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AMSOUTH FUNDS
Statement of Additional Information
March 13, 2000
As amended March 24, 2000
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This Statement of Additional Information is not a Prospectus, but should be read
in conjunction with the Prospectus of the AmSouth Value Fund, the AmSouth Growth
Fund, the AmSouth Capital Growth Fund, the AmSouth Large Cap Fund, the AmSouth
Mid Cap Fund, the AmSouth Small Cap Fund, the AmSouth Equity Income Fund, the
AmSouth Balanced Fund, the AmSouth Select Equity Fund, the AmSouth Enhanced
Market Fund, the AmSouth International Equity 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, the
AmSouth Strategic Portfolios: Current Income Portfolio, the AmSouth Bond Fund,
the AmSouth Limited Term Bond Fund, the AmSouth Government Income Fund, the
AmSouth Limited Term U.S. Government Fund, the AmSouth Municipal Bond Fund, the
AmSouth Florida Tax-Exempt Fund, the AmSouth Tennessee Tax-Exempt Fund, the
AmSouth Limited Term Tennessee Tax-Exempt Fund, the AmSouth Prime Money Market
Fund, the AmSouth U.S. Treasury Money Market Fund, the AmSouth Treasury Reserve
Money Market Fund, the AmSouth Tax-Exempt Money Market Fund, and the AmSouth
Prime Obligations Money Market Fund (each a "Fund" and collectively the
"Funds"), each dated March 13, 2000. This Statement of Additional Information is
incorporated by reference in its entirety into each Prospectus. A copy of each
Fund's 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.
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TABLE OF CONTENTS
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AMSOUTH FUNDS ........................................................................... 1
INVESTMENT OBJECTIVES AND POLICIES ...................................................... 2
Additional Information on Portfolio Instruments ................................... 3
Investment Restrictions ........................................................... 36
Additional Investment Restrictions ................................................ 40
Portfolio Turnover ................................................................ 43
VALUATION ............................................................................... 45
Valuation of the Money Market Funds and the Institutional Money Market Fund ....... 45
Valuation of the Capital Appreciation Funds, the Former ISG Capital Appreciation
Funds, the former ISG Income Funds, and the Income Funds .................... 46
ADDITIONAL PURCHASE AND REDEMPTION INFORMATION .......................................... 46
Purchase of Shares ................................................................ 47
Matters Affecting Redemption ...................................................... 50
Taxes ............................................................................. 51
Additional Tax Information ........................................................ 54
Additional Tax Information Concerning the Tax-Exempt Fund, the
Tax-Free Funds, the Tennessee Tax-Exempt Fund, and the Limited Term
Tennessee Tax-Exempt Fund ................................................... 57
MANAGEMENT OF THE TRUST ................................................................. 61
Officers .......................................................................... 63
Portfolio Transactions ............................................................ 70
Glass-Steagall Act ................................................................ 72
Administrator ..................................................................... 73
Expenses .......................................................................... 75
Sub-Administrators ................................................................ 76
Distributor ....................................................................... 76
Custodian ......................................................................... 81
Transfer Agent and Fund Accounting Services ....................................... 81
Independent Accountants ........................................................... 81
Legal Counsel ..................................................................... 82
PERFORMANCE INFORMATION ................................................................. 82
Yields of the Money Market Funds .................................................. 83
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Yield of the Capital Appreciation Funds, the former ISG Capital Appreciation Funds,
the former ISG Income Funds, and the Income Funds ........................... 84
Calculation of Total Return ....................................................... 86
Performance Comparisons ........................................................... 95
ADDITIONAL INFORMATION .................................................................. 96
Organization and Description of Shares ............................................ 96
Shareholder Liability ............................................................. 97
Miscellaneous ..................................................................... 97
FINANCIAL STATEMENTS .................................................................... 128
APPENDIX ................................................................................ 129
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STATEMENT OF ADDITIONAL INFORMATION
AMSOUTH FUNDS
AmSouth Funds (the "Trust") is an open-end management investment company.
The Trust consists of twenty-nine series of units of beneficial interest
("Shares"), each representing interests in one of twenty-nine separate
investment portfolios (each a "Fund"): the AmSouth Value Fund (formerly the
AmSouth Equity Fund)(the "Value Fund"), the AmSouth Growth Fund (formerly the
AmSouth Capital Growth Fund)(the "Growth Fund"), the AmSouth Small Cap Fund (the
"Small Cap Fund"), the AmSouth Equity Income Fund (the "Equity Income Fund"),
the AmSouth Balanced Fund (the "Balanced Fund"), the AmSouth Select Equity Fund
(the "Select Equity Fund"), and the AmSouth Enhanced Market Fund (the "Enhanced
Market Fund" and these seven Funds being collectively referred to as the
"Capital Appreciation Funds"), the AmSouth Capital Growth Fund (the "Capital
Growth Fund"), the AmSouth Large Cap Fund (the "Large Cap Fund"), the AmSouth
Mid Cap Fund (the "Mid Cap Fund"), and the International Equity Fund (the
"International Equity Fund" and these four Funds being collectively referred to
as the "former ISG Capital Appreciation Funds"), 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"), the AmSouth Strategic
Portfolios: Current Income Portfolio (the "Current Income Portfolio" and these
five Funds being collectively referred to as the "Strategic Portfolios"), the
AmSouth Bond Fund (the "Bond Fund"), the AmSouth Limited Term Bond Fund
(formerly the AmSouth Limited Maturity Fund)(the "Limited Term Bond Fund"), the
AmSouth Government Income Fund (the "Government Income Fund"), the AmSouth
Municipal Bond Fund (the "Municipal Bond Fund"), the AmSouth Florida Tax-Exempt
Fund (formerly the AmSouth Florida Tax-Free Fund)(the "Florida Fund" and these
five Funds being collectively referred to as the "Income 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 "former ISG
Income Funds"), the AmSouth Prime Money Market Fund (formerly the AmSouth Prime
Obligations Fund) (the "Prime Money Market Fund"), the AmSouth U.S. Treasury
Money Market Fund (formerly the AmSouth U.S. Treasury Fund)(the "U.S. Treasury
Fund"), the AmSouth Tax-Exempt Money Market Fund (the "Tax-Exempt Fund"), the
AmSouth Treasury Reserve Money Market Fund (the "Treasury Reserve Fund" and
these four Funds being collectively referred to as the "Money Market Funds"),
and the AmSouth Institutional Prime Obligations Money Market Fund (formerly the
AmSouth Institutional Prime Obligations Fund)(the "Institutional Prime
Obligations Fund" or the "Institutional Money Market Fund"). The Florida Fund
and the Municipal Bond Fund are also collectively referred to herein as the
"Tax-Free Funds." The Tennessee Tax-Exempt Fund and the Limited Term Tennessee
Tax-Exempt Fund are also collectively referred to
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herein as the "former ISG Tax-Free Funds." The Funds, except for the U.S.
Treasury Fund, the Tax-Exempt Fund, the Treasury Reserve Fund, and the
Institutional Prime Obligations Fund, offer three classes of Shares: Trust
Shares (formerly Premier Shares), Class A Shares (formerly Classic Shares), and
Class B Shares. The U.S. Treasury Fund, the Treasury Reserve Fund, and the
Tax-Exempt Fund offer two classes of Shares: Trust Shares and Class A Shares.
The Institutional Prime Obligations Fund and the Institutional U.S. Treasury
Fund offer three classes of Shares: Class I Shares, Class II Shares, and Class
III Shares. Much of the information contained in this Statement of Additional
Information expands on subjects discussed in the Prospectuses. This Statement of
Additional Information relates to all Funds. Capitalized terms not defined
herein are defined in the Prospectuses. No investment in Shares of a Fund should
be made without first reading that Fund's Prospectus.
INVESTMENT OBJECTIVES AND POLICIES
Strategic Portfolios
Each Strategic Portfolio 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:
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Strategy Ranges
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Moderate
Aggressive Growth and Growth and Current
Growth Growth Income Income Income
Underlying Fund Portfolio Portfolio Portfolio Portfolio Portfolio
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Value Fund 0-70% 0-65% 0-60% 0-50% 0%
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%
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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 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.
Additional Information on Portfolio Instruments
The following policies supplement the investment objectives, restrictions
and policies of each Fund as set forth in the respective Prospectus for that
Fund.
High Quality Investments With Regard to the Money Market Funds and the
Institutional Money Market Fund. As noted in the Prospectuses for the Money
Market Funds and the Institutional Money Market Fund, each such Fund may invest
only in obligations determined by AmSouth Bank, Birmingham, Alabama ("AmSouth")
the investment adviser to the Trust ("Adviser") to present minimal credit risks
under guidelines adopted by the Trust's Trustees.
With regard to the Prime Money Market Fund and the Institutional Prime
Obligations Fund, investments will be limited to those obligations which, at the
time of purchase, (i) possess the highest short-term ratings from at least two
nationally recognized statistical ratings organizations ("NRSROs"); or (ii) do
not possess a rating, (i.e., are unrated) but are determined by the Adviser to
be of comparable quality to the rated instruments eligible for purchase by the
Fund under guidelines adopted by the Trustees. With regard to the Tax-Exempt
Fund, investments will be limited to those obligations which, at the time of
purchase, (i) possess one of the two highest short-term ratings from an NRSRO;
or (ii) possess, in the case of multiple-rated securities, one of the two
highest short-term ratings by at least two NRSROs; or (iii) do not possess a
rating, (i.e., are unrated) but are determined by the Adviser
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to be of comparable quality to the rated instruments eligible for purchase by
the Fund under the guidelines adopted by the Trustees. For purposes of these
investment limitations, a security that has not received a rating will be deemed
to possess the rating assigned to an outstanding class of the issuer's
short-term debt obligations if determined by the Adviser to be comparable in
priority and security to the obligation selected for purchase by a Fund. (The
above-described securities which may be purchased by the Prime Money Market Fund
and the Tax-Exempt Fund are hereinafter referred to as "Eligible Securities.")
A security subject to a tender or demand feature will be considered an
Eligible Security only if both the demand feature and the underlying security
possess a high quality rating or, if such do not possess a rating, (i.e., are
unrated) but are determined by the Adviser to be of comparable quality;
provided, however, that where the demand feature would be readily exercisable in
the event of a default in payment of principal or interest on the underlying
security, the obligation may be acquired based on the rating possessed by the
demand feature or, if the demand feature does not possess a rating, a
determination of comparable quality by the Adviser. A security which at the time
of issuance had a maturity exceeding 397 days but, at the same time of purchase,
has a remaining maturity of 397 days or less, is not considered an Eligible
Security if it does not possess a high quality rating and the long-term rating,
if any, is not within the two highest rating categories of an NRSRO.
The Prime Money Market Fund and the Institutional Prime Obligations Fund
will not invest more than 5% of its total assets in the securities of any one
issuer, except that the Fund may invest up to 25% of its total assets in the
securities of a single issuer for a period of up to three business days. If a
percentage limitation is satisfied at the time of purchase, a later increase in
such percentage resulting from a change in the Fund's net asset value or a
subsequent change in a security's qualification as an Eligible Security will not
constitute a violation of the limitation. In addition, there is no limit on the
percentage of the Fund's assets that may be invested in obligations issued or
guaranteed by the U.S. government, its agencies, and instrumentalities and
repurchase agreements fully collateralized by such obligations.
Under the guidelines adopted by the Trust's Trustees and in accordance
with Rule 2a-7 under the Investment Company Act of 1940 (the "1940 Act"), the
Adviser may be required promptly to dispose of an obligation held in a Fund's
portfolio in the event of certain developments that indicate a diminishment of
the instrument's credit quality, such as where an NRSRO downgrades an obligation
below the second highest rating category, or in the event of a default relating
to the financial condition of the issuer.
The Appendix to this Statement of Additional Information identifies each
NRSRO that may be utilized by the Adviser with regard to portfolio investments
for the Funds and provides a description of relevant ratings assigned by each
such NRSRO. A rating by an NRSRO may be utilized only where the NRSRO is neither
controlling, controlled by, or under common control with the issuer of, or any
issuer, guarantor, or provider of credit support for, the instrument.
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Bankers' Acceptances and Certificates of Deposit. All of the Funds, except
the U.S. Treasury Fund, the Treasury Reserve Fund, and the Limited Term U.S.
Government Fund, may invest in bankers' acceptances, certificates of deposit,
and demand and time deposits. Bankers' acceptances are negotiable drafts or
bills of exchange typically drawn by an importer or exporter to pay for specific
merchandise, which are "accepted" by a bank, meaning, in effect, that the bank
unconditionally agrees to pay the face value of the instrument on maturity.
Certificates of deposit are negotiable certificates issued against funds
deposited in a commercial bank or a savings and loan association for a definite
period of time and earning a specified return. The Prime Money Market Fund and
the Institutional Prime Obligations Fund will not invest in excess of 10% of its
net assets in time deposits, including ETDs and CTDs but not including
certificates of deposit, with maturities in excess of seven days which are
subject to penalties upon early withdrawal.
Bankers' acceptances will be those guaranteed by domestic and foreign
banks, if at the time of purchase, such banks have capital, surplus, and
undivided profits in excess of $100,000,000 (as of the date of their most
recently published financial statements). Certificates of deposit and demand and
time deposits will be those of domestic and foreign banks and savings and loan
associations, if (a) at the time of purchase they have capital, surplus, and
undivided profits in excess of $100,000,000 (as of the date of their most
recently published financial statements) or (b) the principal amount of the
instrument is insured in full by the Federal Deposit Insurance Corporation.
Commercial Paper. Each Fund, except for the U.S. Treasury Fund, the
Treasury Reserve Fund, and the Limited Term U.S. Government Fund, may invest in
commercial paper. Commercial paper consists of unsecured promissory notes issued
by corporations. Issues of commercial paper normally have maturities of less
than nine months and fixed rates of return.
Each Fund except the U.S. Treasury Fund, the Treasury Reserve Fund, the
Limited Term U.S. Government Fund, the Tax-Exempt Fund, and the Tax-Free Funds
may invest in (i) Canadian Commercial Paper, which is commercial paper issued by
a Canadian corporation or a Canadian counterpart of a U.S. corporation, and (ii)
Europaper, which is U.S. dollar-denominated commercial paper of an issue located
in Europe.
High Yield Securities. The Equity Income Fund, and to a limited extent the
Capital Growth Fund, may invest in high yield convertible securities. High yield
securities are securities that are rated below investment grade by an NRSRO
(e.g., "BB" or lower by S&P and "Ba" or lower by Moody's). The Capital Growth
Fund may invest in securities rated as low as Ba by Moody's or BB by S&P, Fitch,
or Duff. Other terms used to describe such securities include "lower rated
bonds," "non-investment grade bonds" and "junk bonds." Generally, lower rated
debt securities provide a higher yield than higher rated debt securities of
similar maturity, but are subject to a greater degree of risk with respect to
the ability of the issuer to meet its principal and interest obligations.
Issuers of high yield securities may not be
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as strong financially as those issuing higher rated securities. The securities
are regarded as predominantly speculative. The market value of high yield
securities may fluctuate more than the market value of higher rated securities,
since high yield securities tend to reflect short-term corporate and market
developments to a greater extent than higher rated securities, which fluctuate
primarily in response to the general level of interest rates, assuming that
there has been no change in the fundamental interest rates, assuming that there
has been no change in the fundamental quality of such securities. The market
prices of fixed income securities generally fall when interest rates rise.
Conversely, the market prices of fixed-income securities generally rise when
interest rates fall.
Additional risks of high yield securities include limited liquidity and
secondary market support. As a result, the prices of high yield securities may
decline rapidly in the event that a significant number of holders decide to
sell. Changes in expectations regarding an individual issuer, an industry or
high yield securities generally could reduce market liquidity for such
securities and make their sale by the Equity Income Fund more difficult, at
least in the absence of price concessions. Reduced liquidity also could
adversely affect the Equity Income Fund's ability to accurately value high yield
securities. Issuers of high yield securities also are more vulnerable to real or
perceived economic changes (for instance, an economic downturn or prolonged
period of rising interest rates), political changes or adverse developments
specific to the issuer. Adverse economic, political or other developments may
impair the issuer's ability to service principal and interest obligations, to
meet projected business goals and to obtain additional financing, particularly
if the issuer is highly leveraged. In the event of a default, the Equity Income
Fund would experience a reduction of its income and could expect a decline in
the market value of the defaulted securities.
Insurance Company Funding Agreements. The former ISG Capital Appreciation
Funds, the Bond Fund, the Limited Term Bond Fund, the former ISG Tax-Free Funds,
the Prime Money Market Fund, and the Institutional Prime Obligations Fund may
invest in funding agreements ("Funding Agreements"), also known as guaranteed
investment contracts, issued by insurance companies. Pursuant to such
agreements, these Funds invest an amount of cash with an insurance company and
the insurance company credits such investment on a monthly basis with guaranteed
interest which is based on an index. The Funding Agreements provide that this
guaranteed interest will not be less than a certain minimum rate. These Funds
will only purchase a Funding Agreement (i) when the Adviser has determined,
under guidelines established by the Board of Trustees, that the Funding
Agreement presents minimal credit risks to the Fund and is of comparable quality
to instruments that are rated high quality by a nationally recognized
statistical rating organization that is not an affiliated person, as defined in
the 1940 Act, of the issuer, on any insurer, guarantor, provider of credit
support for the instrument and (ii) if it may receive all principal of and
accrued interest on a Funding Agreement at any time upon thirty days' written
notice. Because these Funds may not receive the principal amount of a Funding
Agreement from the insurance company on seven days' notice or less, the Funding
Agreement is considered an illiquid investment, and, together with other
instruments in such Fund which are not readily marketable, will not exceed 15%
of such
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Fund's net assets in the case of the Bond Fund, the Limited Term Bond Fund, the
International Equity Fund, the Large Cap Fund, and the Mid Cap Fund, and 10% of
such Funds net assets in the case of the Prime Money Market Fund, the Capital
Growth Fund, the Tennessee Tax-Exempt Fund, and the Limited Term Tennessee
Tax-Exempt fund. In determining average weighted portfolio maturity, a Funding
Agreement will be deemed to have a maturity equal to 30 days, representing the
period of time remaining until the principal amount can be recovered through
demand.
Variable Amount Master Demand Notes. Variable amount master demand notes,
in which the Prime Money Market Fund, the Institutional Prime Obligations Fund,
the Capital Appreciation Funds, the former ISG Capital Appreciation Funds, the
Income Funds, and the former ISG Tax-Free Funds may invest, are unsecured demand
notes that permit the indebtedness thereunder to vary and provide for periodic
readjustments in the interest rate according to the terms of the instrument.
They are also referred to as variable rate demand notes. Because these notes are
direct lending arrangements between a Fund and the issuer, they are not normally
traded. Although there may be no secondary market in the notes, a Fund may
demand payment of principal and accrued interest at any time or during specified
periods not exceeding one year, depending upon the instrument involved, and may
resell the note at any time to a third party. The absence of such an active
secondary market, however, could make it difficult for the Funds to dispose of a
variable amount master demand note if the issuer defaulted on its payment
obligations or during periods when the Funds are not entitled to exercise their
demand rights, and the Funds could, for this or other reasons, suffer a loss to
the extent of the default. While the notes are not typically rated by credit
rating agencies, issuers of variable amount master demand notes must satisfy the
same criteria as set forth above for commercial paper. The Adviser or
Sub-Adviser will consider the earning power, cash flow, and other liquidity
ratios of the issuers of such notes and will continuously monitor their
financial status and ability to meet payment on demand. Where necessary to
ensure that a note is of "high quality," a Fund will require that the issuer's
obligation to pay the principal of the note be backed by an unconditional bank
letter or line of credit, guarantee or commitment to lend. In determining the
dollar-weighted average portfolio maturity, a variable amount master demand note
will be deemed to have a maturity equal to the period of time remaining until
the principal amount can be recovered from the issuer through demand.
Variable and Floating Rate Notes and Bonds. The former ISG Capital
Appreciation Funds, the Tax-Exempt Fund, the Bond Fund, the Limited Term Bond
Fund, the Tax-Free Funds, and the former ISG Tax-Free Funds may acquire variable
and floating rate notes and bonds, subject to each Fund's investment objective,
policies and restrictions. A variable rate note is one whose terms provide "for
the readjustment of its interest rate on set dates and which, upon such
readjustment, can reasonably be expected to have a market value that
approximates its par value. A floating rate note is one whose terms provide for
the readjustment of its interest rate whenever a specified interest rate changes
and which, at any time, can reasonably be expected to have a market value that
approximates its par value. Such notes are frequently not rated by credit rating
agencies; however, unrated variable and floating
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rate notes purchased by a Fund will be determined by the Adviser under
guidelines established by the Trust's Board of Trustees to be of comparable
quality at the time of purchase to rated instruments eligible for purchase under
the Fund's investment policies. In making such determinations, the Adviser will
consider the earning power, cash flow and other liquidity ratios of the issuers
of such notes (such issuers include financial, merchandising, bank holding and
other companies) and will continuously monitor their financial condition.
Although there may be no active secondary market with respect to a particular
variable or floating rate note purchased by a Fund, the Fund may resell the note
at any time to a third party. The absence of an active secondary market,
however, could make it difficult for the Fund to dispose of a variable or
floating rate note in the event the issuer of the note defaulted on its payment
obligations and the Fund could, as a result or for other reasons, suffer a loss
to the extent of the default. Variable or floating rate notes may be secured by
bank letters of credit or drafts.
For purposes of these Funds, the maturities of the variable and floating
rate notes will be determined in accordance with Rule 2a-7 under the 1940 Act.
Participation Interests and Trust Receipts. (Former ISG Capital Appreciation
Funds, former ISG 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 Trustees, 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
Trustees, 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
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needed to provide liquidity to meet redemptions, or to maintain or improve the
quality of its investment portfolio.
Zero Coupon Obligations. The Bond Fund, Limited Term Bond Fund, the former
ISG Capital Appreciation Funds, the former ISG Income Fund, the Treasury Reserve
Fund, and the Tax-Exempt Fund may acquire zero-coupon obligations evidencing
ownership of future interest and principal payments on U.S. Treasury bonds. Such
zero-coupon obligations pay no current interest and are typically sold at prices
greatly discounted from par value, with par value to be paid to the holder at
maturity. The return on a zero-coupon obligation, when held to maturity, equals
the difference between the par value and the original purchase price.
Zero-coupon obligations have greater price volatility than coupon obligations
and such obligations will be purchased when the yield spread, in light of the
obligation's duration, is considered advantageous. The Bond Fund will only
purchase zero-coupon obligations if, at the time of purchase, such investments
do not exceed 15% of the value of the Bond Fund's total assets, and the Limited
Term Bond Fund and the Tennessee Tax-Exempt Fund will only purchase zero-coupon
obligations if, at the time of purchase, such investments do not exceed 25% of
the value of the Limited Term Bond Fund's total assets. The former ISG Capital
Appreciation Funds and the former ISG Tax-Free Funds also may invest in zero
coupon securities issued by corporations and financial institutions which
constitute a proportionate ownership of the issuer's pool of underlying U.S.
Treasury securities.
An increase in interest rates will generally reduce the value of the
investments in the Income Funds and a decline in interest rates will generally
increase the value of those investments. Depending upon prevailing market
conditions, the Adviser may purchase debt securities at a discount from face
value, which produces a yield greater than the coupon rate. Conversely, if debt
securities are purchased at a premium over face value, the yield will be lower
than the coupon rate. In making investment decisions, the Adviser will consider
many factors other than current yield, including the preservation of capital,
maturity, and yield to maturity.
Foreign Investment. All of the Funds, except the U.S. Treasury Fund, the
Treasury Reserve Fund, the former ISG Income Funds, and the Tax-Free Funds, may,
subject to their investment objectives, restrictions and policies, invest in
certain obligations or securities of foreign issuers. Permissible investments
include Eurodollar Certificates of Deposit ("ECDs") which are U.S. dollar
denominated certificates of deposit issued by branches of foreign and domestic
banks located outside the United States, Yankee Certificates of Deposit ("Yankee
CDs") which are certificates of deposit issued by a U.S. branch of a foreign
bank denominated in U.S. dollars and held in the United States, Eurodollar Time
Deposits ("ETD's") which are U.S. dollar denominated deposits in a foreign
branch of a U.S. bank or a foreign bank, Canadian Time Deposits ("CTD's") which
are U.S. dollar denominated certificates of deposit issued by Canadian offices
of major Canadian Banks, and American Depository Receipts ("ADRs") which are
foreign shares of a company held by a U.S. bank which issues a receipt
evidencing ownership. Investments in securities issued by foreign branches of
U.S. banks,
B-9
<PAGE> 13
foreign banks, or other foreign issuers, including ADRs and securities purchased
on foreign securities exchanges, may subject the Funds to investment risks that
differ in some respects from those related to investment in obligations of U.S.
domestic issuers or in U.S. securities markets. Such risks include future
adverse political and economic developments, possible seizure, currency
blockage, nationalization or expropriation of foreign investments, less
stringent disclosure requirements, the possible establishment of exchange
controls or taxation at the source, and the adoption of other foreign
governmental restrictions. Additional risks include currency exchange risks,
less publicly available information, the risk that companies may not be subject
to the accounting, auditing and financial reporting standards and requirements
of U.S. companies, the risk that foreign securities markets may have less volume
and therefore many securities traded in these markets may be less liquid and
their prices more volatile than U.S. securities, and the risk that custodian and
brokerage costs may be higher. Foreign issuers of securities or obligations are
often subject to accounting treatment and engage in business practices different
from those respecting domestic issuers of similar securities or obligations.
Foreign branches of U.S. banks and foreign banks may be subject to less
stringent reserve requirements than those applicable to domestic branches of
U.S. banks. A Fund will acquire such securities only when the Adviser or
Sub-Adviser believes the risks associated with such investments are minimal.
Repurchase Agreements. Securities held by each Fund may be subject to
repurchase agreements. Under the terms of a repurchase agreement, a Fund would
acquire securities from member banks of the Federal Deposit Insurance
Corporation with capital, surplus, and undivided profits of not less than
$100,000,000 (as of the date of their most recently published financial
statements) and from registered broker-dealers which the Adviser or Sub-Adviser
deems creditworthy under guidelines approved by the Board of Trustees, subject
to the seller's agreement to repurchase such securities at a mutually
agreed-upon date and price. The repurchase price would generally equal the price
paid by the Fund plus interest negotiated on the basis of current short-term
rates, which may be more or less than the rate on the underlying portfolio
securities. The seller under a repurchase agreement will be required to maintain
the value of collateral held pursuant to the agreement at not less than the
repurchase price (including accrued interest) and the Adviser or Sub-Adviser
will monitor the collateral's value to ensure that it equals or exceeds the
repurchase price (including accrued interest). In addition, securities subject
to repurchase agreements will be held in a segregated account.
If the seller were to default on its repurchase obligation or become
insolvent, the Fund holding such obligation would suffer a loss to the extent
that the proceeds from a sale of the underlying portfolio securities were less
than the repurchase price under the agreement, or to the extent that the
disposition of such securities by the Fund were delayed pending court action.
Additionally, if the seller should be involved in bankruptcy or insolvency
proceedings, a Fund may incur delay and costs in selling the underlying security
or may suffer a loss of principal and interest if the Fund is treated as an
unsecured creditor and required to return the underlying security to the
seller's estate. Securities subject to repurchase agreements will be held by the
Trust's custodian or another qualified custodian or in the Federal
Reserve/Treasury
B-10
<PAGE> 14
book-entry system. Repurchase agreements are considered to be loans by a Fund
under the 1940 Act.
Reverse Repurchase Agreements. As discussed in each Prospectus, each Fund,
except the former ISG Capital Appreciation Funds and the former ISG Income
Funds, may borrow funds for temporary purposes by entering into reverse
repurchase agreements in accordance with the Fund's investment restrictions.
Pursuant to such an agreement, a Fund would sell portfolio securities to
financial institutions such as banks and broker-dealers, and agree to repurchase
the securities at a mutually agreed-upon date and price. Each Fund intends to
enter into reverse repurchase agreements only to avoid otherwise selling
securities during unfavorable market conditions to meet redemptions. At the time
a Fund enters into a reverse repurchase agreement, it will place in a segregated
custodial account assets consistent with the Fund's investment restrictions
having a value equal to the repurchase price (including accrued interest), and
will subsequently monitor the account to ensure that such equivalent value is
maintained. Such assets will include U.S. government securities or other liquid
high quality debt securities in the case of the Money Market Funds, the
Institutional Money Market Fund, and the Income Funds or other liquid,
high-grade debt securities, in the case of the Capital Appreciation Funds.
Reverse repurchase agreements involve the risk that the market value of the
securities sold by a Fund may decline below the price at which a Fund is
obligated to repurchase the securities. Reverse repurchase agreements are
considered to be borrowings by a Fund under the 1940 Act.
U.S. Government Obligations. The U.S. Treasury Fund will invest
exclusively in bills, notes and bonds issued by the U.S. Treasury. Such
obligations are supported by the full faith and credit of the U.S. government.
Each of the other Funds may invest in such obligations and in other obligations
issued or guaranteed by the U.S. government, its agencies and instrumentalities.
Such other obligations may include those such as GNMA and the Export- Import
Bank of the United States, which are supported by the full faith and credit of
the U.S. government; others, such as those of FNMA, which are supported by the
right of the issuer to borrow from the Treasury; others which are supported by
the discretionary authority of the U.S. government to purchase the agency's
obligations; and still others, such as those of the Federal Farm Credit Banks or
FHLMC, which are supported only by the credit of the instrumentality. No
assurance can be given that the U.S. government would provide financial support
to U.S. government-sponsored agencies or instrumentalities if it is not
obligated to do so by law. A Fund will invest in the obligations of such
agencies and instrumentalities only when the Adviser or Sub-Adviser believes
that the credit risk with respect thereto is minimal.
The principal governmental (i.e., backed by the full faith and credit of
the U.S. government) guarantor of mortgage-related securities is GNMA. GNMA is a
wholly-owned U.S. government corporation within the Department of Housing and
Urban Development. GNMA is authorized to guarantee, with the full faith and
credit of the U.S. government, the timely payment of principal and interest on
securities issued by institutions approved by
B-11
<PAGE> 15
GNMA (such as savings and loan institutions, commercial banks and mortgage
bankers) and backed by pools of FHA-insured or VA-guaranteed mortgages.
Government-related (i.e., not backed by the full faith and credit of the
U.S. government) guarantors include FNMA and FHLMC. FNMA and FHLMC are
government-sponsored corporations owned entirely by private stockholders.
Pass-through securities issued by FNMA and FHLMC are guaranteed as to timely
payment of principal and interest by FNMA and FHLMC but are not backed by the
full faith and credit of the U.S. government.
When-Issued or Forward Commitment Securities. As discussed in the
Prospectuses, each Fund except the Prime Money Market Fund, the Institutional
Prime Obligations Fund, and the U.S. Treasury Fund may purchase securities on a
when-issued basis (i.e., for delivery beyond the normal settlement date at a
stated price and yield). When a Fund agrees to purchase securities on a
when-issued basis, the Fund's custodian will set aside cash or liquid portfolio
securities equal to the amount of the commitment in a separate account.
Normally, the custodian will set aside portfolio securities to satisfy the
purchase commitment, and in such a case, the Fund may be required subsequently
to place additional assets in the separate account in order to assure that the
value of the account remains equal to the amount of the Fund's commitment. It
may be expected that the Fund's net assets will fluctuate to a greater degree
when it sets aside portfolio securities to cover such purchase commitments than
when it sets aside cash. Securities purchased on a "when-issued" basis are
recorded as an asset and are subject to changes in value based upon changes in
the general level of interest rates. Each of the Capital Appreciation Funds
expects that commitments to purchase "when-issued" securities will not exceed
25% of the value of its total assets under normal market conditions, and that a
commitment to purchase "when-issued" securities will not exceed 60 days. In
addition, because a Fund will set aside cash or liquid portfolio securities to
satisfy its purchase commitments in the manner described above, a Fund's
liquidity and the ability of the Adviser or Sub-Adviser to manage it might be
affected in the event its commitments to purchase when-issued securities ever
exceeded 25% of the value of its total assets.
When a Fund engages in when-issued transactions, it relies on the seller
to consummate the trade. Failure of the seller to do so may result in the Fund
incurring a loss or missing the opportunity to obtain a price considered to be
advantageous. No Fund intends to purchase when-issued securities for speculative
purposes but only in furtherance of its investment objective.
Asset-Backed Securities. The Bond Fund, the Limited Term Bond Fund, the
Institutional Prime Obligations Fund, the Capital Growth Fund, and the Prime
Money Market Fund may invest in securities backed by automobile receivables and
credit-card receivables and other securities backed by other types of
receivables.
Offerings of Certificates for Automobile Receivables ("CARS") are
structured either as flow-through grantor trusts or as pay-through notes. CARS
structured as flow-through
B-12
<PAGE> 16
instruments represent ownership interests in a fixed pool of receivables. CARS
structured as pay-through notes are debt instruments supported by the cash flows
from the underlying assets. CARS may also be structured as securities with fixed
payment schedules which are generally issued in multiple-classes. Cash-flow from
the underlying receivables is directed first to paying interest and then to
retiring principal via paying down the two respective classes of notes
sequentially. Cash-flows on fixed-payment CARS are certain, while cash-flows on
other types of CARS issues depends on the prepayment rate of the underlying
automobile loans. Prepayments of automobile loans are triggered mainly by
automobile sales and trade-ins. Many people buy new cars every two or three
years, leading to rising prepayment rates as a pool becomes more seasoned.
Certificates for Amortizing Revolving Debt ("CARDS") represent
participation in a fixed pool of credit card accounts. CARDS pay "interest only"
for a specified period, typically 18 months. The CARD'S principal balance
remains constant during this period, while any cardholder repayments or new
borrowings flow to the issuer's participation. Once the principal amortization
phase begins, the balance declines with paydowns on the underlying portfolio.
CARDS have monthly payment schedules, weighted-average lives of 18-24 months and
stated final maturities ranging from 3 to 5 years. Cash flows on CARDS are
certain during the interest-only period. After this initial interest-only
period, the cash flow will depend on how fast cardholders repay their
borrowings. Historically, monthly cardholder repayment rates have been
relatively fast. As a consequence, CARDS amortize rapidly after the end of the
interest-only period. During this amortization period, the principal payments on
CARDS depend specifically on the method for allocating cardholder repayments to
investors. In many cases, the investor's participation is based on the ratio of
the CARDS' balance to the total credit card portfolio balance. This ratio can be
adjusted monthly or can be based on the balances at the beginning of the
amortization period. In some issues, investors are allocated most of the
repayments, regardless of the CARDS' balance. This method results in especially
fast amortization.
Credit support for asset-backed securities may be based on the underlying
assets or provided by a third party. Credit enhancement techniques include
letters of credit, insurance bonds, limited guarantees (which are generally
provided by the issuer), senior-subordinated structures and over
collateralization. The Bond Fund and the Limited Term Bond Fund will only
purchase an asset-backed security if it is rated at the time of purchase in one
of the three highest rating categories by an NRSRO or, if unrated, found by the
Adviser under guidelines established by the Trust's Board of Trustees to be of
comparable quality. Asset-backed securities purchased by the Institutional Prime
Obligations Fund will be subject to the same quality requirements as other
securities purchased by the Fund.
Mortgage-Related Securities. Mortgage-related securities have mortgage
obligations backing such securities, including among others, conventional thirty
year fixed rate mortgage obligations, graduated payment mortgage obligations,
fifteen year mortgage obligations, and adjustable rate mortgage obligations. All
of these mortgage obligations can be used to create
B-13
<PAGE> 17
pass-through securities. A pass-through security is created when mortgage
obligations are pooled together and undivided interests in the pool or pools are
sold. The cash flow from the mortgage obligations is passed through to the
holders of the securities in the form of periodic payments of interest,
principal and prepayments (net of a service fee). Prepayments occur when the
holder of an individual mortgage obligation prepays the remaining principal
before the mortgage obligation's scheduled maturity date. As a result of the
pass-through of prepayments of principal on the underlying securities,
mortgage-backed securities are often subject to more rapid prepayment of
principal than their stated maturity would indicate. Because the prepayment
characteristics of the underlying mortgage obligations vary, it is not possible
to predict accurately the realized yield or average life of a particular issue
of pass-through certificates. Prepayment rates are important because of their
effect on the yield and price of the securities. Accelerated prepayments have an
adverse impact on yields for pass-throughs purchased at a premium (i.e., a price
in excess of principal amount) and may involve additional risk of loss of
principal because the premium may not have been fully amortized at the time the
obligation is repaid. The opposite is true for pass-throughs purchased at a
discount. The Government Income Fund may purchase mortgage-related securities at
a premium or at a discount.
Mortgage-Related Securities Issued By Nongovernmental Entities. The
Government Income Fund and the Capital Growth Fund may invest in
mortgage-related securities issued by nongovernmental entities. Commercial
banks, savings and loan institutions, private mortgage insurance companies,
mortgage bankers and other secondary market issues also create pass-through
pools of conventional residential mortgage loans. Such issuers may also be the
originators of the underlying mortgage loans as well as the guarantors of the
mortgage-related securities. Pools created by such nongovernmental issuers
generally offer a higher rate of interest than government and government-related
pools because there are not direct or indirect government guarantees of payments
in the former pools. However, timely payment of interest and principal of these
pools is supported 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.
Such insurance and guarantees and the creditworthiness of the issuers thereof
will be considered in determining whether a mortgage-related security meets the
Government Income Fund's investment quality standards. There can be no assurance
that the private insurers can meet their obligations under the policies. The
Government Income Fund may buy mortgage-related securities without insurance or
guarantees if through an examination of the loan experience and practices of the
poolers the Adviser determines that the securities meet the Government Income
Fund's quality standards. Although the market for such securities is becoming
increasingly liquid, securities issued by certain private organizations may not
be readily marketable. The Government Income Fund and the Capital Growth Fund
will not purchase mortgage-related securities or any other assets which in the
Adviser's opinion are illiquid, if as a result, more than 15% of the value of
the Government Income Fund's or more than 10% of the value of the Capital Growth
Fund's net assets will be illiquid.
B-14
<PAGE> 18
Collateralized Mortgage Obligations. Mortgage-related securities in which
the Government Income Fund, the Limited Term U.S. Government Fund, and the
Capital Growth Fund may invest may also include collateralized mortgage
obligations ("CMOs"). CMOs are debt obligations issued generally by finance
subsidiaries or trusts that are secured by mortgage-backed certificates,
including, in many cases, certificates issued by government-related guarantors,
including GNMA, FNMA and FHLMC, together with certain funds and other
collateral. Although payment of the principal of and interest on the
mortgage-backed certificates pledged to secure the CMOs may be guaranteed by
GNMA, FNMA or FHLMC, the CMOs represent obligations solely of the issuer and are
not insured or guaranteed by GNMA, FHLMC, FNMA or any other governmental agency,
or by any other person or entity. The issuers of the CMOs typically have no
significant assets other than those pledged as collateral for the obligations.
The staff of the Securities and Exchange Commission has determined that certain
issuers of CMOs are investment companies for purposes of the 1940 Act.
CMOs may include Stripped Mortgage Securities. Such securities are
derivative multiclass mortgage 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, mortgage
banks, commercial banks, investment banks and special purpose subsidiaries of
the foregoing. Stripped Mortgage Securities are usually structured with two
classes that receive different proportions of the interest and principal
distributions on a pool of mortgage assets. A common type of Stripped Mortgage
Security will have one class receiving all of the interest from the mortgage
assets (the interest-only or "IO" class), while the other class will receive all
of the principal (the principal-only or "PO" class). The yield to maturity on an
IO class is extremely sensitive to the rate of principal payments (including
prepayments) on the related underlying mortgage assets, and a rapid rate of
principal payments may have a material adverse effect on the securities' yield
to maturity. If the underlying mortgage assets experience greater than
anticipated prepayments of principal, the Fund may fail to fully recoup its
initial investment in these securities even if the security is rated AAA or Aaa.
The Stripped Mortgage Securities held by the Funds will be considered
liquid securities only under guidelines established by the Trust's Board of
Trustees, and the Fund will not purchase a Stripped Mortgage Security that is
illiquid if, as a result thereof, more than 15% of the value of the Fund's net
assets would be invested in such securities and other illiquid securities.
In reliance on a recent staff interpretation, the Funds' investment in
certain qualifying CMOs, including CMOs that have elected to be treated as Real
Estate Mortgage Investment Conduits (REMICs), are not subject to the 1940 Act's
limitation on acquiring interests in other investment companies. In order to be
able to rely on the staff's interpretation, the CMOs and REMICs must be
unmanaged, fixed-asset issuers, that (a) invest primarily in mortgaged-backed
securities, (b) do not issue redeemable securities, (c) operate under general
exemptive orders exempting them from all provisions of the 1940 Act, and (d) are
not registered or regulated
B-15
<PAGE> 19
under the 1940 Act as investment companies. To the extent that the Funds select
CMOs or REMICs that do not meet the above requirements, the Funds' investment in
such securities will be subject to the limitations on its investment in
investment company securities. See "Investment Company Securities" in this
Statement of Additional Information.
The Fund expect that governmental, government-related or private entities
may create mortgage loan pools offering pass-through investments in addition to
those described above. The mortgages underlying these securities may be
alternative mortgage instruments, that is, mortgage instruments whose principal
or interest payments may vary or whose terms to maturity may be different from
customary long-term fixed rate mortgages. As new types of mortgage-related
securities are developed and offered to investors, the Adviser will, consistent
with the Funds' investment objective, policies and quality standards, consider
making investments in such new types of securities.
Convertible Securities. Each of the Capital Appreciation Funds and the
former ISG Capital Appreciation Funds may invest in convertible securities.
Convertible securities are fixed-income securities which may be exchanged or
converted into a predetermined number of the issuer's underlying common stock at
the option of the holder during a specified time period. Convertible securities
may take the form of convertible preferred stock, convertible bonds or
debentures, units consisting of "usable" bonds and warrants or a combination of
the features of several of these securities. Each Fund other than the Balanced
Fund may invest in convertible securities rated "BBB" or higher by an NRSRO at
the time of investment, or if unrated, of comparable quality. The Equity Income
Fund may invest in convertible securities rated "BB" or lower by an NRSRO at the
time of investment, or if unrated, of comparable quality. The Balanced Fund may
invest in convertible securities rated "A" or higher by an NRSRO or, if unrated,
of comparable quality. If a convertible security falls below these minimum
ratings after a Fund has purchased it, a Fund is not required to drop the
convertible bond from its portfolio, but will consider appropriate action. The
investment characteristics of each convertible security vary widely, which
allows convertible securities to be employed for different investment
objectives.
Securities which are rated "BB" or lower by Standard & Poor's or "Ba" or
lower by Moody's either have speculative characteristics or are speculative with
respect to capacity to pay interest and repay principal in accordance with the
terms of the obligations. A description of the rating categories is contained in
the Appendix to the Statement of Additional Information. There is no lower limit
with respect to rating categories for convertible securities in which the Equity
Income Fund may invest.
Corporate debt obligations that are not determined to be investment-grade
are high-yield, high-risk bonds, typically subject to greater market
fluctuations and greater risk of loss of income and principal due to an issuer's
default. To a greater extent than investment-grade securities, lower rated
securities tend to reflect short-term corporate, economic and market
developments, as well as investor perceptions or the issuer's credit quality.
Because
B-16
<PAGE> 20
investments in lower rated securities involve greater investment risk,
achievement of the Equity Income Fund's investment objective may be more
dependent on the Sub-Adviser's credit analysis than would be the case if the
Fund were investing in higher rated securities. High yield securities may be
more susceptible to real or perceived adverse economic and competitive industry
conditions than investment grade securities. A projection of an economic
downturn, for example, could cause a decline in high yield prices because the
advent of a recession could lessen the ability of a highly leveraged company to
make principal and interest payments on its debt securities. In addition, the
secondary trading market for high yield securities may be less liquid than the
market for higher grade securities. The market prices of debt securities also
generally fluctuate with changes in interest rates so that the Fund's net asset
value can be expected to decrease as long-term interest rates rise and to
increase as long-term rates fall. In addition, lower rated securities may be
more difficult to dispose of or to value than high-rated, lower-yielding
securities. The Sub-Adviser attempts to reduce the risks described above through
diversification of the portfolio and by credit analysis of each issuer as well
as by monitoring broad economic trends and corporate and legislative
developments.
Convertible bonds and convertible preferred stocks are fixed-income
securities that generally retain the investment characteristics of fixed-income
securities until they have been converted but also react to movements in the
underlying equity securities. The holder is entitled to receive the fixed-income
of a bond or the dividend preference of a preferred stock until the holder
elects to exercise the conversion privilege. Usable bonds are corporate bonds
that can be used in whole or in part, customarily at full face value, in lieu of
cash to purchase the issuer's common stock. When owned as part of a unit along
with warrants, which are options to buy the common stock, they function as
convertible bonds, except that the warrants generally will expire before the
bond's maturity. Convertible securities are senior to equity securities, and,
therefore, have a claim to assets of the corporation prior to the holders of
common stock in the case of liquidation. However, convertible securities are
generally subordinated to similar non-convertible securities of the same
company. The interest income and dividends from convertible bonds and preferred
stocks provide a stable stream of income with generally higher yields than
common stocks, but lower than non-convertible securities of similar quality.
The Funds will exchange or convert the convertible securities held in
portfolio into shares of the underlying common stock in instances in which, in
the opinion of the Adviser or Sub-Adviser, the investment characteristics of the
underlying common shares will assist a Fund in achieving its investment
objectives. Otherwise, a Fund will hold or trade the convertible securities. In
selecting convertible securities for a Fund, the Adviser or Sub-Adviser
evaluates the investment characteristics of the convertible security as a
fixed-income instrument, and the investment potential of the underlying equity
security for capital appreciation. In evaluating these matters with respect to a
particular convertible security, the Adviser or Sub-Adviser considers numerous
factors, including the economic and political outlook, the value of the security
relative to other investment alternatives, trends in the determinants of the
issuer's profits, and the issuer's management capability and practices.
B-17
<PAGE> 21
As with all debt securities, the market values of convertible securities
tend to increase when interest rates decline and, conversely, tend to decline
when interest rates increase.
Calls. The Capital Appreciation Funds, the former ISG Capital Appreciation
Funds, the Bond Fund, the Limited Term Bond Fund and the Government Income Fund
may write (sell) "covered" call options and purchase options to close out
options previously written by it. Such options must be issued by the Options
Clearing Corporation and may or may not be listed on a National Securities
Exchange. The purpose of writing covered call options is to generate additional
premium income for a Fund. This premium income will serve to enhance the Fund's
total return and will reduce the effect of any price decline of the security
involved in the option. Covered call options will generally be written on
securities which, in the Adviser's or Sub-Adviser's opinion, are not expected to
make any major price moves in the near future but which, over the long term, are
deemed to be attractive investments for the Fund.
A call option gives the holder (buyer) the "right to purchase" a security
at a specified price (the exercise price) at any time until a certain date (the
expiration date). So long as the obligation of the writer of a call option
continues, he or she may be assigned an exercise notice by the broker-dealer
through whom such option was sold, requiring him or her to deliver the
underlying security against payment of the exercise price. This obligation
terminates upon the expiration of the call option, or such earlier time at which
the writer effects a closing purchase transaction by repurchasing an option
identical to that previously sold. To secure his or her obligation to deliver
the underlying security in the case of a call option, a writer is required to
deposit in escrow the underlying security or other assets in accordance with the
rules of the Options Clearing Corporation. The Funds will write only covered
call options. This means that a Fund will only write a call option on a security
which it already owns.
Fund securities on which call options may be written will be purchased
solely on the basis of investment considerations consistent with a Fund's
investment objectives. The writing of covered call options is a conservative
investment technique believed to involve relatively little risk (in contrast to
the writing of naked or uncovered options, which the Funds will not do), but
capable of enhancing a Fund's total return. When writing a covered call option,
a Fund, in return for the premium, gives up the opportunity for profit from a
price increase in the underlying security above the exercise price, but retains
the risk of loss should the price of the security decline. Unlike when a Fund
owns securities not subject to an option, these Funds will not have any control
over when they may be required to sell the underlying securities, since they may
be assigned an exercise notice at any time prior to the expiration of their
obligation as a writer. If a call option which the Fund has written expires, the
Fund will realize a gain in the amount of the premium; however, such gain may be
offset by a decline in the market value of the underlying security during the
option period. If the call option is exercised, the Fund will realize a gain or
loss from the sale of the underlying security. The security covering the call
will be maintained in a segregated account of the Fund's custodian. The Funds
will consider a security covered by a call to be "pledged" as that term is used
in its policy which limits the pledging or mortgaging of its assets.
B-18
<PAGE> 22
The premium received is the market value of an option. The premium a Fund
will receive from writing a call option will reflect, among other things, the
current market price of the underlying security, the relationship of the
exercise price to such market price, the historical price volatility of the
underlying security, and the length of the option period. Once the decision to
write a call option has been made, the Adviser or Sub-Adviser, in determining
whether a particular call option should be written on a particular security,
will consider the reasonableness of the anticipated premium and the likelihood
that a liquid secondary market will exist for those options. The premium
received by a Fund for writing covered call options will be recorded as a
liability in the Fund's statement of assets and liabilities. This liability will
be adjusted daily to the option's current market value, which will be the latest
sale price at the time at which the net asset value per share of the Fund is
computed (close of the New York Stock Exchange), or, in the absence of such
sale, the latest asked price. The liability will be extinguished upon expiration
of the option, the purchase of an identical option in the closing transaction,
or delivery of the underlying security upon the exercise of the option.
Closing transactions will be effected in order to realize a profit on an
outstanding call option, to prevent an underlying security from being called, or
to permit the sale of the underlying security. Furthermore, effecting a closing
transaction will permit a Fund to write another call option on the underlying
security with either a different exercise price or expiration date or both. If a
Fund desires to sell a particular security from its portfolio on which it has
written a call option, it will seek to effect a closing transaction prior to, or
concurrently with, the sale of the security. There is, of course, no assurance
that the Fund will be able to effect such closing transactions at a favorable
price. If a Fund cannot enter into such a transaction, it may be required to
hold a security that it might otherwise have sold, in which case it would
continue to be at market risk on the security. This could result in higher
transaction costs. A Fund will pay transaction costs in connection with the
writing of options to close out previously written options. Such transaction
costs are normally higher than those applicable to purchases and sales of
portfolio securities.
Call options written by the Funds will normally have expiration dates of
less than nine months from the date written. The exercise price of the options
may be below, equal to, or above the current market values of the underlying
securities at the time the options are written. From time to time, a Fund may
purchase an underlying security for delivery in accordance with an exercise
notice of a call option assigned to it, rather than delivering such security
from its portfolio. In such cases, additional costs will be incurred.
A Fund will realize a profit or loss from a closing purchase transaction
if the cost of the transaction is less or more than the premium received from
the writing of the option. Because increases in the market price of a call
option will generally reflect increases in the market price of the underlying
security, any loss resulting from the repurchase of a call option is likely to
be offset in whole or in part by appreciation of the underlying security owned
by a Fund.
B-19
<PAGE> 23
Puts. The Tax-Exempt Fund and the Tax-Free Funds may acquire "puts" with
respect to Municipal Securities held in their portfolios, the Balanced Fund, the
Bond Fund, and the Limited Term Bond Fund may acquire "puts" with respect to
debt securities held in their portfolios, and the former ISG Capital
Appreciation Funds, the Enhanced Market Fund and Select Equity Fund may acquire
"puts" with respect to equity securities held in their portfolios. A put is a
right to sell a specified security (or securities) within a specified period of
time at a specified exercise price. The Funds may sell, transfer, or assign a
put only in conjunction with the sale, transfer, or assignment of the underlying
security or securities.
The amount payable to a Fund upon its exercise of a "put" is normally (i)
the Fund's acquisition cost of the securities subject to the put (excluding any
accrued interest which the Fund paid on the acquisition), less any amortized
market premium or plus any amortized market or original issue discount during
the period the Fund owned the securities, plus (ii) all interest accrued on the
securities since the last interest payment date during that period.
Puts may be acquired by a Fund to facilitate the liquidity of the
portfolio assets. Puts may also be used to facilitate the reinvestment of assets
at a rate of return more favorable than that of the underlying security. Puts
may, under certain circumstances, also be used to shorten the maturity of
underlying variable rate or floating rate securities for purposes of calculating
the remaining maturity of those securities and the dollar-weighted average
portfolio maturity of the Tax-Exempt Fund's assets pursuant to Rule 2a-7 under
the 1940 Act. See "Variable and Floating Rate Notes" and "Valuation of the Prime
Money Market Fund, the U.S. Treasury Fund and the Tax-Exempt Fund" in this
Statement of Additional Information.
The Limited Term Bond Fund will acquire puts solely to shorten the
maturity of the underlying debt security.
The Tax-Exempt Fund, the Tax-Free Funds, the Limited Term Bond Fund, the
former ISG Capital Appreciation Funds, the Balanced Fund, the Enhanced Market
Fund, and the Select Equity Fund will generally acquire puts only where the puts
are available without the payment of any direct or indirect consideration.
However, if necessary or advisable, a Fund may pay for puts either separately in
cash or by paying a higher price for portfolio securities which are acquired
subject to the puts (thus reducing the yield to maturity otherwise available for
the same securities).
The Funds intend to enter into puts only with dealers, banks, and
broker-dealers which, in the Adviser's opinion, present minimal credit risks.
The former ISG Capital Appreciation Funds may write covered put options in
respect of specific securities in which the Funds may invest and write covered
call and put option contracts. 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
B-20
<PAGE> 24
affected as new or existing institutions, including other investment companies,
engage in or increase their option-writing activities.
Futures Contracts and Related Options. The Enhanced Market Fund, the
Select Equity Fund, the Small Cap Fund, the former ISG Capital Appreciation
Funds, and the former ISG Tax-Free Funds may invest in futures contracts and
options thereon (interest rate futures contracts or index futures contracts, as
applicable) to commit funds awaiting investment, to maintain cash liquidity or
for other hedging purposes. The value of a Fund's contracts may equal or exceed
100% of the Fund's total assets, although a Fund will not purchase or sell a
futures contract unless immediately afterwards the aggregate amount of margin
deposits on its existing futures positions plus the amount of premiums paid for
related futures options entered into for other than bona fide hedging purposes
is 5% or less of its net assets.
Futures contracts obligate a Fund, at maturity, to take or make delivery
of securities, the cash value of a securities index or a stated quantity of a
foreign currency. A Fund may sell a futures contract in order to offset an
expected decrease in the value of its portfolio positions that might otherwise
result from a market decline or currency exchange fluctuation. A Fund may do so
either to hedge the value of its securities portfolio as a whole, or to protect
against declines occurring prior to sales of securities in the value of the
securities to be sold. In addition, a Fund may utilize futures contracts in
anticipation of changes in the composition of its holdings or in currency
exchange rates.
Positions in futures contracts may be closed out only on an exchange which
provides a secondary market for such futures. However, there can be no assurance
that a liquid secondary market will exist for any particular futures contract at
any specific time. Thus, it may not be possible to close a futures position. In
the event of adverse price movements, the Fund would continue to be required to
make daily cash payments to maintain its required margin. In such situations, if
a Fund has insufficient cash, it may have to sell portfolio securities to meet
daily margin requirements at a time when it may be disadvantageous to do so. In
addition, a Fund may be required to make delivery of the instruments underlying
the futures contracts it holds. The inability to close options and futures
positions also could have an adverse impact on a Fund's ability to effectively
hedge.
When a Fund purchases an option on a futures contract, it has the right to
assume a position as a purchaser or a seller of a futures contract at a
specified exercise price during the option period. When a Fund sells an option
on a futures contract, it becomes obligated to sell or buy a futures contract if
the option is exercised. In connection with a Fund's position in a futures
contract or related option, a Fund will create a segregated account of liquid
assets or will otherwise cover its position in accordance with applicable SEC
requirements.
Successful use of futures by the Funds is also subject to an adviser's or
sub-adviser's ability to correctly predict movements in the direction of the
market. For example, if a Fund has hedged against the possibility of a decline
in the market adversely affecting securities held
B-21
<PAGE> 25
by it and securities prices increase instead, a Fund will lose part or all of
the benefit to the increased value of its securities which it has hedged because
it will have approximately equal offsetting losses in its futures positions. In
addition, in some situations, if a Fund has insufficient cash, it may have to
sell securities to meet daily variation margin requirements. Such sales of
securities may be, but will not necessarily be, at increased prices which
reflect the rising market. A Fund may have to sell securities at a time when it
may be disadvantageous to do so.
The risk of loss in trading futures contracts in some strategies can be
substantial, due both to the low margin deposits required, and the extremely
high degree of leverage involved in futures pricing. As a result, a relatively
small price movement in a futures contract may result in immediate and
substantial loss (as well as gain) to the investor. For example, if at the time
of purchase, 10% of the value of the futures contract is deposited as margin, a
subsequent 10% decrease in the value of the futures contract would result in a
total loss of the margin deposit, before any deduction for the transaction
costs, if the account were then closed out. A 15% decrease would result in a
loss equal to 150% of the original margin deposit, before any deduction for the
transaction costs, if the contract were closed out. Thus, a purchase or sale of
a futures contract may result in losses in excess of the amount invested in the
contract.
Utilization of futures transactions by a Fund involves the risk of loss by
a Fund of margin deposits in the event of bankruptcy of a broker with whom a
Fund has an open position in a futures contract or related option.
Most futures exchanges limit the amount of fluctuation permitted in
futures contract prices during a single trading day. The daily limit establishes
the maximum amount that the price of a futures contract may vary either up or
down from the previous day's settlement price at the end of a trading session.
Once the daily limit has been reached in a particular type of contract, no
trades may be made on that day at a price beyond that limit. The daily limit
governs only price movement, during a particular trading day and therefore does
not limit potential losses, because the limit may prevent the liquidation of
unfavorable positions. Futures contract prices have occasionally moved to the
daily limit for several consecutive trading days with little or no trading,
thereby preventing prompt liquidation of futures positions and subjecting some
futures traders to substantial losses.
The trading of futures contracts is also subject to the risk of trading
halts, suspensions, exchange or clearing house equipment failures, government
intervention, insolvency of a brokerage firm or clearing house or other
disruptions of normal trading activity, which could at times make it difficult
or impossible to liquidate existing positions or to recover excess variation
margin payments.
Investment Company Securities. Each Capital Appreciation Fund and Income
Fund may invest up to 5% of the value of its total assets in the securities of
any one money market mutual fund including Shares of the AmSouth Prime Money
Market Fund, the AmSouth U.S.
B-22
<PAGE> 26
Treasury Fund and the Treasury Reserve Fund (the "AmSouth Money Market Funds"),
and the AmSouth Institutional Prime Obligations Fund (the "AmSouth Institutional
Money Market Fund"); the former ISG Capital Appreciation Funds, the former ISG
Income Funds, and the Treasury Reserve Money Market Fund may invest in
securities issued by other investment companies which principally invest in
securities of the type in which such Fund invests; and the Prime Money Market
Fund, the Institutional Prime Obligations Fund, and the Tax-Exempt Fund may
invest in the securities of other money market funds that have similar policies
and objectives provided that no more than 10% of a Fund's total assets may be
invested in the securities of money market mutual funds in the aggregate. In
order to avoid the imposition of additional fees as a result of investments by
the Funds in the AmSouth Money Market Funds or the AmSouth Institutional Money
Market Fund, the Adviser and the Administrator will reduce that portion of their
usual service fees from each Fund by an amount equal to their service fees from
the AmSouth Money Market Funds or the AmSouth Institutional Money Market Fund
that are attributable to those Fund investments. The Adviser and the
Administrator will promptly forward such fees to the Funds. Each Fund will incur
additional expenses due to the duplication of expenses as a result of investing
in securities of other unaffiliated money market mutual funds.
Securities Lending. In order to generate additional income, each Fund may,
from time to time, lend its portfolio securities to broker-dealers, banks or
institutional borrowers of securities which are not affiliated directly or
indirectly with the Trust. While the lending of securities may subject a Fund to
certain risks, such as delays or the inability to regain the securities in the
event the borrower were to default on its lending agreement or enter into
bankruptcy, the Fund will receive 100% collateral in the form of cash or other
liquid securities. This collateral will be valued daily by the Adviser or
Sub-Adviser and should the market value of the loaned securities increase, the
borrower will furnish additional collateral to the Fund. During the time
portfolio securities are on loan, the borrower pays the Fund any dividends or
interest paid on such securities. Loans are subject to termination by the Funds
or the borrower at any time. While the Funds do not have the right to vote
securities on loan, the Funds intend to terminate the loan and regain the right
to vote if that is considered important with respect to the investment. The
Funds will only enter into loan arrangements with broker-dealers, banks or other
institutions which the Adviser or Sub-Adviser has determined are creditworthy
under guidelines established by the Trust's Board of Trustees.
Short-Term Trading. Each Capital Appreciation Fund and the Government
Income Fund may engage in the technique of short-term trading. Such trading
involves the selling of securities held for a short time, ranging from several
months to less than a day. The object of such short-term trading is to increase
the potential for capital appreciation and/or income of the Fund in order to
take advantage of what the Adviser or Sub-Adviser believes are changes in
market, industry or individual company conditions or outlook. Any such trading
would increase the turnover rate of a Fund and its transaction costs.
B-23
<PAGE> 27
Short-Selling. (International Equity Fund and, to a limited extent,
Capital Growth Fund, and the former ISG Income 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 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.
Municipal Securities. Under normal market conditions, the Tax-Exempt Fund
and the Municipal Bond Fund will be primarily invested in bonds (and in the case
of the Tax-Exempt Fund, notes) issued by or on behalf of states (including the
District of Columbia), territories, and possessions of the United States and
their respective authorities, agencies, instrumentalities, and political
subdivisions, the interest on which is exempt from federal income tax
("Municipal Securities"). Under normal market conditions, the Tax-Exempt Fund
will invest at least 80% of its total assets, the Municipal Bond Fund will
invest at least 80% of its net assets, and the Florida Fund may invest up to 20%
of its net assets in Municipal Securities, the interest on which is not treated
as a preference item for purposes of the federal alternative minimum tax.
Municipal Securities include debt obligations issued by governmental
entities to obtain funds for various public purposes, such as the construction
of a wide range of public facilities, the refunding of outstanding obligations,
the payment of general operating expenses, and the extension of loans to other
public institutions and facilities. Private activity bonds that are issued by or
on behalf of public authorities to finance various privately-operated facilities
are included within the term Municipal Securities if the interest paid thereon
is exempt from both federal income tax and not treated as a preference item for
individuals for purposes of the federal alternative minimum tax. Interest on
private activity bonds (and industrial development bonds) is fully tax-exempt
only if the bonds fall within certain defined categories of qualified private
activity bonds and meet the requirements specified in those respective
categories. Regardless of whether they qualify for tax-exempt status, private
activity bonds may subject both individual and corporate investors to tax
liability under the alternative minimum tax. However, private activity bonds
will only be considered Municipal Securities if they do not have this effect
regarding individuals.
B-24
<PAGE> 28
Municipal Securities may also include General Obligation Notes, Tax
Anticipation Notes, Bond Anticipation Notes, Revenue Anticipation Notes, Project
Notes, Tax Exempt Commercial Paper, Construction Loan Notes and other forms of
short-term tax-exempt loans. Such instruments are issued with a short-term
maturity in anticipation of the receipt of tax funds, the proceeds of bond
placements or other revenues.
Project Notes are issued by a state or local housing agency and are sold
by the Department of Housing and Urban Development. While the issuing agency has
the primary obligation with respect to its Project Notes, they are also secured
by the full faith and credit of the United States through agreements with the
issuing authority which provide that, if required, the federal government will
lend the issuer an amount equal to the principal of and interest on the Project
Notes.
As described in the Prospectuses of the Tax-Exempt Fund, the Municipal
Bond Fund and the Florida Fund (collectively, the "Tax-Free Funds"), the two
principal classifications of Municipal Securities consist of "general
obligation" and "revenue" issues. A Fund permitted to invest in Municipal
Securities may also acquire "moral obligation" issues, which are normally issued
by special purpose authorities. If the issuer of moral obligation bonds is
unable to meet its debt service obligations from current revenues, it may draw
on a reserve fund, the restoration of which is a moral commitment but not a
legal obligation of the state or municipality that created the issuer. There
are, of course, variations in the quality of Municipal Securities, both within a
particular classification and between classifications, and the yields on
Municipal Securities depend upon a variety of factors, including general money
market conditions, the financial condition of the issuer, general conditions of
the municipal bond market, the size of a particular offering, the maturity of
the obligation and the rating of the issue. The ratings of NRSROs represent
their opinions as to the quality of Municipal Securities. It should be
emphasized, however, that ratings are general and are not absolute standards of
quality, and Municipal Securities with the same maturity, interest rate and
rating may have different yields, while Municipal Securities of the same
maturity and interest rate with different ratings may have the same yield.
Subsequent to purchases by the Tax-Exempt Fund, an issue of Municipal Securities
may cease to be rated or its rating may be reduced below the minimum rating
required for purchase by the Tax-Exempt Fund. Neither event would under all
circumstances require the elimination of such an obligation from the Fund's
investment portfolio. However, the obligation generally would be retained only
if such retention was determined by the Board of Trustees to be in the best
interests of the Fund.
Municipal Securities purchased by the Tax-Exempt Fund may include rated
and unrated variable and floating rate tax-exempt notes, which may have a stated
maturity in excess of one year but which will, in such event, be subject to a
demand feature that will permit the Tax-Exempt Fund to demand payment of the
principal of the note either (i) at any time upon not more than thirty days'
notice or (ii) at specified intervals not exceeding one year and upon no more
than thirty days' notice. There may be no active secondary market with respect
to a particular variable or floating rate note. Nevertheless, the periodic
readjustments of their
B-25
<PAGE> 29
interest rates tend to assure that their value to the Tax-Exempt Fund will
approximate their par value.
An issuer's obligations under its Municipal Securities are subject to the
provisions of bankruptcy, insolvency, and other laws affecting the rights and
remedies of creditors, such as the federal bankruptcy code, and laws, if any,
which may be enacted by Congress or state legislatures extending the time for
payment of principal or interest, or both, or imposing other constraints upon
the enforcement of such obligations or upon the ability of municipalities to
levy taxes. The power or ability of an issuer to meet its obligations for the
payment of interest on and principal of its Municipal Securities may be
materially adversely affected by litigation or other conditions.
Opinions relating to the validity of Eligible Municipal Securities and to
the exemption of interest thereon from federal income tax are rendered by bond
counsel to the respective issuers at the time of issuance. Neither the Tax-Free
Funds nor the Adviser will review the proceedings relating to the issuance of
Eligible Municipal Securities or the basis for such opinions.
Although the Tax-Exempt Fund and Municipal Bond Fund do not presently
intend to do so on a regular basis, each may invest more than 25% of its total
assets in Municipal Securities that are related in such a way that an economic,
business, or political development or change affecting one such security would
likewise affect the other Municipal Securities. An example of such securities
are obligations the repayment of which is dependent upon similar types of
projects. Such investments would be made only if deemed necessary or appropriate
by the Adviser. To the extent that the Fund's assets are concentrated in
Municipal Securities that are so related, the Fund will be subject to the
peculiar risks presented by such securities, such as negative developments in a
particular industry, to a greater extent than it would be if the Fund's assets
were not so concentrated.
The Tax-Free Funds may acquire "puts" with respect to Eligible Municipal
Securities held in their portfolios. Under a put, the Funds would have the right
to sell a specified Eligible Municipal Security within a specified period of
time at a specified price to a third party. A put would be sold, transferred, or
assigned only with the underlying Eligible Municipal Security. The Funds will
acquire puts solely to facilitate portfolio liquidity, shorten the maturity of
the underlying Eligible Municipal Securities, or permit the investment of the
Funds' at a more favorable rate of return. The Funds expect that they will
generally acquire puts only where the puts are available without the payment of
any direct or indirect consideration. However, if necessary or advisable, the
Funds may pay for a put separately in cash. The aggregate price of a security
subject to a put may be higher than the price which otherwise would be paid for
the security without such an option, thereby increasing the security's cost and
reducing its yield.
B-26
<PAGE> 30
Tax-Free Funds. The Tax-Free Funds may also invest in master demand notes
in order to satisfy short-term needs or, if warranted, as part of its temporary
defensive investment strategy. Such notes are demand obligations that permit the
investment of fluctuating amounts at varying market rates of interest pursuant
to arrangements between the issuer and a U.S. commercial bank acting as agent
for the payees of such notes. Master demand notes are callable on demand by the
Funds, but are not marketable to third parties. Master demand notes are direct
lending arrangements between the Fund and the issuer of such notes. The Adviser
will review the quality of master demand notes at least quarterly, and will
consider the earning power, cash flow and debt-to-equity ratios indicating the
borrower's ability to pay principal together with accrued interest on demand.
While master demand notes are not typically rated by credit rating agencies,
issuers of such notes must satisfy the same criteria for the Funds set forth
above for commercial paper.
The Tax-Free Funds may acquire rated and unrated variable and floating
rate notes. Variable and floating rate notes are frequently not rated by credit
rating agencies; however, unrated variable and floating rate notes purchased by
the Funds will be determined by the Adviser under guidelines established by the
Board of Trustees to be of comparable quality at the time of purchase to rated
instruments eligible for purchase under the Funds' investment policies. There
may be no active secondary market with respect to a particular variable or
floating rate note. Nevertheless, the periodic readjustments of their interest
rates tend to assure that their value to the Funds will approximate their par
value.
The Tax-Free Funds may acquire zero coupon obligations. Such zero-coupon
obligations pay no current interest and are typically sold at prices greatly
discounted from par value, with par value to be paid to the holder at maturity.
The return on a zero-coupon obligation, when held to maturity, equals the
difference between the par value and the original purchase price. Zero-coupon
obligations have greater price volatility than coupon obligations and such
obligations will be purchased when the yield spread, in light of the
obligation's duration, is considered advantageous. The Funds will only purchase
zero-coupon obligations if, at the time of purchase, such investments do not
exceed 20% of the value of the Florida Fund's total assets and 25% of the
Municipal Bond Fund's total assets.
An increase in interest rates will generally reduce the value of the
investments in the Tax-Free Funds and a decline in interest rates will generally
increase the value of those investments. Depending upon prevailing market
conditions, the Adviser may purchase debt securities at a discount from face
value, which produces a yield greater than the coupon rate. Conversely, if debt
securities are purchased at a premium over face value, the yield will be lower
than the coupon rate. In making investment decisions, the Adviser will consider
many factors besides current yield, including the preservation of capital,
maturity, and yield to maturity.
Former ISG Tax-Free Funds. Municipal Securities bear fixed, floating or
variable rates of interest, which are determined in some instances by formulas
under which the Municipal
B-27
<PAGE> 31
Security'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 Securities are subject to redemption at a
date earlier than their stated maturity pursuant to call options, which may be
separated from the related Municipal Securities 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.
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 Securities. 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 "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
Trustees 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 Security (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
B-28
<PAGE> 32
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 Security'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 Security, 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 Securities 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 Securities 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.
The Municipal Bond Fund -- Concentration in Alabama Issuers. The Municipal
Bond Fund may invest 25% or more of its total assets in bonds, notes and
warrants generally issued by or on behalf of the State of Alabama and its
political subdivisions, the interest on which, in the opinion of the issuer's
bond counsel at the time of issuance, is exempt form both federal income tax and
Alabama personal income tax and is not treated as a preference item for purposes
of the federal alternative minimum tax for individuals ("Alabama Municipal
Securities"). Because of the relatively small number of issuers of Alabama
Municipal Securities, the Fund is more likely to invest a higher percentage of
its assets in the securities of a single issuer. This concentration involves an
increased risk of loss if the issuer is unable to make interest or principal
payments or if the market value of such securities were to decline.
Concentration of this nature may cause greater fluctuation in the net asset
value of the Fund's Shares.
General Economic Characteristics of Alabama. Alabama ranks twenty-third in
the nation in total population, with over four million residents in 1998. Its
economy has historically been based primarily on agriculture, textiles, mineral
extraction and iron and steel production, although the state has diversified
into health care related industries and other service-oriented sectors. Overall
job growth rate was 0.2% in 1998. Alabama's per capita income in 1998 was
$21,442, 81.2% of U.S. per capita income. Currently Alabama's general
obligations are rated Aa3 by Moody's and AA by Standard and Poor's.
BALANCED BUDGET AND PRO-RATION PROCEDURES. Section 213 of the
Constitution of Alabama, as amended, requires that annual financial operations
of Alabama must be on a
B-29
<PAGE> 33
balanced budget. The Constitution also prohibits the state from incurring
general obligation debt unless authorized by an amendment to the Constitution.
Amendments to the Constitution have generally been adopted through a procedure
that requires each amendment to be proposed by a favorable vote of three-fifths
of all the members of each house of the Legislature and thereafter approved by a
majority of the voters of the state voting in a statewide election.
Alabama has statutory budget provisions which create a proration procedure
in the event that estimated budget resources in a fiscal year are insufficient
to pay in full all appropriations for such fiscal year. The Alabama state budget
is composed of two funds - the General Fund and the Education Fund. Proration of
either Fund is possible in any fiscal year, and proration may have a material
adverse effect on entities dependent on state funding, including certain issuers
of Alabama Municipal Securities held in the Alabama Fund.
Court decisions have indicated that certain state expenses necessary for
essential functions of government are not subject to proration under applicable
law. The Supreme Court of Alabama has held that the debt prohibition contained
in the constitutional amendment does not apply to obligations incurred for
current operating expenses payable during the current fiscal year, debts
incurred by separate public corporations, or state debt incurred to repel
invasion or suppress insurrection. The state may also make temporary loans not
exceeding $300,000 to cover deficits in the state treasury. Limited obligation
debt may be authorized by the legislature without amendment to the Constitution.
The state has followed the practice of financing certain capital improvement
programs - principally for highways, education and improvements to the State
Docks - through the issuance of limited obligation bonds payable solely out of
certain taxes and other revenues specifically pledged for their payment and not
from the general revenues of the state.
GENERAL OBLIGATION WARRANTS. Municipalities and counties in Alabama
traditionally have issued general obligation warrants to finance various public
improvements. Alabama statutes authorizing the issuance of such interest-bearing
warrants do not require an election prior to issuance. On the other hand, the
Constitution of Alabama (Section 222) provides that general obligation bonds may
not be issued without an election.
The Supreme Court of Alabama validated certain general obligation warrants
issued by the City of Hoover, reaffirming that such obligations did not require
an election under Section 222 of the Constitution of Alabama. In so holding, the
Court found that warrants are not "bonds" within the meaning of Section 222.
According to the Court, warrants are not negotiable instruments and transferees
of warrants cannot be holders in due course. Therefore, a transferee of warrants
is subject to all defenses that the issuer of such warrants may have against the
transferor.
County boards of education may borrow money by issuing interest-bearing
warrants payable solely out of such board's allocated or apportioned share of
specified tax. The county
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board's apportioned share of such tax may be diminished upon the establishment
of a city school system, which could jeopardize the payment of the county
board's warrants.
LIMITED TAXING AUTHORITY. Political subdivisions of the state have
limited taxing authority. Ad valorem taxes may be levied only as authorized by
the Alabama Constitution. In order to increase the rate at which any ad valorem
tax is levied above the limit otherwise provided in the Constitution, the
proposed increase must be proposed by the governing body of the taxing authority
after a public hearing, approved by an act of the Alabama Legislature and
approved at an election within the taxing authority's jurisdiction. In addition,
the Alabama Constitution limits the total amount of state, county, municipal and
other ad valorem taxes that may be imposed on any class of property in any one
tax year. This limitation is expressed in terms of a specified percentage of the
market value of such property.
Specific authorizing legislation is required for the levy of taxes by
local governments. In addition, the rate at which such taxes are levied may be
limited to the authorizing legislation or judicial precedent. For example, the
Alabama Supreme Court has held that sales and use taxes, which usually comprise
a significant portion of the revenues for local governments, may not be levied
at rates that are confiscatory or unreasonable. The total sales tax (state and
local) in some jurisdictions is 9%. State and local governments in Alabama are
more dependent on general and special sales taxes than are state and local
governments in many states. Because sales taxes are less stable sources of
revenue than are property taxes, state and local governments in Alabama may be
subject to shortfalls in revenue due to economic cycles.
PRIORITY FOR ESSENTIAL GOVERNMENTAL FUNCTIONS. Numerous decisions of
the Alabama Supreme Court hold that a governmental unit may first use its taxes
and other revenues to pay the expenses of providing necessary governmental
services before paying debt service on its bonds, warrants or other
indebtedness.
CHALLENGE TO EDUCATION FUNDING. On January 10, 1997, the Alabama
Supreme Court affirmed a lower court ruling which held that an unconstitutional
disparity exists among Alabama's public school districts because, among other
things, of an inequitable distribution of tax funds among the school districts.
In order to comply with the ruling, the Alabama Legislature continues to
restructure the public educational system in Alabama, subject to review by the
state courts. Any reallocation of funds between school districts arising out of
this restructuring could impair the ability of certain districts to service
debt.
The Florida Fund -- Diversification and Concentration. The Florida Fund is
a non-diversified fund under the 1940 Act and may concentrate its investments in
the securities of a limited number of issuers. Under the Internal Revenue Code
of 1986, as amended (the "Code"), the Florida Fund generally may not invest in a
manner such that at the end of each fiscal quarter (i) more than 25% of its
total assets are represented by securities of any one issuer (other than U.S.
government securities) and (ii) with respect to 50% of its total assets, more
than 5% of its total assets are represented by the securities of any one issuer
(other than
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U.S. government securities). Thus, the Florida Fund generally may invest up to
25% of its total assets in the securities of each of any two issuers. Because of
the relatively small number of issuers of Florida Municipal Securities, the
Florida Fund is more likely to invest a higher percentage of its assets in the
securities of a single issuer than an investment company that invests in a broad
range of tax-exempt securities. This concentration involves an increased risk of
loss if the issuer is unable to make interest or principal payments or if the
market value of such securities were to decline. Concentration of this nature
may cause greater fluctuation in the net asset value of the Florida Fund's
shares.
General Economic Characteristics of Florida. Florida ranks fourth in the
nation in total population, with over 12.9 million residents in 1990, and has
been one of the fastest growing states in the nation. Historically, tourism,
agriculture, construction and manufacturing have constituted the most important
sectors of the state's economy. Construction activity slows during periods of
high interest rates or cyclical downturns. The service sector employs the
largest number of people in Florida. While wages in the service sector tend to
be lower than in manufacturing and other sectors of the economy, the service
sector traditionally has been less sensitive to business cycles. Currently,
Florida's general obligations are rated Aa3 by Moody's and AA by Standard and
Poor's.
The southern and central portions of Florida's economy, in particular,
rely heavily on tourism and are sensitive to changes in the tourism industry.
For example, tourism in Florida has been adversely affected by publicity
regarding violent crimes against tourists, particularly tourists from abroad.
Gasoline price hikes and/or shortages from an oil embargo or other oil shortage
could severely affect U.S. tourism in the state, which is heavily dependent on
automobiles as the primary form of transportation.
South Florida also is susceptible to international trade and currency
imbalances due to its geographic location as the gateway to Latin America and
its involvement in foreign trade and investment. The central portion of the
state is affected by conditions in the phosphate and agriculture industries,
especially citrus and sugar. Northern Florida's economy is more heavily tied to
military bases, some of which are closing or scaling back as a result of Federal
budget cutbacks, and the lumber and paper industries.
The entire state can be affected by severe weather conditions including
hurricanes. The impact of severe hurricanes on the fiscal resources of the state
and local governments is difficult to assess.
SOURCES OF STATE AND LOCAL REVENUES. Florida's Constitution
prohibits deficit spending by the state for governmental operations. Florida
does not have a personal income tax. An amendment to the state's Constitution
would be required in order to institute an income tax, and passage of such an
amendment is believed to be unlikely due to the relatively large number of
retirees living in the state as well as to the general unpopularity of tax
increases in the current political climate. A two-thirds approval of voters
voting in an election
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is now required for the addition of any new taxes to the Florida Constitution.
The principal sources of state revenues are a 6% sales tax, state lottery, motor
fuels tax, corporate income tax, and miscellaneous other revenue sources,
including beverage tax and licenses, cigarette tax, documentary stamp taxes and
an intangible tax. Dependence on the sales tax may subject state revenues to
more volatility than would be the case if Florida had a personal income tax,
with sales tax collections adversely affected during recessions and periods when
tourism declines.
Taxation by units of government other than the state is permitted only to
the extent that Florida's legislature enacts enabling legislation. The principal
sources of county and municipal government revenues are ad valorem property
taxes, state revenue sharing, and miscellaneous other revenue sources, including
utilities services fees and local option fees. The principal sources of revenues
for Florida's school districts are ad valorem property taxes and state revenue
sharing, including revenues from a state lottery. The state Constitution imposes
millage limits, including a 10-mill limit each on county, municipal and school
ad valorem taxes. Effective January 1, 1995, Florida's voters amended the state
Constitution to limit annual increases in the assessed value of homestead
property to the lesser of 3% of the prior year's assessment or the percentage
change in the Consumer Price Index during the preceding calendar year. The
limitation on increases in assessment of homestead property could eventually
lead to ratings revisions that could have a negative impact on the prices of
obligations funded with this source of taxation. However, the effect of the
limit will be tempered by reassessments of homestead property at market value
when sold.
Units of state and local government in Florida will continue to face
spending pressures due to infrastructure needs for an expanding population,
especially in view of growth management laws enacted by Florida's legislature.
These laws include concurrency requirements that impose building moratoriums
unless roads and other infrastructure are added concurrently with additional
commercial or residential developments.
TYPES OF INDEBTEDNESS. The two principal types of indebtedness
issued by state or local units of government in Florida are "general obligation
bonds" and "revenue bonds." General obligation bonds are secured by a pledge of
the full faith, credit and taxing power of the governmental entity issuing the
bonds. They can be issued in Florida only after a referendum in which the voters
in the jurisdictional limits of the jurisdiction issuing the bonds approve their
issuance. Revenue bonds are payable only from the revenues derived from a
facility or class of facilities or, in some cases, from the proceeds of a
special tax or other specific revenue source. Revenue bonds are not secured by
the full faith, credit and taxing power of the governmental issuer.
MARKET RISK CAUSED BY INTANGIBLE TAX CONSIDERATIONS. As a normal
policy, on January 1 of each calendar year the Florida Fund intends to own only
assets which are exempt from the Florida Intangible Tax. Accordingly, it is
possible that the Florida Fund, in
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disposing of non-exempt assets to meet this policy objective, might sustain
losses which might not otherwise be incurred absent this policy of avoiding the
Florida Intangible Tax.
Tennessee Municipal Securities. (Tennessee Tax-Exempt Fund and Limited
Term Tennessee Tax-Exempt Fund) The average dollar-weighted credit rating of the
Municipal Securities 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 Security 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 Securities 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 Securities 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 Securities
which, while not rated, are determined by the Adviser to be of comparable
quality to the rated securities in which the Fund may invest.
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 Securities. 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.
INVESTMENT RESTRICTIONS - CAPITAL APPRECIATION FUNDS, INCOME FUNDS, MONEY MARKET
FUNDS (EXCEPT THE TREASURY RESERVE FUND), INSTITUTIONAL FUND
The following investment restrictions may be changed with respect to a
particular Fund only by a vote of a majority of the outstanding voting Shares of
that Fund (as defined under "ADDITIONAL INFORMATION - Miscellaneous" in this
Statement of Additional Information).
THE PRIME MONEY MARKET FUND AND THE INSTITUTIONAL PRIME OBLIGATIONS FUND
MAY NOT:
1. 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 the Prime Money
Market Fund's or the Institutional Prime Obligations Fund's total assets would
be invested in such issuer, except that 25% or less of the value of the Prime
Money Market Fund's or the Institutional Prime Obligations Fund's total assets
may be invested without regard to such 5% limitation. 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.
2. Purchase any securities which would cause more than 25% of the value of
the Prime Money Market Fund's or the Institutional Prime Obligations 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, bank
certificates of deposit or bankers' acceptances issued by a domestic bank or by
a U.S. branch of a foreign bank provided that such U.S. branch is subject to the
same regulation as U.S. banks, and repurchase agreements secured by bank
instruments or obligations of the U.S. government or its agencies or
instrumentalities; (b) 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 (c) 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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THE U.S. TREASURY FUND MAY NOT:
1. Purchase securities other than bills, notes, and bonds issued by the
U.S. Treasury, certain of which securities may be subject to repurchase
agreements collateralized by the underlying U.S. Treasury obligation.
THE TAX-EXEMPT FUND MAY NOT:
1. 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 25% of the value of the
Tax-Exempt 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.
2. Purchase any securities which would cause 25% or more of the Tax-Exempt
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.
3. Acquire a put if, immediately after such acquisition, over 5% of the
total amortized cost value of the Tax-Exempt Fund's assets would be subject to
puts from the same institution (except that (i) up to 25% of the value of the
Tax-Exempt Fund's total assets may be subject to puts without regard to such 5%
limitation and (ii) the 5% limitation is inapplicable to puts that, by their
terms, would be readily exercisable in the event of a default in payment of
principal or interest on the underlying securities). For the purpose of this
investment restriction and investment restriction No. 4 below, a put will be
considered to be from the party to whom the Tax-Exempt Fund will look for
payment of the exercise price.
4. Acquire a put that, by its terms would be readily exercisable in the
event of a default in payment of principal and interest on the underlying
security or securities if, immediately after that acquisition, the amortized
cost value of the security or securities underlying that put, when aggregated
with the amortized cost value of any other securities issued or guaranteed by
the issuer of the put, would exceed 10% of the total amortized cost value of the
Tax-Exempt Fund's assets.
THE BOND FUND, THE LIMITED TERM BOND FUND, THE GOVERNMENT INCOME FUND, THE
MUNICIPAL BOND FUND AND THE CAPITAL APPRECIATION FUNDS MAY NOT:
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1. 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. This investment restriction does not apply
to the Select Equity Fund.
THE INCOME FUNDS AND THE CAPITAL APPRECIATION FUNDS MAY NOT:
1. Purchase any securities which would cause more than 25% of the value of
such Income Fund's or Capital Appreciation 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 Bond Fund, the Limited Term Bond Fund, the
Florida Fund, and the Municipal Bond Fund there is no limitation with respect to
Municipal Securities, which, for purposes of this limitation only, do not
include private activity bonds that are backed only by the assets and revenues
of a non-governmental user; (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.
THE TAX-FREE FUNDS MAY NOT:
1. Write or sell puts, calls, straddles, spreads, or combinations thereof
except that the Funds may acquire puts with respect to Eligible Municipal
Securities and sell those puts in conjunction with a sale of those Eligible
Municipal Securities.
THE MONEY MARKET FUNDS, THE INSTITUTIONAL MONEY MARKET FUND, THE INCOME
FUNDS, AND THE CAPITAL APPRECIATION FUNDS MAY NOT:
1. 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 10% of the value of its total assets at the
time of such borrowing (33 1/3% with respect to the Select Equity Fund); 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 10% of the value of such Fund's total assets at the time of its
borrowing (33 1/3% with respect to the Select Equity Fund). A Fund will not
purchase securities while
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borrowings (including reverse repurchase agreements) in excess of 5% of its
total assets are outstanding.
2. 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.
NONE OF THE FUNDS MAY:
1. 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;
2. Purchase or sell commodities, commodity contracts (including futures
contracts with respect to each Fund other than the Small Cap, Enhanced Market
and Select Equity 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 U.S. Treasury 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 Growth Fund, the Small Cap Fund,
the Equity Income Fund, the Enhanced Market Fund and the Select Equity Fund);
3. Invest in securities of other investment companies, except as such
securities may be acquired as part of a merger, consolidation, reorganization,
or acquisition of assets; provided, however, that the Capital Appreciation Funds
and the Income Funds may purchase securities of a money market fund, including
securities of both the Prime Money Market Fund and the U.S. Treasury Fund (and
in the case of the Tax-Free Funds, securities of the Tax-Exempt Fund) and the
Tax-Exempt Fund, the Institutional Prime Obligations Fund, and the Prime Money
Market Fund may purchase securities of a money market fund which invests
primarily in high quality short-term obligations exempt from federal income tax,
if, with respect to each such Fund, immediately after such purchase, the
acquiring Fund, does not own in the aggregate (i) more than 3% of the acquired
company's outstanding voting securities, (ii) securities issued by the acquired
company having an aggregate value in excess of 5% of the value of the total
assets of the acquiring Fund, or (iii) securities issued by the acquired company
and all other investment companies (other than Treasury stock of the acquiring
Fund) having an aggregate value in excess of 10% of the value of the acquiring
Fund's total assets;
4. Invest in any issuer for purposes of exercising control or management;
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<PAGE> 43
5. Purchase or retain securities of any issuer if the officers or Trustees
of the Trust or the officers or directors of its investment adviser owning
beneficially more than one-half of 1% of the securities of such issuer together
own beneficially more than 5% of such securities; and
6. Invest more than 10% of total assets in the securities of issuers which
together with any predecessors have a record of less than three years of
continuous operation.
The Prime Money Market Fund, the Institutional Prime Obligations Fund, and
the U.S. Treasury Fund may not buy common stocks or voting securities, or state,
municipal, or private activity bonds. The Money Market Funds, the Institutional
Money Market Fund, and the Tax-Free Funds may not write or purchase call
options. None of the Funds (except the Enhanced Market and Select Equity Fund)
may write put options. The Prime Money Market Fund, the U.S. Treasury Fund, the
Value Fund, the Institutional Prime Obligations Fund, the Growth Fund and the
Equity Income Fund may not purchase put options. The Tax-Exempt Fund and the
Tax-Free Funds may not invest in private activity bonds where the payment of
principal and interest are the responsibility of a company (including its
predecessors) with less than three years of continuous operation. As a
non-fundamental investment restriction with respect to the Small Cap Fund only,
the Small Cap Fund may not write or purchase put options.
If any percentage restriction described above is satisfied at the time of
investment, a later increase or decrease in such percentage resulting from a
change in asset value will not constitute a violation of such restriction.
Additional Investment Restrictions
The following investment restriction is non-fundamental and may be changed
by a vote of the majority of the Board of Trustees: No Fund will invest more
than 15% of its net assets in securities that are restricted as to resale, or
for which no readily available market exists, including repurchase agreements
providing for settlement more than seven days after notice.
INVESTMENT RESTRICTIONS - FORMER ISG CAPITAL APPRECIATION FUNDS, STRATEGIC
PORTFOLIOS, FORMER ISG INCOME FUNDS, TREASURY RESERVE FUND
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 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
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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 33 1/3% 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 33 1/3% 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 permitted under the 1940 Act, are not considered senior
securities for purposes of this investment restriction.
B-41
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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, Large Cap Equity 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.
The following investment restriction numbered 9 is fundamental for the Mid
Cap Fund, Large Cap Equity 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:
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<PAGE> 46
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.
Portfolio Turnover
The portfolio turnover rate for each Fund is calculated by dividing the
lesser of a Fund's purchases or sales of portfolio securities for the year by
the monthly average value of the portfolio securities. The calculation excludes
all securities whose maturities at the time of
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<PAGE> 47
acquisition were one year or less. Portfolio turnover with respect to each of
the Money Market Funds and the Institutional Money Market Fund is expected to be
zero percent for regulatory purposes.
For the fiscal years ended July 31, 1999 and July 31, 1998, the portfolio
turnover rate for the Balanced Fund was 13.51% and 17.15%, respectively, for the
common stock portion of its portfolio and 23.01% and 11.99%, respectively, for
the other portion of its portfolio.
For the other AmSouth Funds, each Fund's portfolio turnover rate for the
fiscal year ended July 31, 1999 and July 31, 1998 (December 31, 1999 and
December 31, 1998 in the case of Funds participating in the ISG/AmSouth
combination) were as follows:
<TABLE>
<CAPTION>
Fund 1999 1998
- ---- ---- ----
<S> <C> <C>
Balanced Fund 23.24% 25.40%
Growth Fund 79.30% 77.26%
Enhanced Market Fund 36.03% --
Value Fund 17.65% 16.95%
Equity Income Fund 133.74% 83.26%
Select Equity Fund 9.72% --
Small Cap Fund 208.13% 70.64%
Bond Fund 18.26% 40.41%
Government Income Fund 26.85% 34.89%
Limited Term Bond Fund 39.15% 39.31%
Florida Tax-Exempt Fund 34.33% 29.55%
Municipal Bond Fund 20.74% 28.75%
</TABLE>
<TABLE>
<CAPTION>
December 31, 1999 December 31, 1998
----------------- -----------------
<S> <C> <C>
International Equity Fund 39.97% 62.47%
Mid Cap Fund 19.71% N/A
Capital Growth Fund 178.49% 152.00%
Large Cap Fund 14.92% 2.79%
Limited Term U.S. Government Fund 16.91% 86.00%
Tennessee Tax-Exempt Fund 63.97% 154.86%
Limited Term Tennessee Tax-Exempt Fund 52.09% 167.48%
Treasury Reserve Money Market Fund N/A N/A
Aggressive Growth Portfolio 94.78% N/A
Growth Portfolio 82.83% N/A
Growth and Income Portfolio 61.90% N/A
Moderate Growth and Income Portfolio 133.91% N/A
Current Income Portfolio 103.66% N/A
</TABLE>
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<PAGE> 48
The portfolio turnover rate may vary greatly from year to year as well as
within a particular year, and may also be affected by cash requirements for
redemptions of Shares and, in the case of the Tax-Exempt Fund, the Tax-Free
Funds, and the former ISG Tax-Free Funds, by requirements which enable these
Funds to receive certain favorable tax treatments. A higher portfolio turnover
rate may lead to increased taxes and transaction costs. Portfolio turnover will
not be a limiting factor in making investment decisions.
The Tax-Free Funds and the former ISG Tax-Free Funds will not purchase
securities solely for the purpose of short-term trading. The turnover rates for
the Funds will not be a factor preventing either the sale or the purchase of
securities when the Adviser believes investment considerations warrant such sale
or purchase. However, the portfolio turnover rate for each of the Tax-Free Funds
and the former ISG Tax-Free Funds may vary greatly from year to year as well as
within a particular year. High turnover rates will generally result in higher
transaction costs to the Funds and may result in higher levels of taxable
realized gains to the Funds' Shareholders. To the extent portfolio turnover
results in the realization of short-term capital gains, such gains will
generally be taxed to shareholders at ordinary income tax rates.
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., Eastern time
(and also as of 1:00 p.m., Eastern time for the Treasury Reserve Fund and as of
2:00 p.m., Eastern time for the Institutional Prime Obligations Fund) (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 Money Market Funds and the Institutional Money Market Fund
These Funds have 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
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<PAGE> 49
than the price the Fund would receive if it sold the instrument. The value of
securities in these Funds can be expected to vary inversely with changes in
prevailing interest rates.
Pursuant to Rule 2a-7, these Funds will maintain a dollar-weighted average
portfolio maturity appropriate to its objective of maintaining a stable net
asset value per Share, provided that no Fund will purchase any security with a
remaining maturity of more than thirteen months (securities subject to
repurchase agreements may bear 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 Funds 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 each 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 a 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 a 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, the former ISG Capital Appreciation
Fund, the Income Funds, and the former ISG Income Funds
The value of the portfolio securities held by each of the 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.
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.
B-46
<PAGE> 50
Purchase of Shares
As stated in the relevant Prospectuses, the public offering price of Class
A Shares of the Capital Appreciation Funds, the former ISG Capital Appreciation
Funds, the Strategic Portfolios, the Income Funds, and the former ISG 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). The public offering price
of the Class I, Class II, and Class III Shares is their net asset value per
Share, as next computed after an order is received.
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, former ISG Capital
Appreciation Fund, former ISG Income 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 Class A and Class B Shares Prospectus, the Class B Shares are subject to a
Contingent Deferred Sales Charge if
B-47
<PAGE> 51
they are redeemed prior to the sixth anniversary of purchase. Class B Shares of
the Prime Money Market Fund only are available to Shareholders of Class B Shares
of another Fund who wish to exchange their Class B Shares of such other Fund for
Class B Shares of the Prime Money Market Fund.
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 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
B-48
<PAGE> 52
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 or the Institutional 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
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.
There is no sales charge imposed by the Trust in connection with the
purchase of Shares of the Institutional Money Market Fund.
Shares of the Institutional Money Market Fund are purchased at the
appropriate net asset value per Share next determined after receipt by the
Distributor of an order in good form to purchase Shares. An order to purchase
Shares will be deemed to have been received by the Distributor only when federal
funds with respect thereto are available to the Trust's custodian for
investment. Federal funds are monies credited to a bank's account within a
Federal Reserve Bank. Payment for an order to purchase Shares which is
transmitted by federal funds wire will be available the same day for investment
by the Trust's custodian, if received prior to the last Valuation Time. Payments
transmitted by other means (such as by check drawn on a member of the Federal
Reserve System) will normally be converted into federal funds within two banking
days after receipt. The Trust strongly recommends that investors use federal
funds to purchase Shares.
Every Shareholder will receive a confirmation of each new transaction in
his or her account, which will also show the total number of Shares of the
particular Fund owned by the Shareholder. In the case of Shares held of record
by Financial Institutions but beneficially owned by a Customer, confirmations of
purchases, exchanges, and redemptions of Shares by a
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<PAGE> 53
Financial Institution will be sent to the Customer by the Financial Institution.
Shareholders may rely on these statements in lieu of certificates. Certificates
representing Shares will not be issued.
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.
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 and the Institutional Money Market
Fund" above.
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<PAGE> 54
The Trust reserves the right to convert, at net asset value, Class I
Shares of any Shareholder to Trust Shares if, because of redemptions of Shares
by or on behalf of the Shareholder, the account of such Shareholder in Class I
Shares of the Institutional Money Market Fund has a value of less than $3
million. Accordingly, an investor purchasing Class I Shares of the Institutional
Money Market Fund in only the minimum investment amount may be subject to such
involuntary conversion to Trust Shares of a Money Market Fund if he or she
thereafter redeems some of his or her Shares. Before the Trust exercises its
right to convert Class I Shares to Trust Shares, the Shareholder will be given
notice that the value of the Class I Shares in his or her account is less than
the minimum amount and the Shareholder will be allowed 60 days to make an
additional investment in an amount which will increase the value of the account
to at least $3 million.
Taxes
THE MONEY MARKET FUNDS AND THE INSTITUTIONAL MONEY MARKET FUND
The net income of each 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. For each Fund, 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.
INFORMATION SPECIFIC TO THE PRIME MONEY MARKET FUND, THE INSTITUTIONAL
PRIME OBLIGATIONS FUND, THE TREASURY RESERVE FUND, AND THE U.S. TREASURY FUND.
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 each
Fund is expected to be interest income, it is anticipated that no distributions
will qualify for the dividends-received deduction for corporate shareholders.
These Funds do not expect to realize any long-term capital gains and, therefore,
do 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, the Treasury Reserve Fund's, and the Institutional Prime Obligations
Fund's investments in U.S. government obligations may not be eligible for
exemption from state and local taxes even
B-51
<PAGE> 55
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 AND THE FORMER ISG 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 BOND FUND, THE LIMITED TERM BOND FUND AND THE
GOVERNMENT INCOME FUND. Distributions by the Bond Fund, the Limited Term Bond
Fund and the Government Income Fund of ordinary income and/or an excess of net
short-term capital gain over net long-term loss are taxable to shareholders as
ordinary income. It is not expected that the dividends-received deduction for
corporations will apply to these distributions.
Distributions designated by the Bond Fund, the Limited Term Bond Fund and
the Government Income Fund as derived from net gains on securities held for more
than one year are taxable to Shareholders as such regardless of how long the
Shareholder has held Shares in such Fund. Such distributions are not eligible
for the dividends-received deduction.
Prior to purchasing Shares of the Bond Fund, the Limited Term Bond Fund or
the Government Income Fund, the impact of dividends or capital gains
distributions which are expected to be declared or have been declared, but not
paid, should be carefully considered.
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<PAGE> 56
Dividends or capital gains distributions paid after a purchase of Shares are
subject to federal income taxes, although in some circumstances the dividends or
distributions may be, as an economic matter, a return of capital. A Shareholder
should consult his or her own Adviser for any special advice.
Dividends received by a Shareholder that are derived from the Bond Fund's,
the Limited Term Bond Fund's or the Government Income Fund's investments in U.S.
government obligations may not be entitled to the exemptions from state and
local income taxes that would be available if the Shareholder had purchased U.S.
government obligations directly.
A Shareholder will generally recognize long-term capital gain or loss on
the sale or exchange of shares in an Income Fund held by the Shareholder for
more than twelve months. If a Shareholder receives a capital gain dividend with
respect to a Share of the Bond Fund, Limited Term Bond Fund, and Government
Income Fund and such Share is held for six months or less, any loss on the sale
or exchange of such Share shall be treated as a long-term capital loss to the
extent of the capital gain dividend.
The holder of a security issued with "original issue discount" (including
a zero-coupon U.S. Treasury security) is required to accrue as income each year
a portion of the discount at which the security was purchased, even though the
holder does not currently receive the interest payment in cash. A security has
original issue discount if its redemption price exceeds its issue price by more
than a de minimis amount. Accordingly, the Bond Fund, the Limited Term Bond Fund
and the Government Income Fund may be required to distribute each year an amount
which is greater than the total amount of cash interest the Fund actually
received. Such distributions may be made from the cash assets of the Fund or by
liquidation of its portfolio securities, if necessary. The Fund may realize
gains or losses from such liquidations. In the event the Fund realizes net
capital gains from such transactions, its shareholders may receive a larger
capital gain distribution than they would have in the absence of such
transactions.
INFORMATION SPECIFIC TO THE TAX-EXEMPT FUND, THE FLORIDA FUND, THE
MUNICIPAL BOND FUND, THE TENNESSEE TAX-EXEMPT FUND, AND THE LIMITED TERM
TENNESSEE TAX-EXEMPT FUND. Shareholders of these 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 these 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
B-53
<PAGE> 57
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-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
these Funds will not be eligible for the dividends-received deduction for
corporate shareholders.
Gains on the sale of Shares in the 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 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
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<PAGE> 58
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-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
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<PAGE> 59
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 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.
B-56
<PAGE> 60
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.
Additional Tax Information Concerning the Tax-Exempt Fund, the Tax-Free Funds,
the Tennessee Tax-Exempt Fund, and the Limited Term Tennessee Tax-Exempt Fund
As indicated in the Prospectuses of the Tax-Exempt Fund and 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-Exempt Fund and 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-Exempt Fund and 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-Exempt Fund and 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
B-57
<PAGE> 61
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-Exempt
Fund and 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-Exempt Fund and 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-Exempt Fund and the Tax-Free Funds during such
year, regardless of the period for which the Shares were held.
While the Tax-Exempt Fund and 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-Exempt Fund and 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 designated as a capital gains dividend
in a written notice mailed by the Tax-Exempt Fund and the Tax-Free Funds to
Shareholders after the close of the Fund's taxable year.
While the Tax-Exempt Fund and 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-Exempt Fund and the Tax-Free
Funds, the Funds may acquire puts with respect to Municipal Securities (and in
the case of the Florida Fund, Florida Municipal Securities) held in their
portfolios. See "INVESTMENT OBJECTIVES AND POLICIES - Additional Information on
Portfolio Instruments - Puts" in this Statement of Additional Information. The
policy of the Tax-Exempt Fund and 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
B-58
<PAGE> 62
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-Exempt Fund and the Tax-Free Funds could acquire under the 1940 Act.
Therefore, although the Tax-Exempt Fund and 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-Exempt Fund
and the Tax-Free Funds. No attempt has been made to present a detailed
explanation of the federal income tax treatment of the Tax-Exempt Fund and 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-Exempt Fund and 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.
Alabama Taxes
Section 40-18-14(3)f of the Alabama Code specifies that interest on
obligations of the State of Alabama and any county, municipality or other
political subdivision thereof is exempt from personal income tax. Section
40-18-14(3)d provides similar tax-exempt treatment for interest on obligations
of the United States or its Possessions (including Puerto Rico, Guam and the
Virgin Islands). Regulation Section 810-3-14-.02(4)(a) extends the exclusion to
agencies of the United States or corporations owned by the United States and
lists as examples of exempt obligations, U.S. savings bonds, U.S. Treasury notes
or bills, obligations of the Bank for Cooperation, Federal Land Bank, Federal
Intermediate Credit Bank, Federal Home Loan Bank, Production Credit
Associations, Federal Financing Bank, and the Tennessee Valley Authority. In
addition, Regulation Section 810-3-14-.02(4)(b)2 and an Administrative ruling of
the Alabama Department of Revenue dated March 1, 1990 extend these exemptions
for interest to distributions from a regulated investment company to the extent
that they are paid out of interest earned on such exempt obligations. Tax-exempt
treatment is not available on distributions from income earned on securities
that are merely guaranteed by the federal government (GNMAs, FNMAs, etc.), for
repurchase agreements collateralized by U.S.
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<PAGE> 63
government obligations or for obligations of other states to the extent such
investments are made by the Fund for temporary or defensive purposes. Such
interest will be taxable on a pro rata basis.
Any distributions of net short-term and net long-term capital gain earned
by the Fund are fully includable in each Shareholder's Alabama taxable income as
dividend income and long-term capital gain, respectively. Both types of income
are currently taxed at ordinary rates.
The foregoing discussion is based on tax laws and regulations which are in
effect as of the date of this Statement of Additional Information; such laws and
regulations may be changed by legislative or administrative actions. The
foregoing is also intended only as a brief summary of some of the important
Alabama tax considerations generally affecting the Municipal Fund and its
Shareholders. Potential investors are urged to consult their tax Advisers
concerning their own tax situation and concerning the application of state and
local (as well as federal) taxes.
Florida Taxes
The State of Florida does not impose an income tax on individuals.
Therefore, distributions of the Florida Fund to individuals will not be subject
to personal income taxation in Florida. Corporations and other entities subject
to the Florida income tax will be subject to tax on distributions of investment
income and capital gains by the Fund. Distributions attributable to interest on
obligations of any state (including Florida), the District of Columbia, U.S.
possessions, or any political subdivision thereof, will be taxable to
corporations and other entities for Florida income tax purposes even though such
interest income is exempt from federal income tax. Similarly, distributions
attributable to interest on obligations of the United States and its territories
will be taxable to corporations and other entities under the Florida income tax.
For individuals and other entities subject to taxation in states and localities
other than Florida, distributions of the Fund will be subject to applicable
taxes imposed by such other states and localities.
In the opinion of special Florida tax counsel to the Fund, shareholders of
the Florida Fund who are subject to the Florida Intangible Personal Property Tax
(the "Intangible Tax") will not be subject to the Intangible Tax on shares of
the Florida Fund if, on the first day of the applicable calendar year, the
assets of the Florida Fund consist solely of obligations of Florida or its
political subdivisions; obligations of the United States, Puerto Rico, the
Virgin Islands or Guam; or bank deposits, cash or other assets which would be
exempt from the Intangible Tax if directly held by the shareholder. A Technical
Assistance Advisement confirming this tax treatment has been obtained from the
Florida Department of Revenue. As described above, it is the Florida Fund's
policy to invest at least 80% of its net assets in Florida Municipal Securities
exempt from the Intangible Tax under normal market conditions. The Florida Fund
intends to insure that, absent abnormal market conditions, all of its assets
held on January 1 of
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<PAGE> 64
each year are exempt from the Intangible Tax. Accordingly, the value of the
Florida Fund shares held by a shareholder should ordinarily be exempt from the
Intangible Tax. However, if on any January 1 the Florida Fund holds investments
that are not exempt from the Intangible Tax, the Florida Fund's shares could be
wholly or partially subject to the Intangible Tax for that year.
The foregoing discussion is intended only as a brief summary of the
Florida tax laws currently in effect which would generally affect the Florida
Fund and its shareholders. Potential investors are urged to consult with their
Florida tax counsel concerning their own tax situation.
Tennessee Taxes
This Statement of Additional Information does not discuss Tennessee tax laws
currently in effect which would generally or specifically affect the former ISG
Tax-Free Funds and their shareholders. Potential investors are urged to consult
with their Tennessee tax counsel concerning such laws.
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, employee of
3435 Stelzer Road BISYS Fund Services Limited Partnership
Columbus, Ohio 43219
</TABLE>
B-61
<PAGE> 65
<TABLE>
<S> <C> <C> <C>
Dick D. Briggs, Jr., M.D. 65 Trustee From September 1989 to present, Emeritus
459 DER Building Professor and Eminent Scholar Chair,
1808 7th Avenue South Univ. of Alabama at Birmingham; from
UAB Medical Center 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
James H. Woodward, Jr. 59 Trustee From 1996 to present, Trustee, The
The University of North Sessions Group; from July 1989 to
Carolina at Charlotte present, Chancellor, The University of
Charlotte, North Carolina 28223 North Carolina at Charlotte; 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.
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<PAGE> 66
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 September 1999 to present, Senior
Vice President, AmSouth Bank; from October
1994 to September 1999, 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
1990, 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.
Jeffrey C. Cusick 38 Assistant Secretary
Vice President 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. Cusick,
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<PAGE> 67
Grimm, Ruehle, and Booth 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 $14,000
Woodward, Jr. None
Homer H. Turner $14,000 None $14,000
None
Wendell D. Cleaver $14,000 None $14,000
None
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.
Code of Ethics
Each Fund, AmSouth Bank, and BISYS Fund Services have adopted codes of
ethics ("Codes") under Rule 17j-1 of the Investment Company Act, and these Codes
permit personnel subject to the Codes to invest in securities, including
securities that may be purchased or held by each Fund.
Investment Adviser
Investment advisory and management services are provided to each Fund
(except the Limited Term Bond Fund) by the Adviser pursuant to the Investment
Advisory Agreement dated as of August 1, 1988, as amended (the "First Investment
Advisory Agreement"). Investment advisory and management services are provided
to the Limited Term Bond Fund by the Adviser pursuant to the Investment Advisory
Agreement dated as of January 20, 1989, as amended (the "Second Investment
Advisory Agreement"). The First Investment Advisory Agreement and the Second
Investment Advisory Agreement are collectively referred to as the "Advisory
Agreements."
In selecting investments for the Value Fund and the Balanced Fund, the
Adviser employs the "value investing" method. A primary theory of value
investing is that many investors tend to exaggerate both prosperity and problems
in market valuations. This method, which may conflict with the prevailing mood
of the market, involves the use of independent judgment backed by careful
analysis of market data. The Adviser's approach when selecting
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<PAGE> 68
investments for each of these Funds is to attempt to buy and sell securities
that are temporarily mispriced relative to long-term value.
In selecting investments for each of the Income Funds, the former ISG
Income Funds, and the Balanced Fund, 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 Advisory Agreements, the fee payable to the Adviser by the Funds
for investment advisory services is the lesser of (a) such fee as may from time
to time be agreed upon in writing by the Trust and the Adviser or (b) a fee
computed daily and paid monthly based on the average daily net assets of each
Fund as follows: the Prime Money Market Fund - forty one-hundredths of one
percent (0.40%) annually; the U.S. Treasury Fund - forty one-hundredths of one
percent (0.40%) annually; the Institutional Prime Obligations Fund twenty
one-hundredths of one percent (0.20%); the Institutional U.S. Treasury Fund -
twenty one-hundredths of one percent (0.20%); the Value Fund - eighty
one-hundredths of one percent (0.80%) annually; the Tax-Exempt Fund - forty
one-hundredths of one percent (0.40%) annually; the Bond Fund - sixty-five
one-hundredths of one percent (0.65%) annually; the Limited Term Bond Fund -
sixty-five one-hundredths of one percent (0.65%) annually; the Balanced Fund -
eighty one-hundredths of one percent (0.80%) annually; the Government Income
Fund - sixty-five one-hundredths of one percent (0.65%) annually; the Florida
Fund -sixty-five one-hundredths of one percent (0.65%) annually; the Municipal
Bond Fund - sixty-five one-hundredths of one percent (0.65%) annually; the
Equity Income Fund - eighty one-hundredths of one percent (0.80%) annually; the
Growth Fund - eighty one-hundredths of one percent (0.80%) annually; the Small
Cap Fund - one hundred twenty one-hundredths of one percent (1.20%) annually;
the Select Equity Fund - eighty one hundredths of one percent (.80%) annually;
the Enhanced Market Fund - forty-five hundredths of one percent (0.45%)
annually; the International Equity Fund - one hundred twenty five one-hundredths
of one percent (1.25%) annually; the Mid Cap Fund - one hundred one-hundredths
of one percent (1.00%) annually; the Capital Growth Fund - eighty one-hundredths
of one percent (0.80%) annually; the Large Cap Fund - eighty one-hundredths of
one percent (0.80%) annually; the Limited Term U.S. Government Fund - sixty-five
one-hundredths of one percent (0.65%) annually; Tennessee Tax-Exempt Fund -
sixty-five one-hundredths of one percent (0.65%) annually; Limited Term
Tennessee Tax-Exempt Fund - sixty-five one-hundredths of one percent (0.65%)
annually; Treasury Reserve Fund - forty one-hundredths of one percent (0.40%)
annually; Aggressive Growth Portfolio - twenty one-hundredths of one percent
(0.20%) annually; Growth Portfolio - twenty one-hundredths of one percent
(0.20%) annually; Growth and Income Portfolio - twenty one-hundredths of one
percent (0.20%) annually; Moderate Growth and Income Portfolio - twenty
one-hundredths of one percent (0.20%) annually; Current Income Portfolio -
twenty one-hundredths of one percent (0.20%) annually. A fee agreed to in
writing from time to time by the Trust and the Adviser may be significantly
lower than the fee calculated at the annual rate and the effect of such lower
fee would be to
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<PAGE> 69
lower a Fund's expenses and increase the net income of such Fund during the
period when such lower fee is in effect.
For the fiscal years ended July 31, 1999, July 31, 1998, and July 31,
1997, the Adviser received the following investment advisory fees(1):
<TABLE>
<CAPTION>
Fiscal Year Ended
July 31, 1999 July 31, 1998 July 31, 1997
-------------------------- ------------------------ --------------------------
Amount Amount Amount
Earned Waived Earned Waived Earned Waived
------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C>
Balanced Fund $3,046,371 -- $3,005,940 -- $2,855,190 --
Growth Fund 207,326 -- 70,873 -- -- --
Enhanced Market Fund 78,331 -- -- -- -- --
Value Fund 8,292,490 -- 7,981,703 3,733,019 --
Equity Income Fund 324,890 -- 267,522 -- 36,130 --
Select Equity Fund 129,762 -- -- -- -- --
Small Cap Fund 127,255 -- 33,202 --
Bond Fund 2,319,255 $535,215 2,056,000 475,000 969,000 $224,000
Government Income Fund 61,967 33,367 69,000 37,000 90,000 48,000
Limited Term Bond Fund 734,542 169,510 774,000 179,000 322,000 74,000
Florida Tax-Exempt Fund 460,845 248,147 369,000 199,000 340,000 183,000
Municipal Bond Fund 2,120,841 815,707 2,170,000 835,000 181,117 70,000
Prime Money Market Fund 2,765,375 -- 2,515,690 -- 2,366,707 --
U.S. Treasury Fund 1,261,718 -- 1,256,351 -- 1,325,127
Tax-Exempt Fund 383,340 191,672 354,000 176,963 321,570 160,785
Institutional Prime
Obligations Fund 198,365 128,935 -- -- -- --
International Equity Fund(1a) 236,272 91,551 239,978 77,837 95,011 47,505
Mid Cap Fund 102,860 745 N/A N/A N/A N/A
Capital Growth Fund 1,501,646 25,355 105,152 10,125 783,646 141,465
Large Cap Fund 6,578,349 809,287 4,767,781 0 4,445,559 0
Limited Term 161,658 76,077 108,195(1b) 35,572 81,110 41,559
U.S. Government Fund
Tennessee Tax-Exempt Fund 453,208 7,254 497,352 5,617 502,268 423,799
Limited Term Tennessee 79,230 22,677 112,873 25,811 93,669(1b) 59,000
Tax-Exempt Fund
Treasury Reserve Fund 1,426,081 215,483 N/A N/A N/A N/A
Aggressive Growth Portfolio 111,136 111,136 N/A N/A N/A N/A
Growth Portfolio 111,326 111,326 N/A N/A N/A N/A
Growth and Income Portfolio 102,659 102,659 N/A N/A N/A N/A
Moderate Growth and 109,442 212,101 N/A N/A N/A N/A
Income Portfolio
Current Income Portfolio 116,123 116,123 N/A N/A N/A N/A
</TABLE>
- ------------------------------------
(1) With respect to Funds participating in the ISG/AmSouth combination, the
figures reflect the investment advisory fee paid to the former Adviser for the
fiscal years ended December 31, 1999, December 31, 1998, and December 31, 1997.
(1a) The International Equity fund commenced operations 12/14/98.
(1b) For the period February 28, 1997 (commencement of operations) through
December 31, 1997.
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<PAGE> 70
Each of the Advisory Agreements provides that the Adviser shall not be
liable for any error of judgment or mistake of law or for any loss suffered by
the Trust in connection with the performance of such Advisory Agreement, except
a loss resulting from a breach of fiduciary duty with respect to the receipt of
compensation for services or a loss resulting from willful misfeasance, bad
faith, or gross negligence on the part of the Adviser in the performance of its
duties, or from reckless disregard by the Adviser of its duties and obligations
thereunder.
Unless sooner terminated, the First Investment Advisory Agreement will
continue in effect until January 31, 2000 as to each of the Money Market Funds,
the Capital Appreciation Funds, the former ISG Capital Appreciation Fund, the
former ISG Income Funds, the Strategic Portfolios, the Tax-Free Funds, the Bond
Fund and the Government Income Fund and for successive one-year periods if such
continuance is approved at least annually by the Trust's Board of Trustees or by
vote of the holders of a majority of the outstanding voting Shares of that Fund,
and a majority of the Trustees who are not parties to the First Investment
Advisory Agreement or interested persons (as defined in the 1940 Act) of any
party to the First Investment Advisory Agreement by votes cast in person at a
meeting called for such purpose.
Unless sooner terminated, the Second Investment Advisory Agreement will
continue in effect as to the Limited Term Bond Fund until January 31, 2000 and
for successive one-year periods thereafter if such continuance is approved at
least annually by the Trust's Board of Trustees or by vote of the holders of a
majority of the outstanding voting Shares of the Limited Term Bond Fund, and a
majority of the Trustees who are not parties to the Second Investment Advisory
Agreement or interested persons (as defined in the 1940 Act) of any party to the
Second Investment Advisory Agreement by votes cast in person at a meeting called
for such purpose. The Advisory Agreements are terminable as to a particular Fund
at any time on 60 days' written notice without penalty by the Trustees, by vote
of the holders of a majority of the outstanding voting Shares of that Fund, or
by the Adviser. The Advisory Agreements also terminate automatically in the
event of any assignment, as defined in the 1940 Act.
From time to time, advertisements, supplemental sales literature and
information furnished to present or prospective shareholders of the Funds may
include descriptions of the investment adviser including, but not limited to,
(i) descriptions of the adviser's operations; and (ii) descriptions of certain
personnel and their functions; and (iii) statistics and rankings related to the
adviser's operations.
AmSouth also serves as Sub-Administrator for the Trust. See
"Sub-Administrator" below.
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<PAGE> 71
Investment Sub-Advisers
Investment sub-advisory services are provided to the Equity Income Fund by
Rockhaven Asset Management, LLC ("Rockhaven" or "Sub-Adviser") pursuant to a
Sub-Advisory Agreement dated as of March 12, 1997 between the Adviser and
Rockhaven ("Sub-Advisory Agreement"). Investment sub-advisory services are
provided to the Growth Fund by Peachtree Asset Management ("Peachtree" or
"Sub-Adviser") pursuant to a Sub-Advisory Agreement dated July 31, 1997 between
the Adviser and Peachtree. Investment sub-advisory services are provided to the
Small Cap Fund by Sawgrass Asset Management, LLC ("Sawgrass" or "Sub-Adviser")
pursuant to a Sub-Advisory Agreement dated as of March 2, 1998 between the
Adviser and Sub-Adviser (a "Sub-Advisory Agreement"). Investment sub-advisory
services are provided to the Select Equity Fund and the Enhanced Market Fund
pursuant to a Sub-Advisory Agreement dated as of September 1, 1998 between the
Adviser and OakBrook Investments, LLC ("OakBrook" or "Sub-Adviser").
The Sub-Advisers shall not be liable for any error of judgement or mistake
of law or for any loss suffered by the Adviser, the Trust or the Fund in
connection with the matters to which Agreement relates, except that a
Sub-Adviser shall be liable to the Adviser for a loss resulting from a breach of
fiduciary duty by the Sub-Adviser under the 1940 Act with respect to the receipt
of compensation for services or a loss resulting from willful misfeasance, bad
faith or gross negligence on the part of the Sub-Adviser in the performance of
its duties or from reckless disregard by it of its obligations or duties
thereunder.
Unless sooner terminated, the Sub-Advisory Agreement shall continue with
respect to the Equity Income Fund until January 31, 2000, with respect to the
Growth Fund until July 31, 2000, with respect to the Small Cap Fund until
January 31, 2000, and with respect to the Select Equity Fund and Enhanced Market
Fund until January 31, 2000, and each Sub-Advisory Agreement shall continue in
effect for successive one-year periods if such continuance is approved at least
annually by the Board of Trustees or by vote of the holders of a majority of the
outstanding voting Shares of the respective Fund and a majority of the Trustees
who are not parties to the Sub-Advisory Agreement or interested persons (as
defined in the 1940 Act) of any party to the Sub-Advisory Agreement by vote cast
in person at a meeting called for such purpose. Each Sub-Advisory Agreement may
be terminated with respect to a Fund by the Trust at any time without the
payment of any penalty by the Board of Trustees, by vote of the holders of a
majority of the outstanding voting securities of the Fund, or by the Adviser or
Sub-Adviser on 60 days written notice. Each Sub-Advisory Agreement will also
immediately terminate in the event of its assignment.
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 as of March 13, 2000. As to such Fund,
the Lazard Sub-Advisory Agreement is subject to annual approval by (i) the Board
or (ii) vote of a
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<PAGE> 72
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 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 as
of March 13, 2000. 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>
From time to time, advertisements, supplemental sales literature and
information furnished to present or prospective Shareholders of the Trust may
include descriptions of a Sub-Adviser including, but not limited to, (i)
descriptions of the Sub-Adviser's operations; (ii) descriptions of certain
personnel and their functions; and (iii) statistics and rankings relating to the
Sub-Adviser's operations.
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<PAGE> 73
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, the Income
Funds, the former ISG Income Funds, and the Balanced Fund (with respect to its
debt securities) 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 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.
To the extent permitted by applicable rules and regulations, either
AmSouth or the Sub-Advisers may execute portfolio transactions on behalf of the
Funds through an affiliate of AmSouth. As required by Rule 17e-1 under the 1940
Act, the Funds have adopted procedures which provide that commissions paid to
such affiliate must be fair and reasonable compared to the commission, fees or
other remuneration paid to other brokers in connection with comparable
transactions. The procedures also provide that the Board will review reports of
such affiliated brokerage transactions in connection with the foregoing
standard.
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
B-70
<PAGE> 74
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.
During the following fiscal years, the Funds listed below paid the
following aggregate brokerage commissions:
<TABLE>
<CAPTION>
Fiscal Year Ended
July 31, 1999 July 31, 1998 July 31, 1997
------------- ------------- -------------
<S> <C> <C> <C>
Balanced Fund $132,669 $365,522 $145,513
Growth Fund 34,442 -- --
Enhanced Market Fund 20,125** -- --
Value Fund 534,115 592,269 397,221
Equity Income Fund 119,234 615,317 28,462*
Select Equity Fund 13,150** -- --
Small Cap Fund 108,710 -- --
</TABLE>
*For the period March 30, 1997 to July 31, 1997.
** For the period September 1, 1998 to July 31, 1999.
<TABLE>
<CAPTION>
Dec. 31, 1999 Dec. 31, 1998 Dec. 31, 1997
------------- ------------- -------------
<S> <C> <C> <C>
International Equity Fund $52,129 $68.007 $67,394
Mid Cap Fund 16,260 N/A N/A
Capital Growth Fund 656,419 494,130 360,208
Large Cap Fund 312,254 76,036 74,672
Limited Term U.S. Government Fund 0 0 0
Tennessee Tax-Exempt Fund 0 0 0
Limited Term Tennessee Tax-Exempt Fund 0 0 0
Treasury Reserve Fund 0 0 0
Aggressive Growth Portfolio N/A N/A N/A
Growth Portfolio N/A N/A N/A
Growth and Income Portfolio N/A N/A N/A
Moderate Growth and Income Portfolio N/A N/A N/A
Current Income Portfolio N/A N/A N/A
</TABLE>
During the period from September 1, 1998 to July 31, 1999, the Select
Equity Fund paid aggregate brokerage commissions of $30 to AmSouth Brokerage
Services, an affiliate of
B-71
<PAGE> 75
AmSouth. The aggregate brokerage commission paid to AmSouth Brokerage Services
was less than 1% of the aggregate commissions paid to brokers by the Fund for
the period ended July 31, 1999. Additionally, the aggregate dollar amount of
transactions involving the payment of commissions effected through AmSouth
Brokerage Services was less than 1% of the aggregate dollar amount of such
transactions for the Fund for the period ended July 31, 1999.
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 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,
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<PAGE> 76
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.
Administrator
ASO Services Company ("ASO") 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"). ASO 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
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 (except the Institutional Money Market 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. Under
the Administration Agreement for expenses assumed and services provided as
manager and administrator, the Administrator receives a fee from the
Institutional Money Market Fund equal to the lesser of (a) a fee computed at the
annual rate of (0.10%) of the Institutional Money Market 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
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<PAGE> 77
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:
<TABLE>
<CAPTION>
Fiscal Year or Period Ended
July 31, 1999(2) July 31, 1998(2) July 31, 1997(2)
--------------------------- -------------------------- --------------------------
Amount Amount Amount
Earned Waived Earned Waived Earned Waived
------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C>
Balanced Fund $ 761,600 -- $ 751,492 -- $ 714,000 $165,000
Growth Fund 51,832 $ 51,832 18,000 $ 16,000 -- --
Enhanced Market Fund 35,097 35,097 -- -- --
Value Fund 2,073,141 -- 1,995,442 -- 934,000 188,000
Equity Income Fund 81,223 -- 66,881 -- 9,033 --
Select Equity Fund 32,564 32,564 -- --
Small Cap Fund 21,209 21,209 6,000 6,000 -- --
Bond Fund 713,624 285,450 633,000 475,000 298,000 119,000
Government Income Fund 19,067 9,450 21,000 10,000 28,000 14,000
Limited Term Bond Fund 226,015 90,406 238,000 95,000 99,000 40,000
Florida Tax-Exempt Fund 141,800 70,899 114,000 57,000 104,000 53,000
Municipal Bond Fund 652,573 261,029 668,000 267,000 55,000 22,000
Prime Money Market Fund 1,382,700 -- 1,257,853 -- 1,183,357 --
U.S. Treasury Fund 630,865 628,179 -- 662,565 --
Tax-Exempt Fund 191,672 -- 176,963 -- 160,785 --
Institutional Prime
Obligations Fund 99,181 69,427 -- -- -- --
International Equity Fund 49,045 0 68,863 0 -- --
Mid Cap Fund 15,317 0 -- --
Capital Growth Fund 340,631 0 231,959 0 180,842 0
Large Cap Fund 1,153,818 0 630,646 0 -- --
Limited Term 71,320 1,485 32,459 23,803 24,333 17,844
U.S. Government Fund
Tennessee Tax-Exempt Fund 133,786 0 149,206 0 150,681
Limited Term Tennessee 30,297 22,218 33,862 24,832 28,101 20,607
Tax-Exempt Fund
Treasury Reserve Fund 484,234 0 192,322 0 189,650 0
Aggressive Growth Portfolio 9,656 0 -- -- -- --
Growth Portfolio 5,547 0 -- --
Growth and Income Portfolio 37,323 0 -- -- -- --
Moderate Growth and 9,525 0 -- -- -- --
Income Portfolio
Current Income Portfolio 622 0 -- -- -- --
</TABLE>
- ------------------------------------
(2) For former ISG Funds, the figures reflect fees received by the former
Administrator for the fiscal year ended December 31, 1999, December 31, 1998,
and December 31, 1997.
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<PAGE> 78
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.
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, Class
B, Class I, Class II and Class III 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, Class B Shares, Class II and Class III, 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.
B-75
<PAGE> 79
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. For the fiscal years ended
July 31, 1999 and July 31, 1998, AmSouth received $2,184,291 and $1,924,684,
respectively, with respect to the Trust.
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.
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.
B-76
<PAGE> 80
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 Class A 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"), all Class B Shares pay a shareholder servicing fee of
0.25% of average daily net assets. Regarding all Funds that participated in the
ISG/AmSouth combination, this fee is in the form of a separate non-Rule 12b-1
fee. With respect to all other AmSouth Funds, the fee is a component of a 1.00%
Rule 12b-1 fee. Funds that participated in the ISG/AmSouth combination bear a
Rule 12b-1 fee of 0.75%. Despite the above-described differences in the legal
character of shareholder servicing fees, all B Shares are subject to the same
1.00% aggregate fees for distribution and shareholder services; Class II 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 twenty-five one-hundredths of one percent (0.25%) of the average daily
net assets of Class II Shares of each Fund; Class III 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 fifty
one-hundredths of one percent (0.50%) of the average daily net assets of the
Class III 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, Class II or Class III 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, Class II or Class
III 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, Class II or Class III 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, Class II or Class III
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").
B-77
<PAGE> 81
In accordance with Rule 12b-1 under the 1940 Act, the Distribution Plan
may be terminated with respect to the Class B, Class II or Class III 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, Class II or Class III 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,
Class II or Class III Shares of a Fund requires the approval of the holders of
that Fund's Class B, Class II or Class III 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.
For the fiscal year ended July 31, 1999, July 31, 1998 and July 31, 1997
the Distributor received the following servicing fees with respect to the Class
A Shares and the following distribution fees with respect to the Class B, Class
II and Class III Shares from the following Funds:
<TABLE>
<CAPTION>
Fiscal Year Ended
July 31, 1999(3) July 31, 1998(3) July 31, 1997(3)
------------------------- ------------------------ ------------------------
Class A Shares Class A Shares Class A Shares
Amount Amount Amount
Earned Waived Earned Waived Earned Waived
<S> <C> <C> <C> <C> <C> <C>
Balanced Fund $113,423 -- $113,853 $ 341 -- --
Growth Fund 28,262 -- 12,190 37 -- --
Enhanced Market Fund 27,092 $ 9,055 -- -- -- --
Value Fund 178,812 -- 145,774 437 -- --
Equity Income Fund 58,845 -- 55,674 167 -- --
Select Equity Fund 28,366 10,391 -- -- --
Small Cap Fund 3,080 -- 1,091 7 -- --
Bond Fund 7,330 -- 15,851 9,530 -- --
Government Income Fund 6,909 -- 21,290 12,799 -- --
Limited Term Bond Fund 7,521 4,513 8,171 4,912 -- --
Florida Tax-Exempt Fund 9,991 -- 13,848 8,325 -- --
Municipal Bond Fund 5,843 -- 4,831 2,904 -- --
Prime Money Market Fund 336,424 201,863 305,250 183,129 $305,882 $182,913
U.S. Treasury Fund 16,054 9,633 19,155 11,498 27,598 16,307
Tax-Exempt Fund 62,542 37,562 58,152 34,888 50,267 31,033
International Equity Fund 1,031 1,031 0 0 -- --
Mid Cap Fund 1,503 0 -- -- -- --
Capital Growth Fund 18,891 0 6,073 0 214,963 214,887
Large Cap Fund 172,705 172,705 0 0 -- --
Limited Term U.S. 7,305 7,305 48,533 48,533 40,554 40,554
Government Fund
Tennessee Tax-Exempt 7,736 0 6,387 0 189,842 189,623
Fund
Limited Term Tennessee 48,523 48,523 55,168 55,168 46,847 46,847
Tax-Exempt Fund
Treasury Reserve Fund 0 0 -- -- -- --
Aggressive Growth 524 0 -- -- -- --
Portfolio
</TABLE>
B-78
<PAGE> 82
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
Growth Portfolio 266 0 -- -- -- --
Growth and Income 755 0 -- -- -- --
Portfolio
Moderate Growth and 291 0 -- -- -- --
Income Portfolio
Current Income Portfolio 5 0 -- -- -- --
</TABLE>
- ----------------------
(3) For participating in the ISG/AmSouth combination, the figures reflect
fees received by the former Distributor for the fiscal year ended December 31,
1999, December 31, 1998, and December 31, 1997.
<TABLE>
<CAPTION>
Fiscal Year Ended
July 31, 1999(3) July 31, 1998(3) July 31, 1997(3)
------------------------ ----------------------- ------------------------
Class B Shares Class B Shares Class B Shares
Amount Amount Amount
Earned Waived Earned Waived Earned Waived
------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C>
Balanced Fund $78,669 -- $21,204 -- -- --
Growth Fund 51,893 -- 15,982 -- -- --
Enhanced Market Fund 20,045 -- -- -- -- --
Value Fund 102,305 -- 33,233 -- -- --
Equity Income Fund 77,644 -- 35,433 -- -- --
Select Equity Fund 8,018 -- -- -- -- --
Small Cap Fund 8,620 -- 2,093 -- -- --
Bond Fund 16,859 -- 1,542 -- -- --
Government Income Fund -- -- -- -- -- --
Limited Term Bond Fund 4,053 -- -- -- -- --
Florida Tax-Exempt Fund 1,086 -- -- -- -- --
Municipal Bond Fund -- -- -- -- -- --
Prime Money Market Fund 1,468 -- -- -- -- --
U.S. Treasury Fund -- -- -- -- -- --
Tax-Exempt Fund -- -- -- -- -- --
International Equity Fund 416 0 0 0 -- --
Mid Cap Fund 2,945 0 -- -- -- --
Capital Growth Fund 40,157 0 8,089 0 -- --
Large Cap Fund 74,774 0 23 23 -- --
Limited Term U.S. 3,735 0 1,398 0 -- --
Government Fund
Tennessee Tax-Exempt 10,630 0 5,131 0 -- --
Fund
Limited Term Tennessee 5,915 0 3,332 0 -- --
Tax-Exempt Fund
Treasury Reserve Fund 0 0 -- -- -- --
Aggressive Growth 2,179 0 -- -- -- --
Portfolio
Growth Portfolio 3,954 0 -- -- -- --
Growth and Income 8,688 0 -- -- -- --
Portfolio
Moderate Growth and 4,809 0 -- -- -- --
Income Portfolio
Current Income Portfolio 167 0 -- -- -- --
</TABLE>
- ------------------------
(3) For participating in the ISG/AmSouth combination, the figures reflect
fees received by the former Distributor for the fiscal year ended December 31,
1999, December 31, 1998, and December 31, 1997.
B-79
<PAGE> 83
<TABLE>
<CAPTION>
Fiscal Year Ended
July 31, 1999 July 31, 1998 July 31, 1997
----------------------- ---------------------- ------------------------
Class II Shares Class II Shares Class II Shares
Amount Amount Amount
Earned Waived Earned Waived Earned Waived
------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C>
Institutional Prime
Obligations Fund $17,200 -- -- -- -- --
</TABLE>
<TABLE>
<CAPTION>
Fiscal Year Ended
July 31, 1999 July 31, 1998 July 31, 1997
------------------------ ---------------------- -------------------------
Class III Shares Class III Shares Class III Shares
Amount Amount Amount
Earned Waived Earned Waived Earned Waived
------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C>
Institutional Prime
Obligations Fund $15,473 -- -- -- -- --
</TABLE>
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, Class II Shares or Class III 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, Class II Shares or Class III 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
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.
B-80
<PAGE> 84
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.
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.
Independent Accountants
The financial information appearing in the Prospectuses under "FINANCIAL
HIGHLIGHTS" has been derived from financial statements of the Trust incorporated
by reference into this Statement of Additional Information which have been
audited by PricewaterhouseCoopers LLP, former independent accountants for the
Trust, as set forth in their report incorporated by reference herein, and are
included in reliance upon such report and on the authority of such firm as
experts in auditing and accounting. For the fiscal year ending July 31, 2000,
Ernst & Young has been selected as the independent accountants for the Trust.
Ernst & Young's address is 10 West Broad Street, Columbus, OH 43215. With
respect to Funds participating in the ISG/AmSouth combination where a former ISG
Fund is the accounting survivor, the financial information appearing in the
Prospectuses under
B-81
<PAGE> 85
"FINANCIAL HIGHLIGHTS" has been derived from financial statements of the ISG
Funds incorporated by reference into this Statement of Additional Information
which have been audited by KPMG LLP, independent accountants for the ISG Funds,
as set forth in their report incorporated by reference herein, and are included
in reliance upon such report and on the authority of such firm as experts in
auditing and accounting.
Legal Counsel
Ropes & Gray, One Franklin Square, 1301 K Street, N.W., Suite 800 East,
Washington, DC 20005-3333, are counsel to the Trust.
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 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
B-82
<PAGE> 86
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 Fund 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 Tax-Exempt Fund may also advertise a "tax equivalent yield" and a "tax
equivalent effective yield." Tax equivalent yield will be computed by dividing
that portion of the Tax-Exempt 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-Exempt Fund is computed by dividing that
portion of the effective yield of the Tax-Exempt 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.
The yield and effective yield of each of the Money Market Funds and the
tax equivalent yield and the tax equivalent effective yield of the Tax-Exempt
Fund will vary in response to fluctuations in interest rates and in the expenses
of the Fund. For comparative purposes the 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.
For the seven-day period ended July 31, 1999, the yield, effective yield,
the tax equivalent yield and the tax equivalent effective yield of the Trust
Shares and Class A Shares of each Money Market Fund, calculated as described,
above was as follows:
<TABLE>
<CAPTION>
Effective Tax Equivalent Tax Equivalent
Fund Class Yield Yield Yield Effective Yield
---- ----- ----- ----- ----- ---------------
<S> <C> <C> <C> <C> <C>
Prime
Money Market Fund Trust 4.39% 4.48% -- --
</TABLE>
B-83
<PAGE> 87
<TABLE>
<S> <C> <C> <C> <C> <C>
U.S. Treasury Fund Trust 4.05% 4.13% -- --
Tax-Exempt Fund Trust 2.57% 2.60% 4.25% 4.30%
Treasury Reserve Fund Trust 4.23% 4.42% -- --
Prime
Money Market Fund Class A 4.29% 4.37% --
U.S. Treasury Fund Class A 3.96% 4.02% -- --
Tax-Exempt Fund Class A 2.47% 2.50% 4.09% 4.14%
Treasury Reserve Fund Class A 4.32% 4.42% --
Institutional
Prime Obligations Fund Class I 4.83% 4.94% -- --
Institutional
Prime Obligations Fund Class II 4.58% 4.68% --
Institutional
Prime Obligations Fund Class III 4.33% 4.42% -- --
</TABLE>
Yield of the Capital Appreciation Funds, the former ISG Capital Appreciation
Funds, the Income Funds and the former ISG Income Funds
The yield of each of the 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 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 Funds.
The Tax-Free Funds and the former ISG 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
B-84
<PAGE> 88
the Fund that is not tax-exempt. The tax equivalent effective yield for the
Tax-Free Funds and the former ISG 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, the former ISG Capital
Appreciation Funds, the former ISG 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.
For the 30-day period ending July 31, 1999, the yield and the tax
equivalent yield of the Income Funds and the former ISG Funds was:
<TABLE>
<CAPTION>
Tax Equivalent
Fund Class Yield Yield
---- ----- ----- -----
<S> <C> <C> <C>
Florida Tax-Exempt Fund Class A 3.88% 6.42%
Trust 3.96% 6.56%
Municipal Bond Fund Class A 4.01% 6.64%
Trust 4.10% 6.79%
Bond Fund Class A 5.43% --
Trust 5.53%
Class B 4.60% --
Government Income Fund Class A 6.11%
Trust 6.22% --
Limited Term Bond Fund Class A 5.29% --
Trust 5.38% --
Limited Term U.S. Class A 4.70% N/A
Government Fund Trust 4.85% N/A
Tennessee Tax-Exempt Class A 3.39% 5.61%
Fund Trust 3.74% 6.19%
Limited Term Tennessee Class A 3.25% 5.38%
Tax-Exempt Fund Trust N/A N/A
</TABLE>
B-85
<PAGE> 89
For the 30-day period ending July 31, 1999, the yield of the Capital
Appreciation Funds and the former ISG Capital Appreciation Funds was:
<TABLE>
<CAPTION>
Fund Class Yield
---- ----- -----
<S> <C> <C>
Value Fund Trust 0.63%
Balanced Fund Trust 2.84%
Equity Income Fund Trust 0.79%
Growth Fund Trust -0.38%
Small Cap Fund Trust -0.99%
Enhanced Market Fund Trust 0.31%
Select Equity Fund Trust -0.84%
International Equity Fund Trust N/A
Mid Cap Fund Trust 0
Capital Growth Fund Trust 0
Large Cap Fund Trust 0.08%
Value Fund Class A 0.38%
Balanced Fund Class A 2.59%
Equity Income Fund Class A 0.54%
Growth Fund Class A -0.63%
Small Cap Fund Class A -1.24%
Enhanced Market Fund Class A 0.56%
Select Equity Fund Class A -1.10%
International Equity Fund Class A 0
Mid Cap Fund Class A 0
Capital Growth Fund Class A 0
Large Cap Fund Class A 0.08%
Value Fund Class B -0.36%
Balanced Fund Class B 1.84%
Equity Income Fund Class B -0.21%
Growth Fund Class B -1.39%
Small Cap Fund Class B -1.99%
Enhanced Market Fund Class B -0.44%
Select Equity Fund Class B -1.85%
International Equity Fund Class B 0
Mid Cap Fund Class B 0
Capital Growth Fund Class B 0
Large Cap Fund Class B 0
</TABLE>
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 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
B-86
<PAGE> 90
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.
For the one-year and five-year periods ended July 31, 1999, average annual
total return was as follows:
<TABLE>
<CAPTION>
Fund Class One-Year Five-Year
---- ----- -------- ---------
<S> <C> <C> <C>
Prime Money Market Fund Trust 4.59% 4.99%
U.S. Treasury Fund Trust 4.16% 4.70%
Tax-Exempt Fund Trust 2.76% 3.08%
Prime Money Market Fund Class A 4.48% 4.92%
U.S. Treasury Fund Class A 4.06% 4.63%
Tax-Exempt Fund Class A 2.66% 3.01%
Florida Tax-Exempt Fund Class A 2.06%
Bond Fund Class A 2.58% 6.00%
Limited Term Bond Fund Class A 4.01% 5.03%
Government Income Fund Class A 2.62% 5.86%
Municipal Bond Class A 2.31% 3.71%
Institutional
Prime Obligations Fund Class I -- --
Institutional
Prime Obligations Fund Class II --
Institutional
Prime Obligations Fund Class III -- --
</TABLE>
B-87
<PAGE> 91
<TABLE>
<CAPTION>
Fund Class One-Year(4) Five-Year(4)
---- ----- --------- ----------
<S> <C> <C> <C>
AmSouth Limited Term Class A N/A N/A
U.S. Government Fund
AmSouth Tennessee Tax- Class A (3.07%) 4.47%
Exempt Fund
AmSouth Limited Term Class A 0.95% 5.83%
Tennessee Tax-Exempt
Fund
AmSouth Treasury Reserve Class A 4.38% 4.80%
Money Market Fund
AmSouth Limited Term Class B N/A N/A
U.S. Government Fund
AmSouth Tennessee Tax- Class B (3.65%) 4.28%
Exempt Fund
AmSouth Limited Term Class B (1.84%) 3.32%
Tennessee Tax-Exempt
Fund
AmSouth Limited Term Trust N/A N/A
U.S. Government Fund
AmSouth Tennessee Tax- Trust (2.83%) 4.58%
Exempt Fund
AmSouth Limited Term Trust 1.08% 5.44%
Tennessee Tax-Exempt
Fund
AmSouth Treasury Reserve Trust 4.39% 4.94%
Money Market Fund
</TABLE>
- ------------------------------
(4) For participating in the ISG/AmSouth combination, the figures reflect
fees received by the former Distributor for the fiscal year ended December 31,
1999, December 31, 1998, and December 31, 1997.
B-88
<PAGE> 92
For the one-year and five-year periods ended July 31, 1999, average annual
total return was as follows:
<TABLE>
<CAPTION>
Fund Class One-Year Five-Year
---- ----- -------- ---------
<S> <C> <C> <C>
Value Fund Trust 15.43% 19.61%
Balanced Fund Trust 9.74% 13.71%
Growth Fund Trust 22.05% --
Equity Income Fund Trust 14.43% --
Small Cap Fund Trust
Value Fund Class A 14.92% 18.38%
Balanced Fund Class A 9.40% 12.55%
Growth Fund Class A 21.76% --
Equity Income Fund Class A 9.03% --
Small Cap Fund Class A -8.10% --
Value Fund Class B 14.03% 18.95%
Balanced Fund Class B 9.74% 13.04%
Growth Fund Class B 20.96% --
Equity Income Fund Class B 13.34% --
Small Cap Fund Class B -8.78% --
</TABLE>
B-89
<PAGE> 93
<TABLE>
<CAPTION>
Fund Class One-Year(5) Five-Year(5)
---- ----- ----------- ------------
<S> <C> <C> <C>
AmSouth Capital Growth Class A 21.85% 27.39%
Fund
AmSouth Large Cap Fund Class A 18.85% 28.74%
AmSouth Mid Cap Fund Class A N/A N/A
AmSouth International Class A 26.77% N/A
Equity Fund
AmSouth Aggressive Class A N/A N/A
Growth Portfolio
AmSouth Growth Portfolio Class A N/A N/A
AmSouth Growth and Class A N/A N/A
Income Portfolio
AmSouth Moderate Growth Class A N/A N/A
Income Portfolio
AmSouth Current Income Class A N/A N/A
Portfolio
AmSouth Capital Growth Class B 21.11% 26.81%
Fund
AmSouth Large Cap Fund Class B 17.78% 28.50%
AmSouth Mid Cap Fund Class B N/A N/A
AmSouth International Class B 25.98% N/A
Equity Fund
AmSouth Aggressive Class B N/A N/A
Growth Portfolio
AmSouth Growth Portfolio Class B N/A N/A
AmSouth Growth and Class B N/A N/A
Income Portfolio
AmSouth Moderate Growth Class B N/A N/A
Income Portfolio
AmSouth Current Income Class B N/A N/A
Portfolio
AmSouth Capital Growth Trust 22.09% 27.29%
Fund
AmSouth Large Cap Fund Trust 18.85% 28.74%
AmSouth Mid Cap Fund Trust N/A N/A
AmSouth International Trust 26.72% N/A
Equity Fund
AmSouth Aggressive Trust N/A N/A
Growth Portfolio
AmSouth Growth Portfolio Trust N/A N/A
AmSouth Growth and Trust N/A N/A
Income Portfolio
AmSouth Moderate Growth Trust N/A N/A
Income Portfolio
AmSouth Current Income Trust N/A N/A
Portfolio
</TABLE>
(5) For participating in the ISG/AmSouth combination, the figures reflect
fees received by the former Distributor for the fiscal year ended December 31,
1999, December 31, 1998, and December 31, 1997.
B-90
<PAGE> 94
For the period from commencement of operations through July 31, 1999, the
average annual total return was as follows:
<TABLE>
<CAPTION>
Commencement of Operations Commencement
Fund Class through July 31, 1999 of Operations Date
---- ----- -------------------------- ------------------
<S> <C> <C> <C>
Prime Money Market Fund Trust 5.33% August 8, 1988
U.S. Treasury Fund Trust 5.08% September 8, 1988
Tax-Exempt Fund Trust 3.06% June 27, 1988
Florida Tax-Exempt Fund Trust 5.05% September 2, 1997
Municipal Bond Fund Trust 5.90% September 2, 1997
Bond Fund Trust 7.94% September 2, 1997
Limited Term Bond Fund Trust 6.78% September 2, 1997
Government Income Fund Trust 5.69% September 2, 1997
Prime Money Market Fund Class A 5.30% April 1, 1996
U.S. Treasury Fund Class A 5.05% April 1, 1996
Tax-Exempt Fund Class A 3.03% April 1, 1996
Florida Fund Class A 4.10% September 30, 1994
Municipal Bond Fund Class A 5.72% July 1, 1997
Bond Fund Class A 7.51% December 1, 1988
Limited Term Bond Fund Class A 6.34% February 1, 1988
Government Income Fund Class A 4.94% October 1, 1993
Bond Fund Class B 7.75% September 2, 1997
Prime Money Market Fund Class B 3.62% June 15, 1998
Institutional
Prime Obligations Fund Class I 4.31% September 15, 1998
Institutional
Prime Obligations Fund Class II 1.96% February 19, 1999
Institutional
Prime Obligations Fund Class III 1.84% February 22, 1999
</TABLE>
B-91
<PAGE> 95
<TABLE>
<CAPTION>
Fund Class Since Inception(6)
---- ----- ----------------
<S> <C> <C>
AmSouth Limited Term Class A 5.99%
U.S. Government Fund
AmSouth Tennessee Tax- Class A 6.25%
Exempt Fund
AmSouth Limited Term Class A 7.48%
Tennessee Tax-Exempt
Fund
AmSouth Treasury Reserve Class A 4.30%
Money Market Fund
AmSouth Limited Term Class B 5.87%
U.S. Government Fund
AmSouth Tennessee Tax- Class B 6.20%
Exempt Fund
AmSouth Limited Term Class B 3.98%
Tennessee Tax-Exempt
Fund
AmSouth Limited Term Trust 5.99%
U.S. Government Fund
AmSouth Tennessee Tax- Trust 6.28%
Exempt Fund
AmSouth Limited Term Trust N/A
Tennessee Tax-Exempt
Fund
AmSouth Treasury Reserve Trust 4.39%
Money Market Fund
</TABLE>
- ------------------------------
(6) For participating in the ISG/AmSouth combination, the figures reflect
fees received by the former Distributor for the fiscal year ended December 31,
1999, December 31, 1998, and December 31, 1997.
B-92
<PAGE> 96
For the period from commencement of operations through July 31, 1999, the
average annual total return was as follows:
<TABLE>
<CAPTION>
Commencement of Operations Commencement
Fund Class through July 31, 1999 of Operations Date
---- ----- -------------------------- ------------------
<S> <C> <C> <C>
Value Fund Trust 15.49% December 1, 1988
Balanced Fund Trust 12.97% December 19, 1991
Equity Income Fund Trust 17.01% March 20, 1997
Growth Fund Trust 19.36% July 31, 1997
Small Cap Fund Trust -11.30% March 2, 1998
Enhanced Market Fund Trust 40.10% September 1, 1998
Select Equity Fund Trust 19.62% September 1, 1998
Value Fund Class B 15.28% December 1, 1988
Balanced Fund Class B 12.70% December 19, 1991
Equity Income Fund Class B 15.00% March 20, 1997
Growth Fund Class B 16.54% August 3, 1997
Small Cap Fund Class B -14.77% March 2, 1998
Enhanced Market Fund Class B 33.90% September 1, 1998
Select Equity Fund Class B 13.59% September 1, 1998
Value Fund Class A 14.93% December 1, 1988
Balanced Fund Class A 12.22% December 19, 1991
Equity Income Fund Class A 14.54% March 20, 1997
Growth Fund Class A 16.34% August 3, 1997
Small Cap Fund Class A -14.27% March 2, 1998
Enhanced Market Fund Class A 33.65% September 1, 1998
Select Equity Fund Class A 14.08% September 1, 1998
</TABLE>
B-93
<PAGE> 97
<TABLE>
<CAPTION>
Fund Class Since Inception(7)
---- ----- ------------------
<S> <C> <C>
AmSouth Capital Growth Class A 13.75%
Fund
AmSouth Large Cap Fund Class A 20.61%
AmSouth Mid Cap Fund Class A 73.30%
AmSouth International Class A 13.37%
Equity Fund
AmSouth Aggressive Class A 16.92%
Growth Portfolio
AmSouth Growth Portfolio Class A 8.85%
AmSouth Growth and Class A 5.21%
Income Portfolio
AmSouth Moderate Growth Class A 3.37%
Income Portfolio
AmSouth Current Income Class A (1.63%)
Portfolio
AmSouth Capital Growth Class B 13.61%
Fund
AmSouth Large Cap Fund Class B 20.46%
AmSouth Mid Cap Fund Class B 72.80%
AmSouth International Class B 13.07%
Equity Fund
AmSouth Aggressive Class B 15.70%
Growth Portfolio
AmSouth Growth Portfolio Class B 9.48%
AmSouth Growth and Class B 6.10%
Income Portfolio
AmSouth Moderate Growth Class B 1.50%
Income Portfolio
AmSouth Current Income Class B (1.66%)
Portfolio
AmSouth Capital Growth Trust 13.73%
Fund
AmSouth Large Cap Fund Trust 20.60%
AmSouth Mid Cap Fund Trust 78.70%
AmSouth International Trust 13.35%
Equity Fund
AmSouth Aggressive Trust 16.31%
Growth Portfolio
AmSouth Growth Portfolio Trust 8.59%
AmSouth Growth and Trust 8.40%
Income Portfolio
AmSouth Moderate Growth Trust 3.64%
Income Portfolio
AmSouth Current Income Trust (1.41%)
Portfolio
</TABLE>
- -------------------------------
(7) For participating in the ISG/AmSouth combination, the figures reflect
fees received by the former Distributor for the fiscal year ended December 31,
1999, December 31, 1998, and December 31, 1997.
B-94
<PAGE> 98
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.
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
B-95
<PAGE> 99
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.
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 30, 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 twenty-nine series of Shares which
represent interests in the Value Fund, the Growth Fund, the Capital Growth Fund,
the Large Cap Fund, the Mid Cap Fund, the Small Cap Fund, the Equity Income
Fund, the Balanced Fund, the Select Equity Fund, the Enhanced Market Fund, the
International Equity Fund, the Strategic Portfolios: Aggressive Growth
Portfolio, the Strategic Portfolios: Growth Portfolio, the Strategic Portfolios:
Growth and Income Portfolio, the Strategic Portfolios: Moderate Growth and
Income Portfolio, the Strategic Portfolios: Current Income Portfolio, the Bond
Fund, the Limited Term Bond Fund, the Government Income Fund, the Limited Term
U.S. Government Fund, the Municipal Bond Fund, the Florida Tax-Exempt Fund, the
Tennessee Tax-Exempt Fund, the Limited Term Tennessee Tax-Exempt Fund, the Prime
Money Market Fund, the U.S. Treasury Money Market Fund, the Treasury Reserve
Money Market Fund, the Tax-Exempt Money Market Fund, and the Prime Obligations
Money Market Fund. 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.
B-96
<PAGE> 100
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 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
B-97
<PAGE> 101
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 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.
As of March 13, 2000, the trustees and officers of the Trust, as a group,
owned less than 1% of the Trust Shares, of the Class A Shares and of the Class B
Shares of any of the AmSouth Funds. The information in the following table
shows, to the best of the knowledge of AmSouth Funds, the shareholders who owned
of record or beneficially 5% or more of the indicated Fund and Class. Those
shareholders who beneficially own 25% or more of the outstanding shares of a
Fund may be deemed to be controlling persons of that Fund under the 1940 Act.
PRIME MONEY MARKET - A SHARES
<TABLE>
<CAPTION>
NAME RECORD % BENEFICIAL %
<S> <C> <C>
NATIONAL FINANCIAL SERVICES CORP 32.847% 32.847%
PO BOX 3752
THE BENEFIT OF OUR CUSTOMERS
NEW YORK, NY 10008
NATIONAL FINANCIAL SERVICES CORP 58.230% 58.230%
200 LIBERTY ST
EXCLUSIVE BENEFIT OF OUR CUSTOMERS
NEW YORK, NY 10281
KENNEBERT & CO 8.344% 7.142%
PO BOX 11426 PROPRIETARY FUNDS
BIRMINGHAM, AL 35202
</TABLE>
B-98
<PAGE> 102
<TABLE>
US TREASURY MONEY MARKET - A SHARES
<CAPTION>
NAME RECORD % BENEFICIAL %
<S> <C> <C>
NATIONAL FINANCIAL SERVICES CORP 98.211% 98.211%
PO BOX 3752
THE BENEFIT OF OUR CUSTOMERS
NEW YORK, NY 10008
TAX EXEMPT MONEY MARKET - A SHARES
<CAPTION>
NAME RECORD % BENEFICIAL %
<S> <C> <C>
NATIONAL FINANCIAL SERVICES CORP 89.491% 89.491%
PO BOX 3752
THE BENEFIT OF OUR CUSTOMERS
NEW YORK, NY 10008
NATIONAL FINANCIAL SERVICES CORP 5.518% 5.518%
200 LIBERTY ST
EXCLUSIVE BENEFIT OF OUR CUSTOMERS
NEW YORK, NY 10281
BOND FUND - A SHARES
<CAPTION>
NAME RECORD % BENEFICIAL %
<S> <C> <C>
NFSC FEBO 010-445851 8.284% 8.284%
P O BOX 2527
FIRST ALA BK AS SUCCESSOR- TTEE
MOBILE, AL 36622
NFSC FEBO 010-445878 6.610% 6.610%
P O BOX 2527
FIRST ALA BK AS SUCCESSOR- TTEE
MOBILE, AL 36622
KENNEBERT & CO 6.911% 5.916%
PO BOX 11426 PROPRIETARY FUNDS
BIRMINGHAM, AL 35202
KENNEBERT & CO 18.136% 15.524%
PO BOX 11426 PROPRIETARY FUNDS
BIRMINGHAM, AL 35202
LIMITED TERM BOND FUND - A SHARES
<CAPTION>
NAME RECORD % BENEFICIAL %
<S> <C> <C>
BISYS BD SERVICES INC 17.236% 17.236%
NASHVILLE TN 37201-1809
MAX A JOHNSTON
CONCORD, CA 94524
</TABLE>
B-99
<PAGE> 103
<TABLE>
<S> <C> <C>
FTC & CO 23.202% 23.202%
P O BOX 173736
DENVER, CO 80217
KENNEBERT & CO 8.014% 6.860%
PO BOX 11426 PROPRIETARY FUNDS
BIRMINGHAM, AL 35202
KENNEBERT & CO 24.779% 21.211%
PO BOX 11426 PROPRIETARY FUNDS
BIRMINGHAM, AL 35202
VALUE FUND - A SHARES
<CAPTION>
NAME RECORD % BENEFICIAL %
<S> <C> <C>
NATIONAL BANK OF COMMERCE 8.823% 8.823%
P O BOX 10686
MAYNARD COOPER
BIRMINGHAM, AL 35202
GOVERNMENT INCOME FUND - A SHARES
<CAPTION>
NAME RECORD % BENEFICIAL %
<S> <C> <C>
NFSC FEBO 09G-098418 5.112% 5.112%
P O BOX 17500
GULF COAST HEALTH COOPERATIVE
PENSACOLA, FL 32522
SEI TRUST COMPANY 9.891% 9.891%
ONE FREEDOM DR
OAKS, PA 19456
KENNEBERT & CO 12.067% 10.329%
PO BOX 11426 PROPRIETARY FUNDS
BIRMINGHAM, AL 35202
KENNEBERT & CO 6.758% 5.785%
PO BOX 11426 PROPRIETARY FUNDS
BIRMINGHAM, AL 35202
MUNICIPAL BOND FUND - A SHARES
<CAPTION>
NAME RECORD % BENEFICIAL %
<S> <C> <C>
KENNEBERT & CO 12.872% 11.018%
PO BOX 11426 PROPRIETARY FUNDS
BIRMINGHAM, AL 35202
</TABLE>
B-100
<PAGE> 104
<TABLE>
<S> <C> <C>
NFSC FEBO 010-563811 5.464% 5.464%
1100 BEACON PKWY E V-304
RICHARD C HASSINGER JR
BIRMINGHAM, AL 35209
NFSC FEBO 010-006483 16.061% 16.061%
4604 DOLLY RIDGE RD
HELEN CROW MILLS
BIRMINGHAM, AL 35243
FLORIDA TAX EXEMPT FUND - A SHARES
<CAPTION>
NAME RECORD % BENEFICIAL %
<S> <C> <C>
NFSC FEBO 09G-349631 15.636% 15.636%
19720 MUSTANG DRIVE
EMIL J WIRTH JR
DUNNELLON, FL 34432
NFSC FEBO 09G-349682 15.636% 15.636%
19720 MUSTANG DRIVE
RADELLE M WIRTH
DUNNELLON, FL 34432
NFSC FEBO 010-372900 48.049% 48.049%
PO BOX 2727
GORDON ROSEN
TUSCALOOSA, AL 35403
SMALL CAP FUND - A SHARES
<CAPTION>
NAME RECORD % BENEFICIAL %
<S> <C> <C>
NFSC FEBO 09G-349097 5.563% 5.563%
702 WATERVIEW LANE
DONALD B QUARLES AND
TARPON SPRINGS, FL 34689
SELECT EQUITY FUND - A SHARES
<CAPTION>
NAME RECORD % BENEFICIAL %
<S> <C> <C>
NFSC FEBO 010-564125 5.691% 5.691%
P O BOX 130842
JUANELLES FAMILY PARTNERSHIP
BIRMINGHAM, AL 35213
</TABLE>
B-101
<PAGE> 105
<TABLE>
PRIME MONEY MARKET - B SHARES
<CAPTION>
NAME RECORD % BENEFICIAL %
<S> <C> <C>
NFSC FEBO 09G-457566 16.383% 16.383%
1709 STRELLITA CIRCLE
B P ROBERTSON AND
CHATTANOOGA, TN 37421
BOND FUND - B SHARES
<CAPTION>
NAME RECORD % BENEFICIAL %
<S> <C> <C>
NFSC FEBO 09G-359173 5.183% 5.183%
2655 NEBRASKA AVENUE APT 337
LILLIAN F KINZEL TTEE
PALM HARBOR, FL 34684
NFSC FEBO 09G-440477 5.362% 5.362%
4315 HARBOR WATCH LANE
EDWARD SIDLASKY
LUTZ, FL 33549
MUNICIPAL BOND FUND - B SHARES
<CAPTION>
NAME RECORD % BENEFICIAL %
<S> <C> <C>
NFSC FEBO FC1-089877 15.359% 15.359%
102 MORTON MILL CIR
MILDRED EVELYN PIPER CONS
NASHVILLE, TN 37221
NFSC FEBO GC1-170470 15.980% 15.980%
1302 DELAWARE AVE
C L WOMACK
MCCOMB, MS 39648
NFSC FEBO 09G-151157 16.982% 16.982%
1147 16TH AVENUE N
CAROLYN K TINLEY
ST PETERSBURG, FL 33704
NFSC FEBO 09G-396931 8.466% 8.466%
917 SIGNAL ROAD
EVELYN K MALMQUIST AND
SIGNAL MTN, TN 37377
NFSC FEBO 09G-349321 12.387% 12.387%
5400 PALIWAY
JOSEPH J CERVENKA LLC
ST PETERSBURG, FL 33706
</TABLE>
B-102
<PAGE> 106
<TABLE>
<S> <C> <C>
NFSC FEBO 010-550752 5.132% 5.132%
4232 PERCH BLVD
MRS THELMA L CASEY AND
MOBILE, AL 36605
NFSC FEBO FC1-039055 8.444% 8.444%
8901 SAWYER BROWN RD
LOUISE GREEN
NASHVILLE, TN 37221
NFSC FEBO FC1-159360 5.067% 5.067%
3818 HILLDALE DR
LEONARD FAM LIMITED PARTSHP
NASHVILLE, TN 37215
FLORIDA TAX EXEMPT FUND - B SHARES
<CAPTION>
NAME RECORD % BENEFICIAL %
<S> <C> <C>
NFSC FEBO 09G-402257 14.710% 14.710%
16416 US HWY 19N
GEORGE C JENKINS AND
CLEARWATER, FL 33764
NFSC FEBO 09G-373753 11.419% 11.419%
1900 59TH AVE NORTH OASIS 312
NICHOLAS C AND ANNE J BUSCH TRUS
ST PETERSBURG, FL 33714
NFSC FEBO 09G-381578 14.478% 14.478%
2384 TAHITIAN LANE APT 24
JOSEPH J KRESS
CLEARWATER, FL 33763
NFSC FEBO 09G-413054 7.198% 7.198%
1587 JONATHAN COURT
PHYLLIS A WALTER TTEE
LARGO, FL 33770
NFSC FEBO 09G-413569 28.771% 28.771%
3808 NE 17TH STREET
JOSEPH MARY WOLLITZ TRUST
OCALA, FL 34470
NFSC FEBO 09G-349321 10.909% 10.909%
5400 PALIWAY
JOSEPH J CERVENKA LLC
ST PETERSBURG, FL 33706
</TABLE>
B-103
<PAGE> 107
<TABLE>
SELECT EQUITY FUND - B SHARES
<CAPTION>
NAME RECORD % BENEFICIAL %
<S> <C> <C>
NFSC FEBO 010-663085 5.113% 5.113%
2316 COUNTY ROAD 7
DON E GUTSCHER
CLANTON, AL 35045
PRIME MONEY MARKET - TRUST SHARES
<CAPTION>
NAME RECORD % BENEFICIAL %
<S> <C> <C>
KENNEBERT & CO 19.506% 16.697%
PO BOX 11426 PROPRIETARY FUNDS
BIRMINGHAM, AL 35202
KENNEBURT & COMPANY 32.302% 27.651%
P O BOX 11426 CSTDY UNIT
BIRMINGHAM, AL 35202
KENNEBURT & COMPANY 30.558% 26.158%
P O BOX 11426 CSTDY UNIT
BIRMINGHAM, AL 35202
US TREASURY MONEY MARKET - TRUST SHARES
<CAPTION>
NAME RECORD % BENEFICIAL %
<S> <C> <C>
KENNEBURT & COMPANY 20.160% 17.257%
P O BOX 11426 CSTDY UNIT
BIRMINGHAM, AL 35202
KENNEBURT & COMPANY 37.693% 32.265%
P O BOX 11426 CSTDY UNIT
BIRMINGHAM, AL 35202
HARE & CO 39.660% 39.660%
ONE WALL ST 2ND FLOOR
NEW YORK, NY 10286
TAX EXEMPT MONEY MARKET - TRUST SHARES
<CAPTION>
NAME RECORD % BENEFICIAL %
<S> <C> <C>
KENNEBERT & CO 13.444% 11.508%
PO BOX 11426 PROPRIETARY FUNDS
BIRMINGHAM, AL 35202
KENNEBERT & CO 48.032% 41.115%
PO BOX 11426 PROPRIETARY FUNDS
BIRMINGHAM, AL 35202
</TABLE>
B-104
<PAGE> 108
<TABLE>
<S> <C> <C>
KENNEBURT & COMPANY 12.959% 11.093%
P O BOX 11426 CSTDY UNIT
BIRMINGHAM, AL 35202
KENNEBURT & COMPANY 24.492% 20.965%
P O BOX 11426 CSTDY UNIT
BIRMINGHAM, AL 35202
BOND FUND - TRUST SHARES
<CAPTION>
NAME RECORD % BENEFICIAL %
<S> <C> <C>
KENNEBURT & COMPANY 30.815% 26.378%
P O BOX 11426 CSTDY UNIT
BIRMINGHAM, AL 35202
KENNEBURT & COMPANY 24.277% 20.781%
P O BOX 11426 CSTDY UNIT
BIRMINGHAM, AL 35202
KENNEBURT & COMPANY 14.241% 12.190%
PO BOX 11426 CSTDY UNIT
FEE'D REINVESTMENT
BIRMINGHAM, AL 35202
KENNEBURT & COMPANY 9.053% 7.749%
PO BOX 11426 CSTDY UNIT
BIRMINGHAM, AL 35202
KENNEBURT & COMPANY 6.296% 5.389%
P O BOX 11426 CSTDY UNIT
BIRMINGHAM, AL 35202
LIMITED TERM BOND FUND - TRUST SHARES
<CAPTION>
NAME RECORD % BENEFICIAL %
<S> <C> <C>
KENNEBURT & COMPANY 14.308% 12.248%
P O BOX 11426 CSTDY UNIT
BIRMINGHAM, AL 35202
KENNEBURT & COMPANY 27.529% 23.565%
P O BOX 11426 CSTDY UNIT
BIRMINGHAM, AL 35202
KENNEBURT & COMPANY 14.889% 12.745%
PO BOX 11426 CSTDY UNIT
BIRMINGHAM, AL 35202
</TABLE>
B-105
<PAGE> 109
<TABLE>
<S> <C> <C>
KENNEBURT & COMPANY 15.410% 13.191%
PO BOX 11426 CSTDY UNIT
NON FEE'D REINVESTMENT
BIRMINGHAM, AL 35202
KENNEBURT & COMPANY 11.183% 9.573%
PO BOX 11426 CSTDY UNIT
BIRMINGHAM, AL 35202
VALUE FUND - TRUST SHARES
<CAPTION>
NAME RECORD % BENEFICIAL %
<S> <C> <C>
KENNEBURT & COMPANY 47.763% 40.885%
P O BOX 11426 CSTDY UNIT
BIRMINGHAM, AL 35202
KENNEBURT & COMPANY 24.449% 20.928%
P O BOX 11426 CSTDY UNIT
BIRMINGHAM, AL 35202
KENNEBURT & COMPANY 12.309% 10.537%
PO BOX 11426 CSTDY UNIT
FEE'D REINVESTMENT
BIRMINGHAM, AL 35202
KENNEBURT & COMPANY 5.571% 4.769%
P O BOX 11426 CSTDY UNIT
BIRMINGHAM, AL 35202
GOVERNMENT INCOME FUND - TRUST SHARES
<CAPTION>
NAME RECORD % BENEFICIAL %
<S> <C> <C>
ISG GROWTH & INCOME PORTFOLIO 8.926% 8.926%
3435 STELZER RD
COLUMBUS, OH 43219
KENNEBURT & COMPANY 36.756% 31.463%
PO BOX 11426 CSTDY UNIT
BIRMINGHAM, AL 35202
KENNEBURT & COMPANY 34.434% 29.476%
PO BOX 11426 CSTDY UNIT
FEE'D REINVESTMENT
BIRMINGHAM, AL 35202
KENNEBURT & COMPANY 5.527% 4.731%
PO BOX 11426 CSTDY UNIT
NON FEE'D REINVESTMENT
BIRMINGHAM, AL 35202
</TABLE>
B-106
<PAGE> 110
<TABLE>
<S> <C> <C>
BALANCED FUND - TRUST SHARES
<CAPTION>
NAME RECORD % BENEFICIAL %
<S> <C> <C>
KENNEBURT & COMPANY 51.964% 44.481%
P O BOX 11426 CSTDY UNIT
BIRMINGHAM, AL 35202
KENNEBURT & COMPANY 37.942% 32.478%
PO BOX 11426 CSTDY UNIT
FEE'D REINVESTMENT
BIRMINGHAM, AL 35202
MUNICIPAL BOND FUND - TRUST SHARES
<CAPTION>
NAME RECORD % BENEFICIAL %
<S> <C> <C>
KENNEBURT & COMPANY 7.978% 6.829%
PO BOX 11426 CSTDY UNIT
BIRMINGHAM, AL 35202
KENNEBURT & COMPANY 30.171% 25.826%
PO BOX 11426 CSTDY UNIT
BIRMINGHAM, AL 35202
KENNEBURT & COMPANY 43.586% 37.310%
PO BOX 11426 CSTDY UNIT
BIRMINGHAM, AL 35202
KENNEBURT & COMPANY 7.228% 6.187%
P O BOX 11426 CSTDY UNIT
BIRMINGHAM, AL 35202
KENNEBURT & COMPANY 8.359% 7.155%
P O BOX 11426 CSTDY UNIT
BIRMINGHAM, AL 35202
FLORIDA TAX EXEMPT FUND - TRUST SHARES
<CAPTION>
NAME RECORD % BENEFICIAL %
<S> <C> <C>
KENNEBURT & COMPANY 90.782% 77.709%
PO BOX 11426 CSTDY UNIT
BIRMINGHAM, AL 35202
KENNEBURT & COMPANY 7.937% 6.794%
P O BOX 11426 CSTDY UNIT
BIRMINGHAM, AL 35202
</TABLE>
B-107
<PAGE> 111
<TABLE>
<S> <C> <C>
EQUITY INCOME FUND - TRUST SHARES
<CAPTION>
NAME RECORD % BENEFICIAL %
<S> <C> <C>
KENNEBURT & COMPANY 5.058% 4.330%
PO BOX 11426 CSTDY UNIT
NON FEE'D REINVESTMENT
BIRMINGHAM, AL 35202
KENNEBURT & COMPANY 49.811% 42.638%
PO BOX 11426 CSTDY UNIT
BIRMINGHAM, AL 35202
KENNEBURT & COMPANY 22.262% 19.056%
P O BOX 11426 CSTDY UNIT
BIRMINGHAM, AL 35202
KENNEBURT & COMPANY 7.504% 6.423%
P O BOX 11426 CSTDY UNIT
BIRMINGHAM, AL 35202
SMALL CAP FUND - TRUST SHARES
<CAPTION>
NAME RECORD % BENEFICIAL %
<S> <C> <C>
KENNEBURT & COMPANY 15.020% 12.857%
PO BOX 11426 CSTDY UNIT
BIRMINGHAM, AL 35202
KENNEBURT & COMPANY 30.757% 26.328%
PO BOX 11426 CSTDY UNIT
FEE'D REINVESTMENT
BIRMINGHAM, AL 35202
KENNEBURT & COMPANY 26.050% 22.299%
P O BOX 11426 CSTDY UNIT
BIRMINGHAM, AL 35202
KENNEBURT & COMPANY 6.551% 5.608%
P O BOX 11426
SMALL CAP PREMIER FUND REINVESTMENT
BIRMINGHAM, AL 35202
KENNEBURT & COMPANY 7.721% 6.609%
P O BOX 11426 CSTDY UNIT
BIRMINGHAM, AL 35202
</TABLE>
B-108
<PAGE> 112
<TABLE>
<S> <C> <C>
GROWTH FUND - TRUST SHARES
<CAPTION>
NAME RECORD % BENEFICIAL %
<S> <C> <C>
KENNEBURT & COMPANY 28.665% 24.537%
P O BOX 11426 CSTDY UNIT
BIRMINGHAM, AL 35202
KENNEBURT & COMPANY 54.483% 46.637%
P O BOX 11426 CSTDY UNIT
BIRMINGHAM, AL 35202
KENNEBURT & COMPANY 14.507% 12.418%
P O BOX 11426 CSTDY UNIT
BIRMINGHAM, AL 35202
SELECT EQUITY FUND - TRUST SHARES
<CAPTION>
NAME RECORD % BENEFICIAL %
<S> <C> <C>
KENNEBURT & COMPANY 6.497% 5.561%
P O BOX 11426 CSTDY UNIT
BIRMINGHAM, AL 35202
KENNEBURT & COMPANY 92.424% 79.115%
P O BOX 11426 CSTDY UNIT
BIRMINGHAM, AL 35202
ENHANCED MARKET FUND - TRUST SHARES
<CAPTION>
NAME RECORD % BENEFICIAL %
<S> <C> <C>
KENNEBURT & COMPANY 51.884% 44.413%
P O BOX 11426 CSTDY UNIT
BIRMINGHAM, AL 35202
KENNEBURT & COMPANY 38.005% 32.532%
P O BOX 11426 CSTDY UNIT
BIRMINGHAM, AL 35202
KENNEBURT & COMPANY 10.086% 8.634%
P O BOX 11426 CSTDY UNIT
BIRMINGHAM, AL 35202
INSTITUTIONAL PRIME OBLIGATIONS - CLASS I
<CAPTION>
NAME RECORD % BENEFICIAL %
<S> <C> <C>
KENNEBURT & COMPANY 64.808% 55.476%
P O BOX 11426 CSTDY UNIT
BIRMINGHAM, AL 35202
</TABLE>
B-109
<PAGE> 113
<TABLE>
<S> <C> <C>
KENNEBURT & COMPANY 35.192% 30.124%
P O BOX 11426 CSTDY UNIT
BIRMINGHAM, AL 35202
INSTITUTIONAL PRIME OBLIGATIONS - CLASS II
<CAPTION>
NAME RECORD % BENEFICIAL %
<S> <C> <C>
AMSOUTH BANK 48.638% 48.638%
P O BOX 11007
BIRMINGHAM, AL 35288
AMSOUTH BANK 51.362% 51.362%
P O BOX 11007
BIRMINGHAM, AL 35288
INSTITUTIONAL PRIME OBLIGATIONS - CLASS III
<CAPTION>
NAME RECORD % BENEFICIAL %
<S> <C> <C>
008709000027 AMSOUTH BANK 17.431% 17.431%
P O BOX 11007
BIRMINGHAM, AL 35288
AMSOUTH BANK 82.568% 82.568%
P O BOX 11007
BIRMINGHAM, AL 35288
200 HOPMEADOW ST
SIMSBURY, CT 06070
TREASURY RESERVE MONEY MARKET - A SHARES
<CAPTION>
NAME RECORD % BENEFICIAL %
<S> <C> <C>
HARE & CO 54.492% 54.492%
ONE WALL STREET 2ND FLOOR
NEW YORK, NY 10286
NATIONAL FINANCIAL SERVICES CORP 12.724% 12.724%
200 LIBERTY ST
EXCLUSIVE BENEFIT OF OUR CUSTOMERS
NEW YORK, NY 10281
KENNEBERT & CO 31.753% 27.181%
PO BOX 11426 PROPRIETARY FUNDS
BIRMINGHAM, AL 35202
</TABLE>
B-110
<PAGE> 114
<TABLE>
<S> <C> <C>
CAPITAL GROWTH FUND - A SHARES
<CAPTION>
NAME RECORD % BENEFICIAL %
<S> <C> <C>
CHARLES SCHWAB CO INC 9.284% 9.284%
101 MONTGOMERY STREET
FBO ACCOUNT NUMBER 32949426
SAN FRANCISCO, CA 94104
KENNEBERT & CO 19.593% 16.772%
PO BOX 11426 PROPRIETARY FUNDS
BIRMINGHAM, AL 35202
KENNEBERT & CO 26.101% 22.342%
PO BOX 11426 PROPRIETARY FUNDS
BIRMINGHAM, AL 35202
LIMITED TERM U.S. GOVERNMENT - A SHARES
<CAPTION>
NAME RECORD % BENEFICIAL %
<S> <C> <C>
NFSC FEBO GC2-314196 7.509% 7.509%
800 SPRING STREET SUITE 201
RASBERRY COMMERCIAL PROPERTIES L
SHREVEPORT, LA 71101
KENNEBERT & CO 29.197% 24.993%
PO BOX 11426 PROPRIETARY FUNDS
BIRMINGHAM, AL 35202
KENNEBERT & CO 20.696% 17.716%
PO BOX 11426 PROPRIETARY FUNDS
BIRMINGHAM, AL 35202
LIMITED TERM TENN TAX-EXEMPT - A SHARES
<CAPTION>
NAME RECORD % BENEFICIAL %
<S> <C> <C>
KENNEBERT & CO 7.334% 6.278%
PO BOX 11426 PROPRIETARY FUNDS
BIRMINGHAM, AL 35202
KENNEBERT & CO 22.096% 18.914%
PO BOX 11426 PROPRIETARY FUNDS
BIRMINGHAM, AL 35202
KENNEBERT & CO 64.305% 55.045%
PO BOX 11426 PROPRIETARY FUNDS
BIRMINGHAM, AL 35202
</TABLE>
B-111
<PAGE> 115
<TABLE>
<S> <C> <C>
INTERNATIONAL EQUITY FUND - A SHARES
<CAPTION>
NAME RECORD % BENEFICIAL %
<S> <C> <C>
NFSC FEBO 010-363731 6.078% 6.078%
P O BOX 20908
TIMOTHY MIZE PARKER JR
TUSCALOOSA, AL 35402
NFSC FEBO 010-564974 9.728% 9.728%
341 TRACE RIDGE RD
JOSE A VALENCIA
BIRMINGHAM, AL 35244
NFSC FEBO GC1-528269 7.751% 7.751%
840 EAST RIVER PLACE STE 500
HALBERT E DOCKINS JR
JACKSON, MS 39202
KENNEBERT & CO 33.242% 28.455%
PO BOX 11426 PROPRIETARY FUNDS
BIRMINGHAM, AL 35202
KENNEBERT & CO 13.327% 11.408%
PO BOX 11426 PROPRIETARY FUNDS
BIRMINGHAM, AL 35202
MID CAP FUND - A SHARES
<CAPTION>
NAME RECORD % BENEFICIAL %
<S> <C> <C>
FIRST AMERICAN NATL BANK 5.850% 5.008%
300 UNION STREET NA052
CASH REINVEST
NASHVILLE, TN 37237
NFSC FEBO 010-564974 5.937% 5.937%
341 TRACE RIDGE RD
JOSE A VALENCIA
BIRMINGHAM, AL 35244
TENNESSEE TAX-EXEMPT - A SHARES
<CAPTION>
NAME RECORD % BENEFICIAL %
<S> <C> <C>
BISYS BD SERVICES INC 7.785% 7.785%
NASHVILLE TN 37201-1809
MAX A JOHNSTON
CONCORD, CA 94524
</TABLE>
B-112
<PAGE> 116
<TABLE>
<S> <C> <C>
NFSC FEBO FC1-080438 5.855% 5.855%
3305 HONEYWOOD DR
ALAN F COOPER
JOHNSON CITY, TN 37604
NFSC FEBO FC1-071587 7.432% 7.432%
1400 KENESAW AVE APT 12R
JANET MYERS TRENT
KNOXVILLE, TN 37919
KENNEBERT & CO 38.918% 33.314%
PO BOX 11426 PROPRIETARY FUNDS
BIRMINGHAM, AL 35202
KENNEBERT & CO 15.732% 13.467%
PO BOX 11426 PROPRIETARY FUNDS
BIRMINGHAM, AL 35202
NFSC FEBO FCI-115614 5.148% 5.148%
TERRY AVENUE
PHILLIP B KELLETT MD
17 WATERFRONT HOUSE
YORK, 205
TREASURY RESERVE MONEY MARKET - TRUST SHARES
<CAPTION>
NAME RECORD % BENEFICIAL %
<S> <C> <C>
KENNEBERT & CO 61.038% 52.249%
PO BOX 11426 PROPRIETARY FUNDS
BIRMINGHAM, AL 35202
KENNEBERT & CO 36.682% 31.400%
PO BOX 11426 PROPRIETARY FUNDS
BIRMINGHAM, AL 35202
CAPITAL GROWTH FUND - TRUST SHARES
<CAPTION>
NAME RECORD % BENEFICIAL %
<S> <C> <C>
KENNEBURT & COMPANY 7.785% 6.664%
PO BOX 11426 CSTDY UNIT
BIRMINGHAM, AL 35202
KENNEBURT & COMPANY 7.606% 6.511%
PO BOX 11426 CSTDY UNIT
BIRMINGHAM, AL 35202
</TABLE>
B-113
<PAGE> 117
<TABLE>
<S> <C> <C>
KENNEBURT & COMPANY 26.538% 22.717%
PO BOX 11426 CSTDY UNIT
NON FEE'D REINVESTMENT
BIRMINGHAM, AL 35202
KENNEBURT & COMPANY 45.293% 38.771%
PO BOX 11426 CSTDY UNIT
BIRMINGHAM, AL 35202
LIMITED TERM U.S. GOVERNMENT - TRUST SHARES
<CAPTION>
NAME RECORD % BENEFICIAL %
<S> <C> <C>
KENNEBURT & COMPANY 52.784% 45.183%
PO BOX 11426 CSTDY UNIT
BIRMINGHAM, AL 35202
KENNEBURT & COMPANY 28.545% 24.435%
PO BOX 11426 CSTDY UNIT
FEE'D REINVESTMENT
BIRMINGHAM, AL 35202
KENNEBURT & COMPANY 5.856% 5.013%
PO BOX 11426 CSTDY UNIT
NON FEE'D REINVESTMENT
BIRMINGHAM, AL 35202
INTERNATIONAL EQUITY - TRUST SHARES
<CAPTION>
NAME RECORD % BENEFICIAL %
<S> <C> <C>
KENNEBURT & COMPANY 39.879% 34.136%
PO BOX 11426 CSTDY UNIT
BIRMINGHAM, AL 35202
KENNEBURT & COMPANY 37.387% 32.003%
PO BOX 11426 CSTDY UNIT
FEE'D REINVESTMENT
BIRMINGHAM, AL 35202
KENNEBURT & COMPANY 13.511% 11.565%
PO BOX 11426 CSTDY UNIT
BIRMINGHAM, AL 35202
LARGE-CAP EQUITY FUND - TRUST SHARES
<CAPTION>
NAME RECORD % BENEFICIAL %
<S> <C> <C>
KENNEBURT & COMPANY 27.899% 23.882%
PO BOX 11426 CSTDY UNIT
BIRMINGHAM, AL 35202
</TABLE>
B-114
<PAGE> 118
<TABLE>
<S> <C> <C>
KENNEBURT & COMPANY 47.026% 40.254%
PO BOX 11426 CSTDY UNIT
FEE'D REINVESTMENT
BIRMINGHAM, AL 35202
MID CAP FUND - TRUST SHARES
<CAPTION>
NAME RECORD % BENEFICIAL %
<S> <C> <C>
FIRST AMERICAN NATL BANK 29.462% 25.219%
300 UNION STREET NA052
CASH CASH
NASHVILLE, TN 37237
FIRST AMERICAN NATIONAL BANK 11.087% 9.490%
300 UNION STREET NA052
CASH REINVEST
NASHVILLE, TN 37237
FIRST AMERICAN NATL BANK 24.084% 20.616%
300 UNION STREET NA052
REINVEST REINVEST
NASHVILLE, TN 37237
KENNEBURT & COMPANY 13.403% 11.473%
PO BOX 11426 CSTDY UNIT
BIRMINGHAM, AL 35202
TENNESSEE TAX-EXEMPT - TRUST SHARES
<CAPTION>
NAME RECORD % BENEFICIAL %
<S> <C> <C>
KENNEBURT & COMPANY 41.235% 35.297%
PO BOX 11426 CSTDY UNIT
BIRMINGHAM, AL 35202
KENNEBURT & COMPANY 55.193% 47.245%
PO BOX 11426 CSTDY UNIT
BIRMINGHAM, AL 35202
LIMITED TERM U.S. GOVERNMENT - B SHARES
<CAPTION>
NAME RECORD % BENEFICIAL %
<S> <C> <C>
NFSC FEBO FC2-069582 7.591% 7.591%
545 LAUREL PARK DRIVE
MARY ELIZABETH LAW
NASHVILLE, TN 37205
NFSC FEBO FR1-058025 11.059% 11.059%
308 DYE RD
NFSC FMTC IRA
BELL BUCKLE, TN 37020
</TABLE>
B-115
<PAGE> 119
<TABLE>
<S> <C> <C>
NFSC FEBO FC1-107280 17.067% 17.067%
115 WOODMONT BLVD APT 220
MARY M MCGAVOCK
NASHVILLE, TN 37205
NFSC FEBO FC1-180432 10.838% 10.838%
4612 SKYMONT DRIVE
LEE ENSIGN JOHNSON
NASHVILLE, TN 37215
NFSC FEBO FC2-027316 5.001% 5.001%
70 BROOKWOOD TERRACE
FRANCES M COX
NASHVILLE, TN 37205
NFSC FEBO FC1-166804 11.513% 11.513%
173 BOXWOOD DR
HELEN E FRANKENBACH
FRANKLIN, TN 37069
NFSC FEBO FR1-118770 6.827% 6.827%
302 COLONIAL ST
NFSC FMTC IRA
WOODBURY, TN 37190
NFSC FEBO FC1-092312 7.085% 7.085%
20 RIDGE RD
LOIS B HOGE
WESTMINSTER, MD 21157
NFSC FEBO FC1-088340 11.678% 11.678%
6045 SUNRISE CIRCLE
FRANCES T HARRIS
FRANKLIN, TN 37067
LIMITED TERM TENN TAX-EXEMPT - B SHARES
<CAPTION>
NAME RECORD % BENEFICIAL %
<S> <C> <C>
NFSC FEBO FC1-059560 9.296% 9.296%
5009 D CAMELOT DR
FLOYD W RHEW
COLUMBIA, TN 38401
NFSC FEBO FC2-045691 5.568% 5.568%
1001 CARR CEMETERY LOOP
MARTHA GLEERUP
CROSS PLAINS, TN 37049
</TABLE>
B-116
<PAGE> 120
<TABLE>
<S> <C> <C>
NFSC FEBO FC1-059579 10.489% 10.489%
5009 D CAMELOT DR
BEATRICE A RHEW
COLUMBIA, TN 38401
NFSC FEBO FC1-169757 7.438% 7.438%
635 FUGATE ROAD
JAMES E FUGATE
EVENSVILLE, TN 37332
NFSC FEBO FC1-142115 17.962% 17.962%
4409 BELMONT TERRACE 246
YVONNE P BENSON
NASHVILLE, TN 37215
NFSC FEBO FC1-101621 10.463% 10.463%
1304 BEDDINGTON PARK
JULIE K TUERFF
NASHVILLE, TN 37215
NFSC FEBO FC1-102121 5.920% 5.920%
610 HENSLEE DR
JERRY N TIDWELL
DICKSON, TN 37055
NFSC FEBO FC2-000078 12.226% 12.226%
1603 TYNE BLVD
ROSE S KENNON
NASHVILLE, TN 37215
GOVERNMENT INCOME FUND - B SHARES
<CAPTION>
NAME RECORD % BENEFICIAL %
<S> <C> <C>
NFSC FEBO FC1-180114 13.831% 13.831%
19205 WYND CHASE CIRCLE
STEPHANIE L WILSON
FRANKLIN, TN 37067
NFSC FEBO FC2-045543 8.846% 8.846%
612 SPRING HOUSE COURT
JAMES R WESSON
BRENTWOOD, TN 37027
NFSC FEBO FC1-169200 11.286% 11.286%
APT S-154
THELMA LORRAINE H BARRETT
NASHVILLE, TN 37215
</TABLE>
B-117
<PAGE> 121
<TABLE>
<S> <C> <C>
NFSC FEBO GR2-013854 16.050% 16.050%
217 WILLIAMSBURG
NFSC FMTC IRA ROLLOVER
MONROE, LA 71203
NFSC FEBO FC2-023680 5.295% 5.295%
3207 BRISTOL HWY APT 205
MILDRED E BROWN
JOHNSON CITY, TN 37601
NFSC FEBO FC1-088340 17.348% 17.348%
6045 SUNRISE CIRCLE
FRANCES T HARRIS
FRANKLIN, TN 37067
NFSC FEBO FC1-180432 8.143% 8.143%
4612 SKYMONT DRIVE
LEE ENSIGN JOHNSON
NASHVILLE, TN 37215
INTERNATIONAL EQUITY FUND - B SHARES
<CAPTION>
NAME RECORD % BENEFICIAL %
<S> <C> <C>
J C BRADFORD CO CUST FBO 7.334% 7.334%
330 COMMERCE ST
PAUL T NAYLOR
NASHVILLE, TN 37201
NFSC FEBO GC1-619019 11.223% 11.223%
PO BOX 9251
WILLIE B SOUTHERN JR
JACKSON, MS 39286
NFSC FEBO GC1-398810 8.413% 8.413%
67 SLATE CREEK DRIVE 12
MALCOLM M PERRY
CHEEKTOWAGA, NY 14227
TENNESSEE TAX-EXEMPT B SHARES
<CAPTION>
NAME RECORD % BENEFICIAL %
<S> <C> <C>
NFSC FEBO FC1-174319 7.206% 7.206%
910 IRONWORKERS RD
LEONARD BOBBE CRISAFULLI
CLARKSVILLE, TN 37043
NFSC FEBO FC1-152552 8.839% 8.839%
8244 SPRING RIDGE DRIVE
BRENDA K BRASHER
NASHVILLE, TN 37221
</TABLE>
B-118
<PAGE> 122
<TABLE>
<S> <C> <C>
NFSC FEBO FC1-128732 6.389% 6.389%
1920 BOWATER DR APT C-8
EMIL FAY PENLEY
KINGSPORT, TN 37660
NFSC FEBO FC1-048933 8.695% 8.695%
903 COUNTY ROAD 956
VIVIAN M JONES
IUKA, MS 38852
NFSC FEBO FC1-111287 6.072% 6.072%
1155 PARK DR
MARTHA H SIRCY
COOKEVILLE, TN 38501
NFSC FEBO FC1-267880 13.156% 13.156%
9 ABBEYWOOD CT
BOBBY L JONES
NASHVILLE, TN 37215
STRATEGIC PORTFOLIOS AGGRESSIVE GROWTH - A SHARES
<CAPTION>
NAME RECORD % BENEFICIAL %
<S> <C> <C>
NFSC FEBO FAD-059480 10.573% 10.573%
6991 DANEMAN DRIVE
WASSIM HOSSARI
MEMPHIS, TN 38133
NFSC FEBO GC1-185850 6.967% 6.967%
2205 WILSON ST
ERIC C BIEDENHARN JR
VICKSBURG, MS 39180
NFSC FEBO GC1-307351 5.524% 5.524%
PO BOX 4525
TERESA KREMSER RUSHIN
GREENVILLE, MS 38701
NFSC FEBO FR1-113727 15.592% 15.592%
1710 FIRST AMERICAN CENTER
NFSC FMTC IRA SEPP
NASHVILLE, TN 37237
NFSC FEBO FC2-064912 6.731% 6.731%
1032 LAKE STREET
VANESSA EPPS
KINGSPORT, TN 37660
</TABLE>
B-119
<PAGE> 123
<TABLE>
<S> <C> <C>
NFSC FEBO FR2-011800 7.660% 7.660%
2095 PURYEARS BEND ROAD
NFSC FMTC IRA
HARTSVILLE, TN 37074
NFSC FEBO GC1-186350 7.021% 7.021%
2205 WILSON STREET
DEBRA G BIEDENHARN
VICKSBURG, MS 39180
NFSC FEBO FR2-011967 5.950% 5.950%
102 CARR ATREET
NFSC FMTC IRA
HARTSVILLE, TN 37074
NFSC FEBO FC2-060364 14.360% 14.360%
P O BOX 3354
SOLOMAN ALADMAH
RIYADAH SAUDI ARABIA, 172
GROWTH PORTFOLIO - A SHARES
<CAPTION>
NAME RECORD % BENEFICIAL %
<S> <C> <C>
NFSC FEBO 010-795089 24.999% 24.999%
1817 ECHO POND PLACE
NFSC FMTC IRA
WESLEY CHAPEL, FL 33543
NFSC FEBO 010-804320 13.564% 13.564%
1817 ECHO POND PLACE
NFSC FMTC IRA
WESLEY CHAPEL, FL 33543
NFSC FEBO FR2-012289 12.543% 12.543%
65 ALBERT HOLDER LOOP
NFSC FMTC IRA
HARTVILLE, TN 37074
NFSC FEBO FR2-011967 11.348% 11.348%
102 CARR ATREET
NFSC FMTC IRA
HARTSVILLE, TN 37074
NFSC FEBO FR2-011800 8.241% 8.241%
2095 PURYEARS BEND ROAD
NFSC FMTC IRA
HARTSVILLE, TN 37074
</TABLE>
B-120
<PAGE> 124
<TABLE>
<S> <C> <C>
NFSC FEBO GC1-221821 15.107% 15.107%
3009 TIDEWATER CIRCLE
JOHN R FRAISER
MADISON, MS 39110
GROWTH AND INCOME PORTFOLIO -- A SHARES
<CAPTION>
NAME RECORD % BENEFICIAL %
<S> <C> <C>
FIRST AMERICAN NATIONAL BANK 5.927% 5.074%
300 UNION STREET NA052
REINVEST REINVEST
NASHVILLE, TN 37237
NFSC FEBO GR1-178713 20.512% 20.512%
719 S SPRING LAKE CIRCLE
NFSC FMTC IRA
TERRY, MS 39170
NFSC FEBO GR1-311316 43.479% 43.479%
14 BRIARWOOD CIRCLE
NFSC FMTC IRA
LONG BEACH, MS 39560
NFSC FEBO FC2-059110 19.773% 19.773%
2195 LEEVILLEPIKE
KATHY B BOYD GDN
LEBANON, TN 37090
NFSC FEBO FR2-011967 5.115% 5.115%
102 CARR STREET
NFSC FMTC IRA
HARTSVILLE, TN 37074
MODERATE GROWTH AND INCOME - A SHARES
<CAPTION>
NAME RECORD % BENEFICIAL %
<S> <C> <C>
MICHAEL W DORAN 5.120% 5.120%
102 LEXINGTON DR
LEBANON, TN 37087
NFSC FEBO GR2-912611 6.947% 6.947%
1131 MOUNTAIN BROOK CIR
NFSC FMTC IRA
SHREVEPORT, LA 71118
NFSC FEBO GC1-178896 7.605% 7.605%
PO BOX 41
TULANE BAPTIST CHURCH
YAZOO CITY, MS 39194
</TABLE>
B-121
<PAGE> 125
<TABLE>
<S> <C> <C>
NFSC FEBO GC1-630268 69.577% 69.577%
130 N THEOBALD
AGAPE STORGE CHRISTIAN CENTER
GREENVILLE, MS 38701
CURRENT INCOME PORTFOLIO - A SHARES
<CAPTION>
NAME RECORD % BENEFICIAL %
<S> <C> <C>
NFSC FEBO FR1-109789 99.380% 99.380%
4204 EDWARDS AVE
NFSC FMTC IRA
NASHVILLE, TN 37216
STRATEGIC PORTFOLIOS AGGRESSIVE GROWTH - B SHARES
<CAPTION>
NAME RECORD % BENEFICIAL %
<S> <C> <C>
NFSC FEBO 09G-400483 22.706% 22.706%
202 E 4TH AVENUE APT 1
RUSSELL M LAMB
ROME, GA 30161
NFSC FEBO 010-820660 8.684% 8.684%
1401 EASTWOOD DR
RICKY A GRAY AND
DOTHAN, AL 36301
NFSC FEBO FC2-057991 5.430% 5.430%
2692 HUNTLEY DRIVE
KENAD SG MEDICAL INC
MEMPHIS, TN 38132
NFSC FEBO FR2-008931 7.769% 7.769%
1105 NEWCASTLE DRIVE
NFSC FMTC IRA
OLD HICKORY, TN 37138
NFSC FEBO FR2-012475 10.412% 10.412%
RR3 BOX 635
NFSC FMTC IRA
MAX MEADOWS, VA 24360
GROWTH PORTFOLIO - B SHARES
<CAPTION>
NAME RECORD % BENEFICIAL %
<S> <C> <C>
NFSC FEBO 010-696102 13.405% 13.405%
155 SUNSET LANE
NFSC FMTC IRA
TRION, GA 30753
</TABLE>
B-122
<PAGE> 126
<TABLE>
<S> <C> <C>
NFSC FEBO 010-834149 8.491% 8.491%
933 DILARD ROAD
MELANIE C MCCLENNY
PANSEY, AL 36370
NFSC FEBO FC2-051845 5.650% 5.650%
440 NARON ROAD
FRANK L JAYAKODY
SHLEBYVILLE, TN 37160
NFSC FEBO GC1-562793 18.497% 18.497%
1329 ROBERT DRIVE
VELMA S HAMILTON
JACKSON, MS 39211
NFSC FEBO 010-833037 5.668% 5.668%
1220 JAMESTOWN STREET
NFSC FMTC IRA ROLLOVER
PRATTVILLE, AL 36067
GROWTH AND INCOME PORTFOLIO - B SHARES
<CAPTION>
NAME RECORD % BENEFICIAL %
<S> <C> <C>
NFSC FEBO 010-695980 8.338% 8.338%
20 PINE GROVE CIRCLE
NFSC FMTC IRA ROLLOVER
ADAIRSVILLE, GA 30103
NFSC FEBO FR2-012726 5.916% 5.916%
1324 GEN GEO PATTON
NFSC FMTC IRA
NASHVILLE, TN 37221
NFSC FEBO FC1-230626 8.577% 8.577%
602 DAVIS DR
EMMETT R RAY SR MARY F RAY TTEE
BRENTWOOD, TN 37027
NFSC FEBO FR2-010197 6.509% 6.509%
542 LOVEDALE DRIVE
NFSC FMTC IRA
KINGSPORT, TN 37660
MODERATE GROWTH AND INCOME - B SHARES
<CAPTION>
NAME RECORD % BENEFICIAL %
<S> <C> <C>
NFSC FEBO 010-556203 7.555% 7.555%
1920 GUN BARREL ROAD 1712
NFSC FMTC IRA
CHATTANOOGA, TN 37421
</TABLE>
B-123
<PAGE> 127
<TABLE>
<CAPTION>
NAME RECORD % BENEFICIAL %
<S> <C> <C>
NFSC FEBO FR2-011371 11.863% 11.863%
112 HILLCREST
NFSC FMTC IRA
CLINTON, TN 37716
NFSC FEBO GC1-362069 5.285% 5.285%
510 MAPLE STREET
W C GORDEN
JACKSON, MS 39203
NFSC FEBO FR2-042412 6.278% 6.278%
2306 DUNDEE LANE
NFSC FMTC ROTH IRA
NASHVILLE, TN 37214
NFSC FEBO FC2-052140 11.954% 11.954%
COLLEGE HILL
MARSHALL E RASNAKE
LA FOLLETTE, TN 37766
NFSC FEBO GC1-173878 8.945% 8.945%
2300 SEVEN SPRINGS RD APTB312
NOELIE L COOK
RAYMOND, MS 39154
NFSC FEBO GR1-372153 9.431% 9.431%
2736 NEWPORT STREET
NFSC FMTC IRA
JACKSON, MS 39213
CURRENT INCOME PORTFOLIO - B SHARES
<CAPTION>
NAME RECORD % BENEFICIAL %
<S> <C> <C>
BISYS FUND SERVICES 50.785% 50.785%
3435 STELZER RD
COLUMBUS, OH 43219
BISYS FUND SERVICES LP 49.215% 49.215%
3435 STELZER RD
COLUMBUS, OH 43219
STRAT PORTFOLIOS AGGRESSIVE GROWTH - TRUST SHARES
<CAPTION>
NAME RECORD % BENEFICIAL %
<S> <C> <C>
BISYS BD SERVICES INC 44.885% 44.885%
16 COACH CIRCLE RD
NFSC FMTC IRA
CONCORD, CA 94524
</TABLE>
B-124
<PAGE> 128
<TABLE>
<S> <C> <C>
KENNEBURT & COMPANY 54.516% 46.666%
PO BOX 11426 CSTDY UNIT
FEE'D REINVESTMENT
BIRMINGHAM, AL 35202
GROWTH PORTFOLIO - TRUST SHARES
<CAPTION>
NAME RECORD % BENEFICIAL %
<S> <C> <C>
BISYS BD SERVICES INC 13.433% 13.433%
16 COACH CIRCLE RD
NFSC FMTC IRA
CONCORD, CA 94524
KENNEBURT & COMPANY 12.580% 10.768%
PO BOX 11426 CSTDY UNIT
BIRMINGHAM, AL 35202
KENNEBURT & COMPANY 32.821% 28.095%
PO BOX 11426 CSTDY UNIT
FEE'D REINVESTMENT
BIRMINGHAM, AL 35202
KENNEBURT & COMPANY 39.096% 33.466%
PO BOX 11426 CSTDY UNIT
BIRMINGHAM, AL 35202
GROWTH AND INCOME - TRUST SHARES
<CAPTION>
NAME RECORD % BENEFICIAL %
<S> <C> <C>
BISYS BD SERVICES INC 18.368% 18.368%
16 COACH CIRCLE RD
NFSC FMTC IRA
CONCORD, CA 94524
KENNEBURT & COMPANY 78.841% 67.488%
PO BOX 11426 CSTDY UNIT
FEE'D REINVESTMENT
BIRMINGHAM, AL 35202
MODERATE GROWTH AND INCOME - TRUST SHARES
<CAPTION>
NAME RECORD % BENEFICIAL %
<S> <C> <C>
BISYS BD SERVICES INC 18.697% 18.697%
16 COACH CIRCLE RD
NFSC FMTC IRA
CONCORD, CA 94524
</TABLE>
B-125
<PAGE> 129
<TABLE>
<S> <C> <C>
KENNEBURT & COMPANY 77.529% 66.365%
PO BOX 11426 CSTDY UNIT
FEE'D REINVESTMENT
BIRMINGHAM, AL 35202
CURRENT INCOME PORTFOLIO - TRUST SHARES
<CAPTION>
NAME Record % Beneficial %
<S> <C> <C>
BISYS BD SERVICES INC 65.002% 65.002%
16 COACH CIRCLE RD
NFSC FMTC IRA
CONCORD, CA 94524
KENNEBURT & COMPANY 34.953% 29.920%
PO BOX 11426 CSTDY UNIT
FEE'D REINVESTMENT
BIRMINGHAM, AL 35202
</TABLE>
B-126
<PAGE> 130
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.
B-127
<PAGE> 131
FINANCIAL STATEMENTS
The financial statements of the AmSouth Funds are incorporated by
reference into this Statement of Additional Information. The financial
statements for the fiscal year ended July 31, 1999 have been audited by
PricewaterhouseCoopers LLP, the former independent public accountants to the
AmSouth Funds, as indicated in their reports with respect thereto, and are
incorporated herein by reference in reliance upon the authority of said firm as
experts in accounting and auditing in giving said reports. The financial
statements for the former ISG Funds for the fiscal year ended December 31, 1999
have been audited by KPMG LLP, the former independent public accountants to the
ISG Funds, as indicated in their reports with respect thereto, and are
incorporated herein by reference in reliance upon the authority of said firm as
experts in accounting and auditing in giving said reports. A copy of each such
reports may be obtained without charge by contacting the Distributor, BISYS Fund
Services at 3435 Stelzer Road, Columbus, Ohio 43219 or by telephone toll-free at
800-451-8382.
B-128
<PAGE> 132
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
B-129
<PAGE> 133
(+) 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.
B-130
<PAGE> 134
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.
B-131
<PAGE> 135
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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