Fees imposed upon customer accounts by Financial
Institutions for cash management services will reduce a Fund's effective yield
to Customers.
DIVIDENDS, DISTRIBUTION AND TAXES
THE TREASURY RESERVE MONEY MARKET FUND
The net income of the Treasury Reserve Money Market Fund is declared
daily as a dividend to Shareholders of record at the close of business on the
day of declaration. Dividends will generally be paid monthly. Distributable net
capital gains (if any) will be distributed at least annually. A Shareholder will
automatically receive all income dividends and capital gains distributions in
additional full and fractional Shares of the same class at net asset value as of
the date of payment unless the Shareholder elects to receive such dividends or
distributions in cash. Reinvested dividends receive the same tax treatment as
dividends paid in cash. Such election, or any revocation thereof, must be made
in writing to the Transfer Agent at P.O. Box 182733, Columbus, Ohio 43218-2733,
and will become effective with respect to dividends and distributions having
record dates after its receipt by the Transfer Agent. Dividends are paid in cash
not later than seven Business Days after a Shareholder's complete redemption of
his or her Shares. Dividends are generally taxable when received. However,
dividends declared in October, November, or December to Shareholders of record
during those months and paid during the following January are treated for tax
purposes as if they were received by each Shareholder on December 31 of the
prior year.
Dividends will generally be taxable to a Shareholder as ordinary income
to the extent of the Shareholder's ratable share of each Fund's earnings and
profits as determined for tax purposes. Because all of the net investment income
of the U.S. Treasury Fund is expected to be interest income, it is anticipated
that no distributions will qualify for the dividends-received deduction for
corporate shareholders. The U.S. Treasury Fund does not expect to realize any
long-term capital gains and, therefore, does not foresee paying any "capital
gains dividends" as described in the Code. Dividends received by a Shareholder
that are derived from the U.S. Treasury Fund's investments in U.S. government
obligations may not be eligible for exemption
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from state and local taxes even though the income on such investments would have
been exempt from state and local taxes if the Shareholder directly held such
investments. In addition, the state and local tax exemption for interest earned
on U.S. government obligations may not extend to income earned on U.S.
government obligations that are subject to a repurchase agreement. Shareholders
are advised to consult their own tax Advisers concerning their own tax situation
and the application of state and local taxes.
THE INCOME FUNDS
A dividend for each Income Fund will be declared monthly at the close
of business on the day of declaration consisting of an amount of accumulated
undistributed net income of the Fund as determined to be necessary or
appropriate by the appropriate officers of the Trust. Dividends will generally
be paid monthly. Distributable net realized capital gains are distributed
annually to Shareholders of record. A Shareholder will automatically receive all
income dividends and capital gains distributions in additional full and
fractional Shares unless the Shareholder elects to receive such dividends or
distributions in cash. Dividends and distributions are reinvested without a
sales charge as of the ex-dividend date using the net asset value determined on
that date and are credited to a Shareholder's account on the payment date.
Reinvested dividends and distributions receive the same tax treatment as
dividends and distributions paid in cash. Dividends are generally taxable when
received. However, dividends declared in October, November, or December to
Shareholders of record during those months and paid during the following January
are treated for tax purposes as if they were received by each Shareholder on
December 31 of the prior year. Elections to receive dividends or distributions
in cash, or any revocation thereof, must be made in writing to the Transfer
Agent at P.O. Box 182733, Columbus, Ohio 43218-2733, and will become effective
with respect to dividends and distributions having record dates after its
receipt by the Transfer Agent.
INFORMATION SPECIFIC TO THE TAX-FREE FUNDS. Shareholders of the
Tax-Free Funds may treat as exempt-interest and exclude from gross income for
federal income tax purposes dividends derived from net exempt-interest income
and designated by the Funds as exempt- interest dividends. However, such
dividends may be taxable to shareholders under state or local law as ordinary
income even though all or a portion of the amounts may be derived from interest
on tax-exempt obligations which, if realized directly, would be exempt from such
taxes.
Dividends from the Tax-Free Funds attributable to exempt-interest
dividends may cause the social security and railroad retirement benefits of
individual Shareholders to become taxable, or increase the amount that is
taxable. Interest on indebtedness incurred by a Shareholder to purchase or carry
Shares is not deductible for federal income tax purposes to the extent the Funds
distribute exempt-interest dividends during the Shareholder's taxable year. The
amount of the disallowed interest deduction is the total amount of interest paid
or accrued on the indebtedness multiplied by a fraction, the numerator of which
is the amount of exempt-
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interest dividends received by the Shareholder and the denominator of which is
the sum of the exempt-interest dividends and taxable dividends received by the
Shareholder (excluding capital gain dividends received by the Shareholder and
capital gains required to be included in the Shareholder's computation of
long-term capital gains under Section 852(b)(3)(D) of the Code). It is
anticipated that distributions from the Tax Exempt and Tax-Free Funds will not
be eligible for the dividends-received deduction for corporate shareholders.
Gains on the sale of Shares in the Tax-Free Funds will be subject to
federal, state, and local taxes. If a Shareholder receives an exempt-interest
dividend with respect to any Share of the Fund and such Share is held for six
months or less, any loss on the sale or exchange of such Share will be
disallowed to the extent of the amount of such exempt-interest dividend.
The Tax-Free Funds may at times purchase Municipal Securities at a
discount from the price at which they were originally issued. For federal income
tax purposes, some or all of this market discount will be included in a Fund's
ordinary income and will be taxable to Shareholders as such when it is
distributed to them.
To the extent dividends paid to Shareholders are derived from taxable
income (for example, from interest on certificates of deposit, market discount
or repurchase agreements) or from long-term or short-term capital gains, such
dividends will be subject to federal income tax and may be subject to state and
local tax. A Shareholder should consult his or her own tax Adviser for any
special advice.
Dividends attributable to interest on certain private activity bonds
issued after August 7, 1986 must be included in the alternative minimum taxable
income of individual and corporate Shareholders for the purpose of determining
liability (if any) for the applicable alternative minimum tax. All tax-exempt
interest dividends will be required to be taken into account in calculating the
alternative minimum taxable income of corporate Shareholders.
ADDITIONAL TAX INFORMATION
It is the policy of each Fund to qualify for the favorable tax
treatment accorded regulated investment companies under Subchapter M of the
Internal Revenue Code of 1986, as amended (the "Code"). By following such
policy, the Trust's Funds expect to eliminate or reduce to a nominal amount the
federal income taxes to which such Fund may be subject.
In order to qualify for the special tax treatment accorded regulated
investment companies and their Shareholders, a Fund must, among other things,
(a) derive at least 90% of its gross income from dividends, interest, payments
with respect to certain securities loans, and gains from the sale or other
disposition of stock, securities, and foreign currencies, or other income
(including but not limited to gains from options, futures, or forward contracts)
derived with respect to its business of investing in such stock, securities, or
currencies; (b) each year distribute at least 90% of the sum of its taxable net
investment company income, its net tax-
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exempt income, and the excess, if any, of its net short-term capital gains over
its net long-term capital losses; and (c) diversify its holdings so that, at the
end of each fiscal quarter (i) at least 50% of the market value of its total
assets is represented by cash, cash items (including receivables), U.S.
Government securities, securities of other regulated investment companies, and
other securities, limited in respect of any one issuer to a value not greater
than 5% of the value of the Fund's total assets and 10% of the outstanding
voting securities of such issuer, and (ii) not more than 25% of the value of its
total assets is invested in the securities (other than those of the U.S.
government or other regulated investment companies) of any one issuer or of two
or more issuers which the Fund controls and which are engaged in the same,
similar, or related trades or businesses.
Dividends and distributions on a Fund's shares are generally subject to
federal income tax as described herein to the extent they do not exceed the
Fund's realized income and gains, even though such dividends and distributions
may economically represent a return of a particular shareholder's investment.
Such distributions are likely to occur in respect of shares purchased at a time
when the Fund's net asset value reflects gains that are either unrealized, or
realized but not distributed.
A non-deductible 4% excise tax is imposed on regulated investment
companies that do not distribute in each calendar year (regardless of whether
they have a non-calendar taxable year) an amount at least equal to the sum of
98% of their "ordinary income" (as defined) for the calendar year, 98% of their
capital gain net income for the 1-year period ending on October 31 of such
calendar year, and any undistributed amounts from the previous year. For the
foregoing purposes, a Fund is treated as having distributed the sum of (i) the
deduction for dividends paid (defined in Section 561 of the Code) during such
calendar year, and (ii) any amount on which it is subject to income tax for any
taxable year ending in such calendar year. If distributions during a calendar
year by a Fund did not meet the excise tax threshold, the Fund would be subject
to the 4% excise tax on the undistributed amounts. Each Fund intends generally
to make distributions sufficient to avoid imposition of this 4% excise tax.
Each Fund will be required in certain cases to withhold and remit to
the United States Treasury 31% of taxable dividends and other distributions paid
to any Shareholder who has provided either an incorrect taxpayer identification
number or no number at all, who is subject to withholding by the Internal
Revenue Service for failure properly to report payments of interest or
dividends, or who fails to provide a certified statement that he or she is not
subject to "backup withholding."
The Internal Revenue Service recently revised its regulations affecting
the application to foreign investors of the back-up withholding and withholding
tax rules described above. The new regulations will generally be effective for
payments made after December 31, 2000. In some circumstances, the new rules will
increase the certification and filing requirements imposed on foreign investors
in order to qualify for exemption from the 31% back-up withholding tax and for
reduced withholding tax rates under income tax treaties. Foreign
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investors in a Fund should consult their tax advisers with respect to the
potential application of these new regulations.
A Fund's transactions in options, foreign-currency-denominated
securities, and certain other investment and hedging activities of the Fund,
will be subject to special tax rules (including "mark-to-market," "straddle,"
"wash sale," "constructive sale" and "short sale" rules), the effect of which
may be to accelerate income to the Fund, defer losses to the Fund, cause
adjustments in the holding periods of the Fund's assets, convert short-term
capital losses into long-term capital losses, convert long-term capital gains
into short-term capital gains, and otherwise affect the character of the Fund's
income. These rules could therefore affect the amount, timing, and character of
distributions to Shareholders. Income earned as a result of these transactions
would, in general, not be eligible for the dividends-received deduction or for
treatment as exempt-interest dividends when distributed to Shareholders. The
Funds will endeavor to make any available elections pertaining to these
transactions in a manner believed to be in the best interest of the Funds.
The Funds each expect to qualify to be taxed as a "regulated investment
company" and to be relieved of all or substantially all federal income taxes.
Depending upon the extent of their activities in states and localities in which
their offices are maintained, in which their agents or independent contractors
are located, or in which they are otherwise deemed to be conducting business,
the Funds may be subject to the tax laws of such states or localities.
However, if for any taxable year the Funds do not qualify for the
special federal tax treatment afforded regulated investment companies, all of
their taxable income will be subject to federal income tax at regular corporate
rates at the Fund level (without any deduction for distributions to their
Shareholders). In addition, distributions to Shareholders may be taxed as
ordinary income even if the distributions are attributable to capital gains or
exempt interest earned by the Fund.
Information set forth in the Prospectuses and this Statement of
Additional Information which relates to federal taxation is only a summary of
some of the important federal tax considerations generally affecting purchasers
of Shares of the Trust's Funds. No attempt has been made to present a detailed
explanation of the federal income tax treatment of a Fund or its Shareholders
and this discussion is not intended as a substitute for careful tax planning.
Accordingly, potential purchasers of Shares of a Fund are urged to consult their
tax advisers with specific reference to their own tax situation. In addition,
the tax discussion in the Prospectuses and this Statement of Additional
Information is based on tax laws and regulations which are in effect on the date
of the Prospectuses and this Statement of Additional Information; such laws and
regulations may be changed by legislative or administrative action.
ADDITIONAL TAX INFORMATION CONCERNING THE TAX-FREE FUNDS
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As indicated in the Prospectuses of the Tax-Free Funds, these Funds are
designed to provide Shareholders with current tax-exempt interest income. The
Funds are not intended to constitute a balanced investment program and are not
designed for investors seeking capital appreciation or maximum tax-exempt income
irrespective of fluctuations in principal. Shares of the Tax-Free Funds would
not be suitable for tax-exempt institutions and may not be suitable for
retirement plans qualified under Section 401 of the Code, so-called Keogh or
H.R. 10 plans, and individual retirement accounts. Such plans and accounts are
generally tax-exempt and, therefore, would not gain any additional benefit from
the dividends of the Tax-Free Funds, being tax-exempt, and such dividends would
be ultimately taxable to the beneficiaries when distributed to them.
In addition, the Tax-Free Funds may not be appropriate investments for
Shareholders that may be "substantial users" of facilities financed by private
activity bonds or "related persons" thereof. "Substantial user" is defined under
U.S. Treasury Regulations to include a non-exempt person who regularly uses a
part of such facilities in his trade or business, and whose gross revenues
derived with respect to the facilities financed by the issuance of bonds
represent more than 5% of the total revenues derived by all users of such
facilities, or who occupies more than 5% of the usable area of such facilities,
or for whom such facilities or a part thereof were specifically constructed,
reconstructed or acquired. "Related person" includes certain related natural
persons, affiliated corporations, a partnership and its partners and an S
Corporation and its shareholders. Each Shareholder that may be considered a
"substantial user" should consult a tax adviser with respect to whether
exempt-interest dividends would retain the exclusion under Section 103 of the
Code if the Shareholder were treated as a "substantial user" or a "related
person."
The Code permits a regulated investment company which invests at least
50% of its assets in tax-free Municipal Securities to pass through to its
investors, tax-free, net Municipal Securities interest income. The policy of the
Tax-Free Funds is to pay each year as dividends substantially all such Fund's
Municipal Securities interest income net of certain deductions. An
exempt-interest dividend is any dividend or part thereof (other than a capital
gain dividend) paid by the Tax-Free Funds and designated as an exempt-interest
dividend in a written notice mailed to Shareholders after the close of such
Fund's taxable year, but not to exceed in the aggregate the net Municipal
Securities interest received by the Fund during the taxable year. The percentage
of the total dividends paid for any taxable year which qualifies as federal
exempt-interest dividends will be the same for all Shareholders receiving
dividends from the Tax-Free Funds during such year, regardless of the period for
which the Shares were held.
While the Tax-Free Funds do not expect to realize any significant
amount of long-term capital gains, any net realized long-term capital gains will
be distributed annually. The Tax-Free Funds will have no tax liability with
respect to such gains and the distributions will be taxable to Shareholders as
net gains on securities held for more than one year, regardless of how long a
Shareholder has held the Shares of the Funds. Such distributions will be
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designated as a capital gains dividend in a written notice mailed by the
Tax-Free Funds to Shareholders after the close of the Fund's taxable year.
While the Tax-Free Funds do not expect to earn any significant amount
of investment company taxable income, taxable income earned by the Funds will be
distributed to Shareholders. In general, the investment company taxable income
will be the taxable income of the Fund (including, the excess of short-term
capital gains for such year over net long-term capital losses for such year)
subject to certain adjustments and excluding the excess, if any, of any net
long-term capital gains for the taxable year over any net short-term capital
loss for such year. Any such income will be taxable to Shareholders as ordinary
income (whether paid in cash or additional Shares).
As indicated in the Prospectuses of the Tax-Free Funds, the Funds may
acquire puts with respect to Municipal Securities held in their portfolios. See
"INVESTMENT MANAGEMENT AND POLICIES - Options Transactions - Puts" in this
Statement of Additional Information. The policy of the Tax-Free Funds is to
limit their acquisition of puts to those under which the Fund will be treated
for federal income tax purposes as the owner of the Municipal Securities
acquired subject to the put and the interest on the Municipal Securities will be
tax-exempt to such Fund. Although the Internal Revenue Service has issued a
published ruling that provides some guidance regarding the tax consequences of
the purchase of puts, there is currently no guidance available from the Internal
Revenue Service that definitively establishes the tax consequences of many of
the types of puts that the Tax-Free Funds could acquire under the 1940 Act.
Therefore, although the Tax-Free Funds will only acquire a put after concluding
that it will have the tax consequences described above, the Internal Revenue
Service could reach a different conclusion from that of the Funds. If the Tax
Exempt Fund and the Tax-Free Funds were not treated as the owner of the
Municipal Securities, income from such securities would probably not be
tax-exempt.
The foregoing is only a summary of some of the important federal tax
considerations generally affecting purchasers of Shares of the Tax-Free Funds.
No attempt has been made to present a detailed explanation of the federal income
tax treatment of the Tax-Free Funds or their Shareholders and this discussion is
not intended as a substitute for careful tax planning. Accordingly, potential
purchasers of Shares of the Tax-Free Funds are urged to consult their tax
advisers with specific reference to their own tax situation. In addition, the
foregoing discussion is based on tax laws and regulations which are in effect on
the date of this Statement of Additional Information; such laws and regulations
may be changed by legislative or administrative action.
All distributions from the Tennessee Tax-Exempt Fund or Tennessee
Limited Term Tax-Exempt Fund, regardless of source, will be subject to the
Tennessee corporate excise tax. Shares of these Funds may be subject to the
Tennessee inheritance tax and the Tennessee estate tax if owned by a Tennessee
decedent at the time of death.
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The International Equity Fund may qualify for and may make an election
permitted under Section 853 of the Code so that shareholders may be eligible to
claim a credit or deduction on their Federal income tax returns for, and will be
required to treat as part of the amounts distributed to them, their pro rata
portion of qualified taxes paid or incurred by the Fund to foreign countries
(which taxes relate primarily to investment income). The International Equity
Fund may make an election under Section 853 of the Code, provided more than 50%
of the value of the Fund's total assets at the close of the taxable year
consists of securities in foreign corporations, and the Fund satisfies the
applicable distribution provisions of the Code. The foreign tax credit available
to shareholders is subject to certain limitations imposed by the Code.
If the International Equity Fund invests in an entity that is
classified as a "passive foreign investment company" ("PFIC") for Federal income
tax purposes, the operation of certain provisions of the Code applying to PFICs
could result in the imposition of certain federal income taxes on the Fund. In
addition, gain realized from the sale or other disposition of PFIC securities
may be treated as ordinary income under Section 1291 of the Code and gain
realized with respect to PFIC securities that are marked-to-market will be
treated as ordinary income under Section 1296 of the Code.
PORTFOLIO TRANSACTIONS
Pursuant to the Advisory Agreements, the Adviser or Sub-Adviser
determines, subject to the general supervision of the Board of Trustees and in
accordance with each Fund's investment objective, policies and restrictions,
which securities are to be purchased and sold by a Fund, and which brokers are
to be eligible to execute such Fund's portfolio transactions. Purchases and
sales of portfolio securities with respect to the Money Market Funds and Income
Funds usually are principal transactions in which portfolio securities are
normally purchased directly from the issuer or from an underwriter or market
maker for the securities. Purchases from underwriters of portfolio securities
include a commission or concession paid by the issuer to the underwriter and
purchases from dealers serving as market makers may include the spread between
the bid and asked price. Transactions on stock exchanges involve the payment of
negotiated brokerage commissions. Transactions in over-the-counter market are
generally principal transactions with dealers. With respect to over-the-counter
market, the Trust, where possible, will deal directly with dealers who make a
market in the securities involved except in those circumstances where better
price and execution are available elsewhere. While the Adviser and Sub-Adviser
generally seek competitive spreads or commissions, the Trust may not necessarily
pay the lowest spread or commission available on each transaction, for reasons
discussed below.
Allocation of transactions, including their frequency, to various
dealers is determined by the Adviser and the Sub-Adviser in their best judgment
and in a manner deemed fair and reasonable to Shareholders. The primary
consideration is prompt execution of orders in an effective manner at the most
favorable price. Subject to this consideration, dealers who
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provide supplemental investment research to the Adviser or Sub-Adviser may
receive orders for transactions on behalf of the Trust. Information so received
is in addition to and not in lieu of services required to be performed by the
Adviser or Sub-Adviser and does not reduce the advisory fees payable to the
Adviser or the Sub-Adviser. Such information may be useful to the Adviser or
Sub-Adviser in serving both the Trust and other clients and, conversely,
supplemental information obtained by the placement of business of other clients
may be useful to the Adviser or Sub-Adviser in carrying out their obligations to
the Trust.
The Trust will not acquire portfolio securities issued by, make savings
deposits in, or enter into repurchase or reverse repurchase agreements with the
Adviser, BISYS, the Sub-Adviser, or their affiliates, and will not give
preference to AmSouth's correspondents with respect to such transactions,
securities, savings deposits, repurchase agreements, and reverse repurchase
agreements. The Trust may execute portfolio transactions through an affiliate of
the Advisor.
Investment decisions for each Fund are made independently from those
for the other Funds or any other investment company or account managed by the
Adviser or Sub-Adviser. Any such other investment company or account may also
invest in the same securities as the Trust. When a purchase or sale of the same
security is made at substantially the same time on behalf of a Fund and another
Fund, investment company or account, the transaction will be averaged as to
price and available investments will be allocated as to amount in a manner which
the Adviser or Sub-Adviser believe to be equitable to the Fund(s) and such other
investment company or account. In some instances, this investment procedure may
adversely affect the price paid or received by a Fund or the size of the
position obtained by a Fund. To the extent permitted by law, the Adviser or
Sub-Adviser may aggregate the securities to be sold or purchased for a Fund with
those to be sold or purchased for the other Funds or for other investment
companies or accounts in order to obtain best execution. As provided by each of
the Advisory Agreements and the Sub-Advisory Agreement, in making investment
recommendations for the Trust, the Adviser or Sub-Adviser will not inquire or
take into consideration whether an issuer of securities proposed for purchase or
sale by the Trust is a customer of the Adviser or Sub-Adviser, its parent or its
subsidiaries or affiliates and, in dealing with its customers, the Adviser or
Sub-Adviser, its parent, subsidiaries, and affiliates will not inquire or take
into consideration whether securities of such customers are held by the Trust.
GLASS-STEAGALL ACT
In 1971, the United States Supreme Court held in INVESTMENT COMPANY
INSTITUTE V. CAMP that the Federal statute commonly referred to as the
Glass-Steagall Act prohibits a national bank from operating a mutual fund for
the collective investment of managing agency accounts. Subsequently, the Board
of Governors of the Federal Reserve System (the "Board") issued a regulation and
interpretation to the effect that the Glass-Steagall Act and such decision: (a)
forbid a bank holding company registered under the Federal Bank Holding
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Company Act of 1956 (the "Holding Company Act") or any non-bank affiliate
thereof from sponsoring, organizing, or controlling a registered, open-end
investment company continuously engaged in the issuance of its shares, but (b)
do not prohibit such a holding company or affiliate from acting as investment
adviser, transfer agent, and custodian to such an investment company. In 1981,
the United States Supreme Court held in BOARD OF GOVERNORS OF THE FEDERAL
RESERVE SYSTEM V. INVESTMENT COMPANY INSTITUTE that the Board did not exceed its
authority under the Holding Company Act when it adopted its regulation and
interpretation authorizing bank holding companies and their non-bank affiliates
to act as investment advisers to registered closed-end investment companies. In
the BOARD OF GOVERNORS case, the Supreme Court also stated that if a national
bank complied with the restrictions imposed by the Board in its regulation and
interpretation authorizing bank holding companies and their non-bank affiliates
to act as investment advisers to investment companies, a national bank
performing investment advisory services for an investment company would not
violate the Glass-Steagall Act.
AmSouth believes that it possesses the legal authority to perform the
services for each Fund contemplated by the Advisory Agreements regarding that
Fund and described in the Prospectus of that Fund and this Statement of
Additional Information and has so represented in the Advisory Agreement
regarding that Fund. Future changes in either federal or state statutes and
regulations relating to the permissible activities of banks or bank holding
companies and the subsidiaries or affiliates of those entities, as well as
further judicial or administrative decisions or interpretations of present and
future statutes and regulations, could prevent or restrict AmSouth from
continuing to perform such services for the Trust. Depending upon the nature of
any changes in the services which could be provided by AmSouth, the Board of
Trustees would review the Trust's relationship with AmSouth and consider taking
all action necessary in the circumstances.
Should future legislative, judicial, or administrative action prohibit
or restrict the proposed activities of AmSouth in connection with customer
purchases of Shares of the Trust, AmSouth might be required to alter materially
or discontinue the services offered by them to customers. It is not anticipated,
however, that any change in the Trust's method of operations would affect its
net asset value per Share or result in financial losses to any customer.
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INFORMATION ABOUT THE TRUST AND THE FUNDS
ADDITIONAL INFORMATION
ORGANIZATION AND DESCRIPTION OF SHARES
The Trust was organized as a Massachusetts business trust by the
Agreement and Declaration of Trust, dated October 1, 1987, under the name "Shelf
Registration Trust IV." The Trust's name was changed to "The ASO Outlook Group"
as of April 12, 1988, to "AmSouth Mutual Funds" as of August 19, 1993, and to
"AmSouth Funds" as of November 23, 1999 by amendments to the Agreement and
Declaration of Trust. A copy of the Trust's Agreement and Declaration of Trust,
as amended (the "Declaration of Trust") is on file with the Secretary of State
of The Commonwealth of Massachusetts. The Declaration of Trust authorizes the
Board of Trustees to issue an unlimited number of Shares, which are units of
beneficial interest. The Trust presently has thirty-one series of Shares each of
which represent interests a separate Fund to thirteen funds discussed in this
Statement of Additional Information are in the International Equity Fund, the
Mid Cap Fund, the Capital Growth Fund, the Large Cap Fund, the Limited Term U.S.
Government Fund, the Tennessee Tax-Exempt Fund, the Limited Term Tennessee
Tax-Exempt Fund, the Treasury Reserve Money Market Fund, the Aggressive Growth
Portfolio, the Growth Portfolio, the Growth and Income Portfolio, the Moderate
Growth and Income Portfolio, and the Current Income Portfolio. The Trust's
Declaration of Trust authorizes the Board of Trustees to divide or redivide any
unissued Shares of the Trust into one or more additional series.
Shares have no subscription or preemptive rights and only such
conversion or exchange rights as the Board of Trustees may grant in its
discretion. When issued for payment as described in the Prospectuses and this
Statement of Additional Information, the Trust's Shares will be fully paid and
non-assessable. In the event of a liquidation or dissolution of the Trust,
Shareholders of a Fund are entitled to receive the assets available for
distribution belonging to that Fund, and a proportionate distribution, based
upon the relative asset values of the respective Funds, of any general assets
not belonging to any particular Fund which are available for distribution.
Shares of the Trust are entitled to one vote per share (with
proportional voting for fractional shares) on such matters as Shareholders are
entitled to vote. Shareholders vote in the aggregate and not by series or class
on all matters except (i) when required by the 1940 Act, shares shall be voted
by individual series, (ii) when the Trustees have determined that the matter
affects only the interests of one or more series or class, then only
Shareholders of such series or class shall be entitled to vote thereon, (iii)
when pertaining to the Shareholder Servicing Plan, and (iv) when pertaining to
the Distribution Plan. There will normally be no meetings of Shareholders for
the purposes of electing Trustees unless and until such time as less than a
majority of the Trustees have been elected by the Shareholders, at which time
the Trustees then in office will call a Shareholders' meeting for the election
of Trustees. In
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addition, Trustees may be removed from office by a written consent signed by the
holders of two-thirds of the outstanding voting Shares of the Trust and filed
with the Trust's custodian or by vote of the holders of two-thirds of the
outstanding voting Shares of the Trust at a meeting duly called for the purpose,
which meeting shall be held upon the written request of the holders of not less
than 10% of the outstanding voting Shares of any Fund. Except as set forth
above, the Trustees shall continue to hold office and may appoint their
successors.
SHAREHOLDER LIABILITY
Under Massachusetts law, Shareholders could, under certain
circumstances, be held personally liable for the obligations of the Trust.
However, the Trust's Declaration of Trust disclaims Shareholder liability for
acts or obligations of the Trust and requires that notice of such disclaimer be
given in every agreement, obligation or instrument entered into or executed by
the Trust or the Trustees. The Declaration of Trust provides for indemnification
out of a Fund's property for all loss and expense of any Shareholder of such
Fund held liable on account of being or having been a Shareholder. Thus, the
risk of a Shareholder incurring financial loss on account of Shareholder
liability is limited to circumstances in which a Fund would be unable to meet
its obligations.
MISCELLANEOUS
The Trust is registered with the Securities and Exchange Commission as
a management investment company. Such registration does not involve supervision
by the Securities and Exchange Commission of the management or policies of the
Trust.
As used in this Statement of Additional Information, "assets belonging
to a Fund" means the consideration received by the Fund upon the issuance or
sale of Shares in that Group, together with all income, earnings, profits, and
proceeds derived from the investment thereof, including any proceeds from the
sale, exchange, or liquidation of such investments, and any funds or payments
derived from any reinvestment of such proceeds, and any general assets of the
Trust not readily identified as belonging to a particular Fund that are
allocated to that Fund by the Trust's Board of Trustees. The Board of Trustees
may allocate such general assets in any manner it deems fair and equitable. It
is anticipated that the factor that will be used by the Board of Trustees in
making allocations of general assets to particular Funds will be the relative
net assets of the respective Funds at the time of allocation. Assets belonging
to a particular Fund are charged with the direct liabilities and expenses in
respect of that Fund, and with a share of the general liabilities and expenses
of the Trust not readily identified as belonging to a particular Fund that are
allocated to that Fund in proportion to the relative net assets of the
respective Funds at the time of allocation. The timing of allocations of general
assets and general liabilities and expenses of the Trust to particular Funds
will be determined by the Board of Trustees of the Trust and will be in
accordance with generally accepted accounting principles. Determinations by the
Board of Trustees of the Trust as to the timing of
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the allocation of general liabilities and expenses and as to the timing and
allocable portion of any general assets with respect to a particular Fund are
conclusive.
As used in this Statement of Additional Information, a "vote of a
majority of the outstanding Shares" of the Trust or a particular Fund means the
affirmative vote, at a meeting of Shareholders duly called, of the lesser of (a)
67% or more of the votes of Shareholders of the Trust or such Fund present at
such meeting at which the holders of more than 50% of the votes attributable to
the Shareholders of record of the Trust or such Fund are represented in person
or by proxy, or (b) the holders of more than 50% of the outstanding votes of
Shareholders of the Trust or such Fund.
The Prospectuses of the Funds and this Statement of Additional
Information omit certain of the information contained in the Registration
Statement filed with the Securities and Exchange Commission. Copies of such
information may be obtained from the Securities and Exchange Commission upon
payment of the prescribed fee.
The Prospectuses of the Funds and this Statement of Additional
Information are not an offering of the securities herein described in any state
in which such offering may not lawfully be made. No salesman, dealer, or other
person is authorized to give any information or make any representation other
than those contained in the Prospectuses of the Funds and this Statement of
Additional Information.
A shareholder who beneficially owns, directly or indirectly, more than
25% of a Fund's voting securities may be deemed a "control person" (as defined
in the 1940 Act) of the Fund.
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APPENDIX
SHORT-TERM RATINGS. Short-term credit ratings of Standard & Poor's
Corporation ("S&P") are current assessments of the likelihood of timely payment
of debt having an original maturity of no more than 365 days. Short-term credit
rated A-1 by S&P indicates that the degree of safety regarding timely payment is
extremely strong. Those issues determined to possess extremely strong safety
characteristics are denoted with a plus sign (+) designation. Short-term credit
rated A-2 by S&P indicates that capacity for timely payment on issues is
satisfactory. However, the relative degree of safety is not as high as for
issues designated A-1. Short-term credit rated A-3 indicates adequate capacity
for timely payment. It is, however, more vulnerable to the adverse effects of
changes in circumstances than obligations carrying the higher designations.
Short-term credit rated B is regarded as having only speculative capacity for
timely payment. Short-term credit rated C is assigned to short-term debt
obligations with a doubtful capacity for payment. Short-term credit rated D
represents an issue in default or when interest payments or principal payments
are not made on the date due, even if the applicable grace period has not
expired unless Standard & Poor's believes such payments will be made during such
grace period.
The rating Prime-1 is the highest short-term rating assigned by Moody's
Investors Service, Inc. ("Moody's"). Issuers rated Prime-1 (or supporting
institutions) are considered to have a superior ability for repayment of senior
short-term debt obligations. Issuers rated Prime-2 (or supporting institutions)
have a strong ability for repayment of senior short-term debt obligations. This
will normally be evidenced by many of the characteristics of Prime-1 rated
issuers, but to a lesser degree. Earnings trends and coverage ratios, while
sound, may be more subject to variation. Capitalization characteristics, while
still appropriate, may be more affected by external conditions. Ample
alternative liquidity is maintained. Issuers rated Prime-3 (or supporting
institutions) have an acceptable ability for repayment of senior short-term
obligations. The effect of industry characteristics and market composition may
be more pronounced. Variability in earnings and profitability may result in
changes in the level of debt protection measurements and may require relatively
high financial leverage. Adequate alternate liquidity is maintained. Issuers
rated Not Prime do not fall within any of the Prime rating categories.
Short-term credit rated F-1 by Fitch IBCA is regarded as having the
strongest capacity for timely payments. Short-term credit rated F-2 by Fitch
IBCA is regarded as having a satisfactory capacity for timely payment, but that
margin of safety is not as great as for issues assigned F-1+ and F-1 ratings.
Short-term credit rated F-3 has an adequate capacity for timely payment but
near-term adverse changes could cause these securities to be rated below
investment grade. Issues rated B have characteristics suggesting a minimal
capacity for timely payment and are vulnerable to near-term adverse changes in
financial and economic conditions. Issues related C have characteristics
suggesting default is a real possibility. Capacity for meeting financial
commitments is solely reliant upon a sustained, favorable business and economic
environment. Issues rated D denotes actual or imminent payment default. The plus
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(+) sign is used after a rating symbol to designate the relative status of an
issuer within the rating category.
CORPORATE DEBT AND STATE AND MUNICIPAL BOND RATINGS.
STANDARD & POOR'S CORPORATION. Debt rated AAA has the highest rating
assigned by S&P. Capacity to pay interest and repay principal is extremely
strong. Debt rated AA has a very strong capacity to pay interest and to repay
principal and differs from the highest rated issues only in small degree. Debt
rated A has a strong capacity to pay interest and repay principal although it is
somewhat more susceptible to adverse effects of changes in circumstances and
economic conditions than debt in higher rated categories. Debt rated BBB is
regarded as having an adequate capacity to pay interest and repay principal.
Whereas it normally exhibits adequate protection parameters, adverse economic
conditions or changing circumstances are more likely to lead to a weakened
capacity to pay interest and repay principal for debt in this category than in
the higher rated categories.
BB -- Debt rated "BB" has less near-term vulnerability to default than
other speculative issues. However, it faces major ongoing uncertainties or
exposure to adverse business, financial, or economic conditions which could lead
to inadequate capacity to meet timely interest and principal payments.
B -- Debt rated "B" has a greater vulnerability to default but
currently has the capacity to meet interest payments and principal repayments.
Adverse business, financial, or economic conditions will likely impair capacity
or willingness to pay interest and repay principal.
CCC -- Debt rated "CCC" has a currently identifiable vulnerability to
default, and is dependent upon favorable business, financial and economic
conditions to meet timely payment of interest and repayment of principal. In the
event of adverse business, financial, or economic conditions, it is not likely
to have the capacity to pay interest and repay principal.
CC -- The rating "CC" is currently highly vulnerable to nonpayment.
C -- The "C" rating may be used to cover a situation where a bankruptcy
petition has been filed, but debt service payments are continued.
D -- Debt rated "D" is in payment default. The "D" rating category is
used when interest payments or principal payments are not made on the date due
even if the applicable grace period has not expired, unless S&P believes that
such payments will be made during such grace period. The "D" rating also will be
used upon the filing of a bankruptcy petition if debt service payments are
jeopardized.
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To provide more detailed indications of credit quality, the ratings
from AA to A may be modified by the addition of a plus or minus sign to show
relative standing within this major rating category.
MOODY'S INVESTOR SERVICES. Bonds that are rated Aaa by Moody's are
judged to be of the best quality. They carry the smallest degree of investment
risk and are generally referred to as "gilt edged." Interest payments are
protected by a large or by an exceptionally stable margin and principal is
secure. While the various protective elements are likely to change, such changes
as can be visualized are most unlikely to impair the fundamentally strong
position of such issues. Bonds that are rated Aa are judged to be of high
quality by all standards. Together with the Aaa group they comprise what are
generally known as high grade bonds. They are rated lower than the best bonds
because margins of protection may not be as large as in Aaa securities or
fluctuation of protective elements may be of greater amplitude or there may be
other elements present which make the long-term risks appear somewhat larger
than in Aaa securities. Bonds that are rated A by Moody's possess many favorable
investment attributes and are to be considered as upper-medium-grade
obligations. Factors giving security to principal and interest are considered
adequate but elements may be present which suggest a susceptibility to
impairment some time in the future. Bonds that are rated Baa are considered
medium-grade obligations; they are neither highly protected nor poorly secured.
Interest payments and principal security appear adequate for the present but
certain protective elements may be lacking or may be characteristically
unreliable over any great length of time. Such bonds lack outstanding investment
characteristics and in fact have speculative characteristics as well.
Ba -- Bonds which are rated Ba are judged to have speculative elements;
their future cannot be considered as well-assured. Often the protection of
interest and principal payments may be very moderate, and thereby not well
safeguarded during both good and bad times over the future. Uncertainty of
position characterizes bonds in this class.
B -- Bonds which are rated B generally lack characteristics of the
desirable investment. Assurance of interest and principal payments or of
maintenance of other terms of the contract over any long period of time may be
small.
Caa -- Bonds which are rated Caa are of poor standing. Such issues may
be in default or there may be present elements of danger with respect to
principal or interest.
Ca -- Bonds which are rated Ca represent obligations which are
speculative in a high degree. Such issues are often in default or have other
marked shortcomings.
C -- Bonds which are rated C are the lowest rated class of bonds, and
issues so rated can be regarded as having extremely poor prospects of ever
attaining any real investment standing.
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OTHER RATINGS OF MUNICIPAL OBLIGATIONS
The following summarizes the two highest ratings used by Moody's
ratings for state and municipal short-term obligations. Obligations bearing
MIG-1 and VMIG-1 designations are of the best quality, enjoying strong
protection by established cash flows, superior liquidity support or demonstrated
broad-based access to the market for refinancing. Obligations rated "MIG-2" or
"VMIG-2" denote high quality with ample margins of protection although not so
large as in the preceding rating group.
PREFERRED STOCK RATINGS
The following summarizes the ratings used by Moody's for preferred
stock:
"aaa" An issue which is rated "aaa" is considered to be a top-quality
preferred stock. This rating indicates good asset protection and the
least risk of dividend impairment within the universe of preferred
stocks.
"aa" An issue which is rated "aa" is considered a high-grade preferred
stock. This rating indicates that there is a reasonable assurance that
earnings and asset protection will remain relatively well maintained in
the foreseeable future.
"a" An issue which is rated "a" is considered to be an upper-medium
grade preferred stock. While risks are judged to be somewhat greater
than in the "aaa" and "aa" classification, earnings and asset
protection are, nevertheless, expected to be maintained at adequate
levels.
"baa" An issue which is rated "baa" is considered to be a medium-grade
preferred stock, neither highly protected nor poorly secured. Earnings
and asset protection appear adequate at present but may be questionable
over any great length of time.
"ba" An issue which is rated "ba" is considered to have speculative
elements and its future cannot be considered well assured. Earnings and
asset protection may be very moderate and not well safeguarded during
adverse periods. Uncertainty of position characterizes preferred stocks
in this class.
"b" An issue which is rate "b" generally lacks the characteristics of a
desirable investment. Assurance of dividend payments and maintenance of
other terms of the issue over any long period of time may be small.
"caa" An issue which is rated "caa" is likely to be in arrears on
dividend payments. This rating designation does not purport to indicate
the future status of payments.
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"ca" An issue which is rated "ca" is speculative in a high degree and
is likely to be in arrears on dividends with little likelihood of
eventual payments.
"c" This is the lowest rated class of preferred or preference stock.
Issues so rated can thus be regarded as having extremely poor prospects
of ever attaining any real investment standing.
The following summarizes the ratings used by Standard & Poor's for
preferred stock:
"AAA" This is the highest rating that may be assigned by Standard &
Poor's to a preferred stock issue and indicates an extremely strong
capacity to pay the preferred stock obligations.
"AA" A preferred stock issue rated "AA" also qualifies as a
high-quality, fixed income security. The capacity to pay preferred
stock obligations is very strong, although not as overwhelming as for
issues rated "AAA."
"A" An issue rated "A" is backed by a sound capacity to pay the
preferred stock obligations, although it is somewhat more susceptible
to the adverse effects of changes in circumstances and economic
conditions.
"BBB" An issue rated "BBB" is regarded as backed by an adequate
capacity to pay the preferred stock obligations. Whereas it normally
exhibits adequate protection parameters, adverse economic conditions or
changing circumstances are more likely to lead to a weakened capacity
to make payments for a preferred stock in this category than for issues
in the "A" category.
"BB," "B," "CCC" Preferred stock rated "BB," "B," and "CCC" are
regarded, on balance, as predominantly speculative with respect to the
issuer's capacity to pay preferred stock obligations. "BB" indicates
the lowest degree of speculation and "CCC" the highest. While such
issues will likely have some quality and protective characteristics,
these are outweighed by large uncertainties or major risk exposures to
adverse conditions.
"CC" The rating "CC" is reserved for a preferred stock issue in arrears
on dividends or sinking fund payments but that is currently paying.
"C" A preferred stock rated "C" is a nonpaying issue.
"D" A preferred stock rated "D" is a nonpaying issue with the issuer in
default on debt instruments.
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"N.R." This indicates that no rating has been requested, that there is
insufficient information on which to base a rating, or that S&P does
not rate a particular type of obligation as a matter of policy.
"Plus (+) or minus (-)" To provide more detailed indications of
preferred stock quality, ratings from "AA" to "CCC" may be modified by
the addition of a plus or minus sign to show relative standing within
the major rating categories.
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