THE INFINITY MUTUAL FUNDS, INC. ISG FUNDS
CAPITAL GROWTH FUND
EQUITY INCOME FUND
INCOME FUND
LIMITED TERM U.S. GOVERNMENT FUND
LIMITED TERM INCOME FUND
LIMITED TERM TENNESSEE TAX-EXEMPT FUND
TENNESSEE TAX-EXEMPT FUND
PRIME MONEY MARKET FUND
TREASURY MONEY MARKET FUND
CLASS A SHARES, CLASS B SHARES AND INSTITUTIONAL SHARES
STATEMENT OF ADDITIONAL INFORMATION
APRIL 24, 1998
As Revised, January 22, 1999
This Statement of Additional Information, which is not a prospectus,
supplements and should be read in conjunction with the current Prospectus for
the ISG Funds listed above (each, a "Fund" and collectively, the "Funds") of The
Infinity Mutual Funds, Inc. (the "Company"), dated November 9, 1998, as it may
be revised from time to time. To obtain a copy of the Prospectus, please write
to the Company at 3435 Stelzer Road, Columbus, Ohio 43219-3035. This Statement
of Additional Information relates only to the Funds and not to any of the
Company's other portfolios.
First American National Bank (the "Adviser") serves as each Fund's
investment adviser.
BISYS Fund Services Limited Partnership ("BISYS") serves as each Fund's
administrator and distributor.
The Treasury Money Market Fund does not offer Class B Shares.
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TABLE OF CONTENTS
PAGE
Investment Objectives and Management Policies............................ B-3
Management of the Company................................................ B-27
Management Arrangements.................................................. B-29
Purchase and Redemption of Shares........................................ B-35
Determination of Net Asset Value......................................... B-40
Performance Information.................................................. B-42
Dividends, Distributions and Taxes....................................... B-47
Portfolio Transactions................................................... B-50
Information About the Funds.............................................. B-52
Custodian, Transfer and Dividend Disbursing
Agent, Counsel and Independent Auditors................................ B-56
Financial Statements..................................................... B-56
Appendix................................................................. B-57
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INVESTMENT OBJECTIVES AND MANAGEMENT POLICIES
THE FOLLOWING INFORMATION SUPPLEMENTS AND SHOULD BE READ IN
CONJUNCTION WITH THE SECTIONS IN THE PROSPECTUS ENTITLED "DESCRIPTION OF THE
FUNDS" AND "APPENDIX."
PORTFOLIO SECURITIES
BANK OBLIGATIONS. (All Funds, except the Limited Term U.S. Government
Fund and Treasury Money Market Fund) Domestic commercial banks organized under
Federal law are supervised and examined by the Comptroller of the Currency and
are required to be members of the Federal Reserve System and to have their
deposits insured by the Federal Deposit Insurance Corporation (the "FDIC").
Domestic banks organized under state law are supervised and examined by state
banking authorities but are members of the Federal Reserve System only if they
elect to join. In addition, state banks whose certificates of deposit ("CDs")
may be purchased by the Fund are insured by the Bank Insurance Fund administered
by the FDIC (although such insurance may not be of material benefit to the Fund,
depending upon the principal amount of the CDs of each bank held by the Fund)
and are subject to Federal examination and to a substantial body of Federal law
and regulation. As a result of Federal and state laws and regulations, domestic
branches of domestic banks, among other things, are generally required to
maintain specified levels of reserves, and are subject to other supervision and
regulation designed to promote financial soundness.
Obligations of foreign branches of domestic banks, foreign
subsidiaries of domestic banks and domestic branches of foreign banks, such as
CDs and time deposits ("TDs"), may be general obligations of the parent banks in
addition to the issuing branch, or may be limited by the terms of a specific
obligation or governmental regulation. Such obligations are subject to different
risks than are those of domestic banks. These risks include foreign economic and
political developments, foreign governmental restrictions that may adversely
affect payment of principal and interest on the obligations, foreign exchange
controls and foreign withholding and other taxes on interest income. Foreign
branches and subsidiaries are not necessarily subject to the same or similar
regulatory requirements that apply to domestic banks, such as mandatory reserve
requirements, loan limitations, and accounting, auditing and financial
recordkeeping requirements. In addition, less information may be publicly
available about a foreign branch of a domestic bank or about a foreign bank than
about a domestic bank. If a domestic bank with deposits insured by the FDIC
becomes insolvent, unsecured deposits and other general obligations of such
bank's foreign branches will be subordinated to the receivership expenses of the
FDIC and such bank's domestic deposits and would be subject to the loss of
principal to a greater extent than such bank's domestic branch deposits. The
Prime Money Market Fund's investment in obligations of foreign subsidiaries of
domestic banks are subject, to the extent required by the Investment Company Act
of 1940, as amended (the "1940 Act"), to the limitations on investing in the
securities of other investment companies.
Obligations of United States branches of foreign banks may be general
obligations of the parent bank in addition to the issuing branch, or may be
limited by the terms of a specific obligation and by Federal and state
regulation as well as governmental action in the country in which the foreign
bank has its head office. In addition, Federal branches licensed by the
Comptroller of the Currency and branches licensed by certain states ("State
Branches") may be required to: (1) pledge to the regulator, by depositing assets
with a designated bank within the state, a certain percentage of their assets as
fixed from time to time by the appropriate regulatory authority; and (2)
maintain assets within the state in an amount equal to a specified percentage of
the aggregate amount of liabilities of the foreign bank payable at or through
all of its agencies or branches within the state. The deposits of Federal and
State Branches generally must be insured by the FDIC if such branches take
deposits of less than $100,000.
In view of the foregoing factors associated with the purchase of CDs
and TDs issued by foreign branches of domestic banks, by foreign subsidiaries of
domestic banks, or by domestic branches of foreign banks, the Adviser carefully
evaluates such investments on a case-by-case basis.
Each of these Funds may purchase CDs issued by banks, savings and loan
associations and similar thrift institutions with less than $1 billion in
assets, which are members of the FDIC, provided the Fund purchases any such CD
in a principal amount of not more than $100,000, which amount would be fully
insured by the Bank Insurance Fund or the Savings Association Insurance Fund
administered by the FDIC. Interest payments on such a CD are not insured by the
FDIC. No Fund will own more than one such CD per such issuer.
Each of these Funds may invest in short-term U.S. dollar denominated
corporate obligations that are originated, negotiated and structured by a
syndicate of lenders ("Co- Lenders") consisting of commercial banks, thrift
institutions, insurance companies, finance companies or other financial
institutions one or more of which administers the security on behalf of the
syndicate (the "Agent Bank"). Co-Lenders may sell such securities to third
parties called "Participants." The Fund may invest in such securities either by
participating as a Co- Lender at origination or by acquiring an interest in the
security from a Co-Lender or a Participant (collectively, "participation
interests"). Co-Lenders and Participants interposed between the Fund and the
corporate borrower (the "Borrower"), together with Agent Banks, are referred
herein as "Intermediate Participants." The Fund also may purchase a
participation interest in a portion of the rights of an Intermediate
Participant, which would not establish any direct relationship between the Fund
and the Borrower. In such cases, the Fund would be required to rely on the
Intermediate Participant that sold the participation interest not only for the
enforcement of the Fund's rights against the Borrower but also for the receipt
and processing of payments due to the Fund under the security. Because it may be
necessary to assert through an Intermediate Participant such rights as may exist
against the Borrower, in the event the Borrower fails to pay principal and
interest when due, the Fund may be subject to delays, expenses and risks that
are greater than those that would be involved if the Fund could enforce its
rights directly against the Borrower. Moreover, under the terms of a
participation interest, the Fund may be regarded as a creditor of the
Intermediate Participant (rather than of the Borrower), so that the Fund also
may be subject to the risk that the Intermediate Participant may become
insolvent. Similar risks may arise with respect to the Agent Bank if, for
example, assets held by the Agent Bank for the benefit of the Fund were
determined by the appropriate regulatory authority or court to be subject to the
claims of the Agent Bank's creditors. In such cases, the Fund might incur
certain costs and delays in realizing payment in connection with the
participation interest or suffer a loss of principal and/or interest. Further,
in the event of the bankruptcy or insolvency of the Borrower, the obligation of
the Borrower to repay the loan may be subject to certain defenses that can be
asserted by such Borrower as a result of improper conduct by the Agent Bank or
Intermediate Participant.
Under normal circumstances, and as a matter of fundamental policy, the
Prime Money Market Fund will "concentrate" at least 25% of its assets in debt
instruments issued by domestic and foreign companies engaged in the banking
industry, including bank holding companies. Such investments may include CDs,
TDs, bankers' acceptances and obligations issued by bank holding companies, as
well as repurchase agreements entered into with banks (as distinct from non-bank
dealers) in accordance with the policies set forth in "Repurchase Agreements"
below. During periods when the Adviser determines that the Prime Money Market
Fund should be in a temporary defensive position, the Fund may invest less than
25% of its total assets in the banking industry; during such times the Prime
Money Market Fund's assets will be invested in accordance with its other
investment policies. The Adviser may determine that the adoption of a temporary
defensive position with respect to issuers in the banking industry is
appropriate on the basis of such factors as political, economic, market or
regulatory developments adversely affecting that industry as compared to the
industries of other issuers of securities available for investment by the Prime
Money Market Fund.
REPURCHASE AGREEMENTS. (All Funds) Each Fund may enter into repurchase
agreements. The Fund's custodian or sub- custodian employed in connection with
third-party repurchase transactions will have custody of, and will hold in a
segregated account, securities acquired by a Fund under a repurchase agreement.
In connection with its third-party repurchase transactions, the Fund will employ
only eligible sub-custodians that meet the requirements set forth in Section
17(f) of the 1940 Act. Repurchase agreements are considered by the staff of the
Securities and Exchange Commission to be loans by the Fund entering into them.
In an attempt to reduce the risk of incurring a loss on a repurchase agreement,
each Fund will enter into repurchase agreements only with registered or
unregistered securities dealers or banks with total assets in excess of one
billion dollars or primary government securities dealers reporting to the
Federal Reserve Bank of New York, with respect to securities of the type in
which such Fund may invest or government securities regardless of their
remaining maturities, and will require that additional securities be deposited
with it if the value of the securities purchased should decrease below resale
price. The Adviser will monitor on an ongoing basis the value of the collateral
to assure that it always equals or exceeds the repurchase price. Each Fund will
consider on an ongoing basis the creditworthiness of the institutions with which
it enters into repurchase agreements.
ILLIQUID SECURITIES. (All Funds) Each Fund may invest up to 10% of the
value of its net assets in illiquid securities. The term "illiquid securities"
for this purpose means securities that cannot be disposed of within seven days
in the ordinary course of business at approximately the amount at which the Fund
has valued the securities and includes, among other things, restricted
securities other than those the Adviser has determined to be liquid pursuant to
guidelines established by the Company's Board and repurchase agreements maturing
in more than seven days. Commercial paper issues include securities issued by
major corporations without registration under the Securities Act of 1933, as
amended ("1933 Act"), in reliance on the exemption from such registration
afforded by Section 3(a)(3) thereof and commercial paper and medium term notes
issued in reliance on the so-called "private placement" exemption from
registration which is afforded by Section 4(2) of the 1933 Act ("Section 4(2)
paper"). Section 4(2) paper is restricted as to disposition under the Federal
securities laws in that any resale must similarly be made in an exempt
transaction. Section 4(2) paper ordinarily is resold to other institutional
investors through or with the assistance of investment dealers who make a market
in Section 4(2) paper, thus providing liquidity.
In recent years a large institutional market has developed for certain
securities that are not registered under the 1933 Act, including private
placements, repurchase agreements, commercial paper, foreign securities and
corporate bonds and notes. These instruments are often restricted securities
because the securities are sold in transactions not requiring registration.
Institutional investors generally will not seek to sell these instruments to the
general public, but instead will often depend either on an efficient
institutional market in which such unregistered securities can be readily resold
or on an issuer's ability to honor a demand for repayment. Therefore, the fact
that there are contractual or legal restrictions on resale to the general public
or certain institutions is not dispositive of the liquidity of such investments.
To facilitate the increased size and liquidity of the institutional
markets for unregistered securities, the Securities and Exchange Commission
adopted Rule 144A under the 1933 Act. Rule 144A establishes a "safe harbor" from
the registration requirements of the 1933 Act for resales of certain securities
to qualified institutional buyers. Section 4(2) paper that is issued by a
company that files reports under the Securities Exchange Act of 1934, as
amended, generally is eligible to be sold in reliance on the safe harbor of Rule
144A. Pursuant to Rule 144A, the institutional restricted securities markets may
provide both readily ascertainable values for restricted securities and the
ability to liquidate an investment in order to satisfy share redemption orders
on a timely basis. Where a substantial market of qualified institutional buyers
has developed for certain restricted securities purchased by the Fund pursuant
to Rule 144A under the Securities Act of 1933, as amended, the Fund intends to
treat such securities as liquid securities in accordance with procedures
approved by the Company's Board. Because it is not possible to predict with
assurance how the market for specific restricted securities sold pursuant to
Rule 144A will develop, the Company's Board has directed the Adviser to monitor
carefully each Fund's investments in such securities with particular regard to
trading activity, availability of reliable price information and other relevant
information. To the extent that, for a period of time, qualified institutional
buyers cease purchasing restricted securities pursuant to Rule 144A, a Fund's
investing in such securities may have the effect of increasing the level of
illiquidity in its investment portfolio during such period.
FORWARD COMMITMENTS. (All Funds) Securities purchased on a forward
commitment or when-issued basis are subject to changes in value (generally
changing in the same way, i.e., appreciating when interest rates decline and
depreciating when interest rates rise) based upon the public's perception of the
creditworthiness of the issuer and changes, real or anticipated, in the level of
interest rates. Securities purchased on a forward commitment or when-issued
basis may expose the Fund to risks because they may experience such fluctuations
prior to their actual delivery. Purchasing securities on a when-issued basis can
involve the additional risk that the yield available in the market when the
delivery takes place actually may be higher than that obtained in the
transaction itself. Purchasing securities on a forward commitment or when-issued
basis when the Fund is fully or almost fully invested may result in greater
potential fluctuation in the value of the Fund's net assets and its net asset
value per share.
MORTGAGE-RELATED SECURITIES. (Income Fund, Capital Growth Fund, Equity
Income Fund and Limited Term Income Fund) Mortgage-related securities are a form
of Derivative collateralized by pools of commercial or residential mortgages.
Pools of mortgage loans are assembled as securities for sale to investors by
various governmental, government-related and private organizations. These
securities may include complex instruments such as collateralized mortgage
obligations and stripped mortgage-backed securities, mortgage pass-through
securities, interests in REMICs or other kinds of mortgage-backed securities,
including those with fixed, floating and variable interest rates, those with
interest rates that change based on multiples of changes in a specified index of
interest rates and those with interest rates that change inversely to changes in
interest rates.
GOVERNMENT AGENCY SECURITIES--Mortgage-related securities issued by the
Government National Mortgage Association ("GNMA") include GNMA Mortgage
Pass-Through Certificates (also known as "Ginnie Maes") which are guaranteed as
to the timely payment of principal and interest by GNMA and such guarantee is
backed by the full faith and credit of the United States. GNMA is a wholly-owned
U.S. Government corporation within the department of Housing and Urban
Development. GNMA certificates also are supported by the authority of GNMA to
borrow funds from the U.S. Treasury to make payments under its guarantee.
GOVERNMENT RELATED SECURITIES--Mortgage-related securities issued by the Federal
National Mortgage Association ("FNMA") include FNMA Guaranteed Mortgage
Pass-Through Certificates (also known as "Fannie Maes") which are solely the
obligations of the FNMA and are not backed by or entitled to the full faith and
credit of the Untied States. The FNMA is a government-sponsored organization
owned entirely by private stockholders. Fannie Maes are guaranteed as to timely
payment of principal and interest by FNMA.
Mortgage-related securities issued by the Federal Home Loan Mortgage
Corporation ("FHLMC") include FHLMC Mortgage Participation Certificates (also
known as "Freddie Macs" or "PCs"). The FHLMC is a corporate instrumentality of
the United States created pursuant to an Act of Congress, which is owned
entirely by Federal Home Loan Banks. Freddie Macs are not guaranteed by the
United States or by any Federal Home Loan Bank and do not constitute a debt or
obligation of the United States or of any Federal Home Loan Bank. Freddie Macs
entitle the holder to timely payment of interest, which is guaranteed by the
FHLMC. The FHLMC guarantees either ultimate collection or timely payment of all
principal payments on the underlying mortgage loans. When the FHLMC does not
guarantee timely payment of principal, FHLMC may remit the amount due on account
of its guarantee of ultimate payment of principal at any time after default on
an underlying mortgage, but in no event later than one year after it becomes
payable.
PRIVATE ENTITY SECURITIES--These mortgage-related securities are issued by
commercial banks, savings and loan institutions, mortgage bankers, private
mortgage insurance companies and other non-governmental issuers. Timely payment
of principal and interest on mortgage-related securities backed by pools created
by non-governmental issuers often is supported partially by various forms of
insurance or guarantees, including individual loan, title, pool and hazard
insurance. The insurance and guarantees are issued by government entities,
private insurers and the mortgage poolers. There can be no assurance that the
private insurers or mortgage poolers can meet their obligations under the
policies, so that if the issuers default on their obligations the holders of the
security could sustain a loss. No insurance or guarantee covers the Fund or the
price of the Fund's shares. Mortgage-related securities issued by
non-governmental issuers generally offer a higher rate of interest than
government-agency and government-related securities because there are no direct
or indirect government guarantees of payment.
COMMERCIAL MORTGAGE-RELATED SECURITIES--Commercial mortgage-related securities
generally are multi-class debt or pass-through certificates secured by mortgage
loans on commercial properties. These mortgage-related securities generally are
structured to provide protection to the senior classes investors against
potential losses on the underlying mortgage loans. This protection generally is
provided by having the holders of subordinated classes of securities
("Subordinated Securities") take the first loss if there are defaults on the
underlying commercial mortgage loans. Other protection, which may benefit all of
the classes or particular classes, may include issuer guarantees, reserve funds,
additional Subordinated Securities, cross-collateralization and
over-collateralization.
Each of these Funds may invest in Subordinated Securities issued or
sponsored by commercial banks, savings and loan institutions, mortgage bankers,
private mortgage insurance companies and other non-governmental issuers.
Subordinated Securities have no governmental guarantee, and are subordinated in
some manner as to the payment of principal and/or interest to the holders of
more senior mortgage-related securities arising out of the same pool of
mortgages. The holders of Subordinated Securities typically are compensated with
a higher stated yield than are the holders of more senior mortgage-related
securities. On the other hand, Subordinated Securities typically subject the
holder to greater risk than senior mortgage-related securities and tend to be
rated in a lower rating category, and frequently a substantially lower rating
category, than the senior mortgage- related securities issued in respect of the
same pool of mortgage. Subordinated Securities generally are likely to be more
sensitive to changes in prepayment and interest rates and the market for such
securities may be less liquid than is the case for traditional fixed-income
securities and senior mortgage- related securities.
The market for commercial mortgage-related securities developed more
recently and in terms of total outstanding principal amount of issues is
relatively small compared to the market for residential single-family
mortgage-related securities. In addition, commercial lending generally is viewed
as exposing the lender to a greater risk of loss than one- to four-family
residential lending. Commercial lending, for example, typically involves larger
loans to single borrowers or groups of related borrowers than residential one-
to four-family mortgage loans. In addition, the repayment of loans secured by
income producing properties typically is dependent upon the successful operation
of the related real estate project and the cash flow generated therefrom.
Consequently, adverse changes in economic conditions and circumstances are more
likely to have an adverse impact on mortgage-related securities secured by loans
on commercial properties than on those secured by loans on residential
properties.
COLLATERALIZED MORTGAGE OBLIGATIONS ("CMOS")--A CMO is a multiclass bond backed
by a pool of mortgage pass-through certificates or mortgage loans. CMOs may be
collateralized by (a) Ginnie Mae, Fannie Mae, or Freddie Mac pass-through
certificates, (b) unsecuritized mortgage loans insured by the Federal Housing
Administration or guaranteed by the Department of Veterans' Affairs, (c)
unsecuritized conventional mortgages, (d) other mortgage-related securities, or
(e) any combination thereof. Each class of CMOs, often referred to as a
"tranche," is issued at a specific coupon rate and has a stated maturity or
final distribution date. Principal prepayments on collateral underlying a CMO
may cause it to be retired substantially earlier than the stated maturities or
final distribution dates. The principal and interest on the underlying mortgages
may be allocated among the several classes of a series of a CMO in many ways.
One or more tranches of a CMO may have coupon rates which reset periodically at
a specified increment over an index, such as the London Interbank Offered Rate
("LIBOR") (or sometimes more than one index). These floating rate CMOs typically
are issued with lifetime caps on the coupon rate thereon. Each of these Funds
also may invest in inverse floating rate CMOs. Inverse floating rate CMOs
constitute a tranche of a CMO with a coupon rate that moves in the reverse
direction to an applicable index such a LIBOR. Accordingly, the coupon rate
thereon will increase as interest rates decrease. Inverse floating rate CMOs are
typically more volatile than fixed or floating rate tranches of CMOs.
Many inverse floating rate CMOs have coupons that move inversely to a
multiple of the applicable indexes. The effect of the coupon varying inversely
to a multiple of an applicable index creates a leverage factor. Inverse floaters
based on multiples of a stated index are designed to be highly sensitive to
changes in interest rates and can subject the holders thereof to extreme
reductions of yield and loss of principal. The markets for inverse floating rate
CMOs with highly leveraged characteristics at times may be very thin. The Fund's
ability to dispose of its positions in such securities will depend on the degree
of liquidity in the markets for such securities. It is impossible to predict the
amount of trading interest that may exist in such securities, and therefore the
future degree of liquidity.
STRIPPED MORTGAGE-BACKED SECURITIES--Each of these Funds also may invest in
stripped mortgage-backed securities. Stripped mortgage-backed securities are
created by segregating the cash flows from underlying mortgage loans or mortgage
securities to create two or more new securities, each with a specified
percentage of the underlying security's principal or interest payments. Mortgage
securities may be partially stripped so that each investor class receives some
interest and some principal. When securities are completely stripped, however,
all of the interest is distributed to holders of one type of security, known as
an interest-only security, or IO, and all of the principal is distributed to
holders of another type of security known as a principal-only security, or PO.
Strips can be created in a pass- through structure or as tranches of a CMO. The
yields to maturity on IOs and POs are very sensitive to the rate of principal
payments (including prepayments) on the related underlying mortgage assets. If
the underlying mortgage assets experience greater than anticipated prepayments
of principal, the Fund may not fully recoup its initial investment in IOs.
Conversely, if the underlying mortgage assets experience less than anticipated
prepayments of principal, the yield on POs could be materially and adversely
affected.
REAL ESTATE INVESTMENT TRUSTS--A REIT is a corporation, or a business trust that
would otherwise be taxed as a corporation, which meets the definitional
requirements of the Internal Revenue Code of 1986, as amended (the "Code"). The
Code permits a qualifying REIT to deduct dividends paid, thereby effectively
eliminating corporate level Federal income tax and making the REIT a
pass-through vehicle for Federal income tax purposes. To meet the definitional
requirements of the Code, a REIT must, among other things, invest substantially
all of its assets in interests in real estate (including mortgages and other
REITs) or cash and government securities, derive most of its income from rents
from real property or interest on loans secured by mortgages on real property,
and distribute to shareholders annually a substantial portion of its otherwise
taxable income.
REITs are characterized as equity REITs, mortgage REITs and hybrid
REITs. Equity REITs, which may include operating or finance companies, own real
estate directly and the value of, and income earned by, the REITs depends upon
the income of the underlying properties and the rental income they earn. Equity
REITs also can realize capital gains (or losses) by selling properties that have
appreciated (or depreciated) in value. Mortgage REITs can make construction,
development or long-term mortgage loans and are sensitive to the credit quality
of the borrower. Mortgage REITs derive their income from interest payments on
such loans. Hybrid REITs combine the characteristics of both equity and mortgage
REITs, generally by holding both ownership interests and mortgage interests in
real estate. The value of securities issued by REITs are affected by tax and
regulatory requirements and by perceptions of management skill. They also are
subject to heavy cash flow dependency, defaults by borrowers or tenants,
self-liquidation and the possibility of failing to qualify for tax-free status
under the Code or to maintain exemption from the 1940 Act.
ADJUSTABLE-RATE MORTGAGE LOANS ("ARMS")--ARMs eligible for inclusion in a
mortgage pool will generally provide for a fixed initial mortgage interest rate
for a specified period of time, generally for either the first three, six,
twelve, thirteen, thirty-six, or sixty scheduled monthly payments. Thereafter,
the interest rates are subject to periodic adjustment based on changes in an
index. ARMs typically have minimum and maximum rates beyond which the mortgage
interest rate may not vary over the lifetime of the loans. Certain ARMs provide
for additional limitations on the maximum amount by which the mortgage interest
rate may adjust for any single adjustment period. Negatively amortizing ARMs may
provide limitations on changes in the required monthly payment. Limitations on
monthly payments can result in monthly payments that are greater or less than
the amount necessary to amortize a negatively amortizing ARM by its maturity at
the interest rate in effect during any particular month.
OTHER MORTGAGE-RELATED SECURITIES--Other mortgage-related securities include
securities other than those described above that directly or indirectly
represent a participation in, or are secured by and payable from, mortgage loans
on real property, including CMO residuals. Other mortgage-related securities may
be equity or debt securities issued by agencies or instrumentalities of the U.S.
Government or by private originators of, or investors in, mortgage loans,
including savings and loan associations, homebuilders, mortgage banks,
commercial banks, investment banks, partnerships, trusts and special purpose
entities of the foregoing.
STANDARD & POOR'S DEPOSITARY RECEIPTS. (Capital Growth Fund and Equity
Income Fund) These securities, commonly referred to as "spiders," represent an
interest in a fixed portfolio of common stocks designed to track the price and
dividend yield performance of the Standard & Poor's 500 Index or the Standard &
Poor's MidCap 400 Index, as the case may be.
MUNICIPAL OBLIGATIONS. (Income Fund, Limited Term Income Fund, Limited
Term Tennessee Tax-Exempt Fund, Tennessee Tax-Exempt Fund and, to a limited
extent, Prime Money Market Fund) The term "Municipal Obligations" generally
includes debt obligations issued to obtain funds for various public purposes,
including the construction of a wide range of public facilities such as
airports, bridges, highways, housing, hospitals, mass transportation, schools,
streets and water and sewer works. Other public purposes for which Municipal
Obligations may be issued include refunding outstanding obligations, obtaining
funds for general operating expenses and lending such funds to other public
institutions and facilities. In addition, certain types of industrial
development bonds are issued by or on behalf of public authorities to obtain
funds to provide for the construction, equipment, repair or improvement of
privately operated housing facilities, sports facilities, convention or trade
show facilities, airport, mass transit, industrial, port or parking facilities,
air or water pollution control facilities and certain local facilities for water
supply, gas, electricity, or sewage or solid waste disposal; the interest paid
on such obligations may be exempt from Federal income tax, although current tax
laws place substantial limitations on the size of such issues. There are, of
course, variations in the security of Municipal Obligations, both within a
particular classification and between classifications.
Floating and variable rate demand notes and bonds are tax exempt
obligations ordinarily having stated maturities in excess of one year, but which
permit the holder to demand payment of principal at any time, or at specified
intervals. The issuer of such obligations ordinarily has a corresponding right,
after a given period, to prepay in its discretion the outstanding principal
amount of the obligations plus accrued interest upon a specified number of days'
notice to the holders thereof. The interest rate on a floating rate demand
obligation is based on a known lending rate, such as a bank's prime rate, and is
adjusted automatically each time such rate is adjusted. The interest rate on a
variable rate demand obligation is adjusted automatically at specified
intervals.
The yields on Municipal Obligations are dependent on a variety of
factors, including general economic and monetary conditions, money market
factors, conditions in the Municipal Obligations market, size of a particular
offering, maturity of the obligation and rating of the issue. The imposition of
the advisory and administration fees, as well as other Fund operating expenses,
will have the effect of reducing the yield to investors.
Each of the Tennessee Tax-Exempt Fund and Limited Term Tennessee
Tax-Exempt Fund may invest up to 5% of the value of its total assets in
municipal lease obligations or installment purchase contract obligations
(collectively, "lease obligations"). Lease obligations have special risks not
ordinarily associated with Municipal Obligations. Although lease obligations do
not constitute general obligations of the municipality for which the
municipality's taxing power is pledged, a lease obligation ordinarily is backed
by the municipality's covenant to budget for, appropriate and make the payments
due under the lease obligation. Certain lease obligations in which these Funds
may invest may contain "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 Company's Board of
Directors has established guidelines for the Adviser to determine the liquidity
and appropriate valuation of lease obligations based on factors which include:
(1) the frequency of trades and quotes for the lease obligation or similar
securities; (2) the number of dealers willing to purchase or sell the lease
obligation or similar securities and the number of other potential buyers; (3)
the willingness of dealers to undertake to make a market in the security or
similar securities; and (4) the nature of the marketplace trades, including the
time needed to dispose of the security, the method of soliciting offers, and the
mechanics of transfer.
Each of the Tennessee Tax-Exempt Fund and Limited Term Tennessee
Tax-Exempt Fund will purchase tender option bonds only when it is satisfied that
the custodial and tender option arrangements, including the fee payment
arrangements, will not adversely affect the tax exempt status of the underlying
Municipal Obligations and that payment of any tender fees will not have the
effect of creating taxable income for the Fund. Based on the tender option bond
agreement, each of these Funds expects to be able to value the tender option
bond at par; however, the value of the instrument will be monitored to assure
that is valued at fair value.
RATINGS OF MUNICIPAL OBLIGATIONS. Subsequent to its purchase by a
Fund, an issue of rated Municipal Obligations may cease to be rated or its
rating may be reduced below the minimum required for purchase by the Fund.
Neither event will require the sale of such Municipal Obligations by the Fund,
but the Adviser will consider such event in determining whether the Fund should
continue to hold the Municipal Obligations. To the extent that the ratings given
by Moody's Investors Service, Inc. ("Moody's"), Standard & Poor's Ratings Group
("S&P") or Fitch IBCA, Inc. ("Fitch") for Municipal Obligations may change as a
result of changes in such organizations or their rating systems, the Fund will
attempt to use comparable ratings as standards for its investments in accordance
with the investment policies contained in the Fund's Prospectus and this
Statement of Additional Information. The ratings of Moody's, S&P and Fitch
represent their opinions as to the quality of the Municipal Obligations which
they undertake to rate. It should be emphasized, however, that ratings are
relative and subjective and are not absolute standards of quality. Although
these ratings may be an initial criterion for selection of portfolio
investments, the Adviser also will evaluate these securities and the
creditworthiness of the issuers of such securities based upon financial and
other available information.
The average distribution of investments (at value) in Municipal
Obligations by ratings for the fiscal year ended December 31, 1997 computed on a
monthly basis, for the Tennessee Tax-Exempt Fund and Limited Term Tax-Exempt
Fund was as follows:
Percentage of Value
---------------------------------------
Limited Term
Tennessee Tennessee
Tax-Exempt Tax-Exempt
MOODY'S Fitch S&P Fund Fund
- ------- ----- --- ---------- ----------
59.3% 50.4%
Aaa AAA AAA 35.9% 31.9%
Aa AA AA 4.8% 17.7%
----- ------
A A A 100.0% 100.0%
====== ======
Management Policies
OPTIONS TRANSACTIONS. (Capital Growth Fund and Equity Income Fund)
Each of the Capital Growth Fund and Equity Income Fund may engage in options
transactions, such as purchasing or writing covered call or put options. The
principal reason for the Fund writing covered call options is to realize,
through the receipt of premiums, a greater return than would be realized on its
portfolio securities alone. In return for a premium, the writer of a covered
call option forfeits the right to any appreciation in the value of the
underlying security above the strike price for the life of the option (or until
a closing purchase transaction can be effected). Nevertheless, the call writer
retains the risk of a decline in the price of the underlying security.
Similarly, the principal reason for writing covered put options is to realize
income in the form of premiums. The writer of a covered put option accepts the
risk of a decline in the price of the underlying security. The size of the
premiums that the Fund may receive may be adversely affected as new or existing
institutions, including other investment companies, engage in or increase their
option-writing activities.
Options written ordinarily will have expiration dates between one and
nine months from the date written. The exercise price of the options may be
below, equal to or above the market values of the underlying securities at the
time the options are written. In the case of call options, these exercise prices
are referred to as "in-the-money," "at-the-money" and "out-of-the- money,"
respectively. The Fund may write (a) in-the-money call options when the Adviser
expects that the price of the underlying security will remain stable or decline
moderately during the option period, (b) at-the-money call options when the
Adviser expects that the price of the underlying security will remain stable or
advance moderately during the option period and (c) out-of-the-money call
options when the Adviser expects that the premiums received from writing the
call option plus the appreciation in market price of the underlying security up
to the exercise price will be greater than the appreciation in the price of the
underlying security alone. In these circumstances, if the market price of the
underlying security declines and the security is sold at this lower price, the
amount of any realized loss will be offset wholly or in part by the premium
received. Out-of-the- money, at-the-money and in-the-money put options (the
reverse of call options as to the relation of exercise price to market price)
may be utilized in the same market environments that such call options are used
in equivalent transactions.
So long as the Fund's obligation as the writer of an option continues,
it may be assigned an exercise notice by the broker-dealer through which the
option was sold, requiring it to deliver, in the case of a call, or take
delivery of, in the case of a put, the underlying security against payment of
the exercise price. This obligation terminates when the option expires or the
Fund effects a closing purchase transaction. The Fund can no longer effect a
closing purchase transaction with respect to an option once it has been assigned
an exercise notice.
While it may choose to do otherwise, the Fund generally will purchase
or write only those options for which the Adviser believes there is an active
secondary market so as to facilitate closing transactions. There is no assurance
that sufficient trading interest to create a liquid secondary market on a
securities exchange will exist for any particular option or at any particular
time, and for some options no such secondary market may exist. A liquid
secondary market in an option may cease to exist for a variety of reasons. In
the past, for example, higher than anticipated trading activity or order flow,
or other unforeseen events, at times have rendered certain clearing facilities
inadequate and resulted in the institution of special procedures, such as
trading rotations, restrictions on certain types of orders or trading halts or
suspensions in one or more options. There can be no assurance that similar
events, or events that otherwise may interfere with the timely execution of
customers' orders, will not recur. In such event, it might not be possible to
effect closing transactions in particular options. If, as a covered call option
writer, the Fund is unable to effect a closing purchase transaction in a
secondary market, it will not be able to sell the underlying security until the
option expires or it delivers the underlying security upon exercise or it
otherwise covers its position.
The Fund intends to treat options in respect of specific securities
that are not traded on a national securities exchange and the securities
underlying covered call options written by the Fund as illiquid securities.
Each of these Funds will purchase options only to the extent permitted
by the policies of state securities authorities in states where shares of the
Fund are qualified for offer and sale.
STOCK INDEX OPTIONS. (Capital Growth Fund and Equity Income Fund) Each
of the Capital Growth Fund and Equity Income Fund may purchase and write put and
call options on stock indexes to the extent of 15% of the value of its net
assets. Options on stock indexes are similar to options on stock except that (a)
the expiration cycles of stock index options are monthly, while those of stock
options are currently quarterly, and (b) the delivery requirements are
different. Instead of giving the right to take or make delivery of a stock at a
specified price, an option on a stock index gives the holder the right to
receive a cash "exercise settlement amount" equal to (i) the amount, if any, by
which the fixed exercise price of the option exceeds (in the case of a put) or
is less than (in the case of a call) the closing value of the underlying index
on the date of exercise, multiplied by (ii) a fixed "index multiplier." Receipt
of this cash amount will depend upon the closing level of the stock index upon
which the option is based being greater than, in the case of a call, or less
than, in the case of a put, the exercise price of the option. The amount of cash
received will be equal to such difference between the closing price of the index
and the exercise price of the option expressed in dollars times a specified
multiple. The writer of the option is obligated, in return for the premium
received, to make delivery of this amount. The writer may offset its position in
stock index options prior to expiration by entering into a closing transaction
on an exchange or it may let the option expire unexercised.
FUTURES CONTRACTS AND OPTIONS ON FUTURES CONTRACTS. (Capital Growth
Fund, Equity Income Fund, Tennessee Tax-Exempt Fund and Limited Term Tennessee
Tax-Exempt Fund) Upon exercise of an option, the writer of the option delivers
to the holder of the option the futures position and the accumulated balance in
the writer's futures margin account, which represents the amount by which the
market price of the futures contract exceeds, in the case of a call, or is less
than, in the case of a put, the exercise price of the option on the futures
contract. The potential loss related to the purchase of options on futures
contracts is limited to the premium paid for the option (plus transaction
costs). Because the value of the option is fixed at the time of sale, there are
no daily cash payments to reflect changes in the value of the underlying
contract; however, the value of the option does change daily and that change
would be reflected in the net asset value of the Fund.
FUTURE DEVELOPMENTS. Each Fund may take advantage of opportunities in
the area of options and futures contracts and options on futures contracts and
any other derivative investments which are not presently contemplated for use by
such Fund or which are not currently available but which may be developed, to
the extent such opportunities are both consistent with its investment objective
and legally permissible for the Fund. Before entering into such transactions or
making any such investment, the Fund will provide appropriate disclosure in its
prospectus.
LENDING PORTFOLIO SECURITIES. To a limited extent, each Fund may lend
its portfolio securities to brokers, dealers and other financial institutions,
provided it receives cash collateral which at all times is maintained in an
amount equal to at least 100% of the current market value of the securities
loaned. By lending its portfolio securities, a Fund can increase its income
through the investment of the cash collateral. For purposes of this policy, each
Fund considers collateral consisting of U.S. Government securities to be the
equivalent of cash. From time to time, a Fund may return to the borrower or a
third party which is unaffiliated with the Fund, and which is acting as a
"placing broker," a part of the interest earned from the investment of
collateral received for securities loaned.
The Securities and Exchange Commission currently requires that the
following conditions must be met whenever portfolio securities are loaned: (1)
the Fund must receive at least 100% cash collateral from the borrower; (2) the
borrower must increase such collateral whenever the market value of the
securities rises above the level of such collateral; (3) the Fund must be able
to terminate the loan at any time; (4) the Fund must receive reasonable interest
on the loan, as well as any dividends, interest or other distributions payable
on the loaned securities, and any increase in market value; (5) the Fund may pay
only reasonable custodian fees in connection with the loan; and (6) while voting
rights on the loaned securities may pass to the borrower, the Company's Board of
Directors must terminate the loan and regain the right to vote the securities if
a material event adversely affecting the investment occurs. These conditions may
be subject to future modification.
REVERSE REPURCHASE AGREEMENTS. (Prime Money Market Fund and Treasury
Money Market Fund) Each of these Funds may enter into reverse repurchase
agreements. The Fund will maintain in a segregated account permissible liquid
assets equal to the aggregate amount of its reverse repurchase obligations, plus
accrued interest, in certain cases, in accordance with releases promulgated by
the Securities and Exchange Commission.
INVESTMENT CONSIDERATIONS AND RISK FACTORS
INVESTING IN TENNESSEE MUNICIPAL OBLIGATIONS. (Tennessee Tax-Exempt
Fund and Limited Term Tennessee Tax-Exempt Fund) Investors in the Tennessee
Tax-Exempt Fund and Limited Term Tennessee Tax-Exempt Fund should consider
carefully the special risks inherent in such Funds' investment in Tennessee
Municipal Obligations. These risks result from the financial condition of the
State of Tennessee. The following information constitutes only a brief summary,
does not purport to be a complete description, and is based on information drawn
from official statements relating to securities offerings of the State of
Tennessee (the "State") and various local agencies, available as of the date of
the Statement of Additional Information. While the Company has not independently
verified such information, it has no reason to believe that such information is
not correct in all material respects.
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 shall not exceed the State's revenues and reserves,
including the proceeds of debt obligations issued to finance capital
expenditures and (2) in no year shall 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.
The Constitution of the State of Tennessee requires a balanced budget.
As required by law, the legislature enacted a balanced budget for fiscal year
1994-95. Beginning January 1, 1994, the State of Tennessee received a waiver
from the Federal government to replace Medicaid with the new program, TennCare.
TennCare was implemented to help control the increasing cost of health care and
to provide insurance coverage not only to previous Medicaid eligible individuals
but also to uninsured Tennesseans. Due principally to inaccurate funding
assumptions with respect to TennCare program, the fiscal ended June 30, 1995 had
an estimated budgetary shortfall of $126 million.
Despite the budgetary concerns caused by the costs associated with
implementing TennCare, the economic outlook for Tennessee remains favorable. The
State's economic diversity has improved substantially over the last eleven
years. Investments announced in new and expanding business exceeded $1 billion
in each of those years and exceeded $2 billion in the last two years. The $3.2
billion in announced capital investments in 1989 was the single largest year and
exceeded the $2.78 billion in 1985 when Saturn Corporation chose Tennessee for
its plant site. This growth created 23,800 new jobs in Tennessee for the year
ended June 1994.
The Tennessee General Assembly enacted a balanced budget for fiscal
year 1994-95. The budget included a two percent salary increase for State
employees, public higher education employees and teachers in the public school
system effective on July 1, 1994, and another two percent salary increase
effective on October 1, 1994. The revenue estimates were officially revised at
March 1 when the budget for the fiscal year 1995-96 was presented to the General
Assembly.
Actual revenue collections for fiscal year 1994-95 through January
1995 reflected increases of 9.68% for the sales tax and 17.45% for the combined
excise tax and franchise tax. Total growth in collections, excluding the health
services tax, is 9.07%. Expenditures for TennCare (a recently implemented
managed care program for Tennessee's poor and uninsured, under a Medicaid
waiver), the housing of state prisoners, institutional operating costs in
prisons, the children's plan and some other services were in excess of the
original budgeted amounts for fiscal year 1994-95. Supplemental appropriations
were accommodated within the revised revenue estimates and a proposal to use
one-time reserves. The recommended budget for 1995-96 continues the funding of
improvements in the Basic Education Program for public schools and begins
funding teacher salary equalization. It funds TennCare and the Administration's
proposed crime legislation. The revenue estimates for fiscal year 1995-96
assumed a 6.3% growth in the sales tax, and a 5.0% growth in the excise and
franchise taxes. The assumed growth in all collections by the Department of
Revenue is 5.08%. The Revenue Fluctuation Reserve was reduced to $101.4 million
at June 30, 1994 due to accrued liabilities in the children's plan and other
programs. The new budget maintains the reserve at $101.4 million for fiscal
years 1994-95 and 1995-96.
On March 22, 1993, the Tennessee Supreme Court affirmed a lower court
decision that funding for the pubic school system in Tennessee is
unconstitutional because citizens in more affluent school districts receive
greater educational funding. The case was remanded to the trial court for
further proceedings with respect to the State's providing additional funding to
less affluent school systems. After substantial subsequent litigation, the
Tennessee Supreme Court issued on February 16, 1995, an opinion approving the
State's plan set forth in the Educational Improvement Act of 1992 with the
modification that the plan should also include a provision to equalize teachers'
salaries in the same way that other expenditures were to be equalized under the
program. The result of this decision may be that the State must provide
additional funding to less affluent school systems. Currently, the general
obligation ratings for the State are Aaa by Moody's, AA+ by S&P and AAA by
Fitch.
LOWER RATED SECURITIES. (Capital Growth Fund and Equity Income Fund)
Each of the Capital Growth Fund and Equity Income Fund is permitted to invest in
securities rated as low as Ba by Moody's or BB by S&P, Fitch or Duff & Phelps
Credit Rating Co. ("Duff"). Such securities, though higher yielding, are
characterized by risk. See "Description of the Funds--Investment Considerations
and Risk Factors--Lower Rated Securities Risk" in the Prospectus for a
discussion of certain risks and the "Appendix" for a general description of
Moody's, S&P, Fitch and Duff ratings. Although ratings may be useful in
evaluating the safety of interest and principal payments, they do not evaluate
the market value risk of these securities. The Fund will rely on the Adviser's
judgment, analysis and experience in evaluating the creditworthiness of an
issuer.
Investors should be aware that the market values of many of these
securities tend to be more sensitive to economic conditions than are higher
rated securities and will fluctuate over time. These securities are considered
by S&P, Moody's, Fitch and Duff generally to be predominantly speculative with
respect to capacity to pay interest and repay principal in accordance with the
terms of the obligation and generally will involve more credit risk than
securities in the higher rating categories.
Companies that issue certain of these securities often are highly
leveraged and may not have available to them more traditional methods of
financing. Therefore, the risk associated with acquiring the securities of such
issuers generally is greater than is the case with the higher rated securities.
For example, during an economic downturn or a sustained period of rising
interest rates, highly leveraged issuers of these securities may not have
sufficient revenues to meet their interest payment obligations. The issuer's
ability to service its debt obligations also may be affected adversely by
specific corporate developments, forecasts, or the unavailability of additional
financing. The risk of loss because of default by the issuer is significantly
greater for the holders of these securities because such securities generally
are unsecured and often are subordinated to other creditors of the issuer.
Because there is no established retail secondary market for many of
these securities, the Fund anticipates that such securities could be sold only
to a limited number of dealers or institutional investors. To the extent a
secondary trading market for these securities does exist, it generally is not as
liquid as the secondary market for higher rated securities. The lack of a liquid
secondary market may have an adverse impact on market price and yield and the
Fund's ability to dispose of particular issues when necessary to meet its
liquidity needs or in response to a specific economic event such as a
deterioration in the creditworthiness of the issuer. The lack of a liquid
secondary market for certain securities also may make it more difficult for the
Fund to obtain accurate market quotations for purposes of valuing its securities
and calculating its net asset value. Adverse publicity and investor perceptions,
whether or not based on fundamental analysis, may decrease the values and
liquidity of these securities. In such cases, judgment may play a greater role
in valuation because less reliable, objective data may be available.
These securities may be particularly susceptible to economic
downturns. It is likely that an economic recession could disrupt severely the
market for such securities and may have an adverse impact on the value of such
securities. In addition, it is likely that any such economic downturn could
adversely affect the ability of the issuers of such securities to repay
principal and pay interest thereon and increase the incidence of default for
such securities.
Each of these Funds may acquire these securities during an initial
offering. Such securities may involve special risks because they are new issues.
The Fund does not have any arrangement with any persons concerning the
acquisition of such securities, and the Adviser will review carefully the credit
and other characteristics pertinent to such new issues.
The credit risk factors pertaining to lower rated securities also
apply to lower rated zero coupon securities. Such zero coupon securities carry
an additional risk in that, unlike securities which pay interest throughout the
period to maturity, the Fund will realize no cash until the cash payment date
unless a portion of such securities are sold and, if the issuer defaults, the
Fund may obtain no return at all on its investment. See "Dividends,
Distributions and Taxes."
INVESTMENT RESTRICTIONS
Each Fund has adopted investment restrictions numbered 1 through 7 as
fundamental policies and the Prime Money Market Fund has adopted investment
restrictions numbered 14 and 15 and each other Fund has adopted investment
restriction number 16 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.
Investment restrictions numbered 8 through 13 are not fundamental policies and
may be changed by vote of a majority of the Company's Directors at any time. No
Fund may:
1. Invest in commodities, except that each Fund may purchase and sell
options, forward contracts, futures contracts, including those relating to
indexes, and options on futures contracts or indexes.
2. Purchase, hold or deal in real estate, or oil, gas or other mineral
leases or exploration or development programs, but each Fund may purchase and
sell securities that are secured by real estate or issued by companies that
invest or deal in real estate.
3. Borrow money, except that each Fund may borrow up to 33-1/3% of the
value of its total assets. For purposes of this investment restriction, a Fund's
entry into options, forward contracts, futures contracts, including those
relating to indexes, and options on futures contracts or indexes shall not
constitute borrowing.
4. Make loans to others, except through the purchase of debt
obligations and the entry into repurchase agreements. However, each Fund may
lend its portfolio securities in an amount not to exceed 33-1/3% of the value of
its total assets. Any loans of portfolio securities will be made according to
guidelines established by the Securities and Exchange Commission and the
Company's Board of Directors.
5. Act as an underwriter of securities of other issuers, except to the
extent the Fund may be deemed an underwriter under the 1933 Act by virtue of
disposing of portfolio securities, and except that the Tennessee Tax-Exempt
Fund, Limited Term Tennessee Tax-Exempt Fund, Limited Term Income Fund and
Income Fund each may bid separately or as part of a group for the purchase of
Municipal Obligations directly from an issuer for its own portfolio to take
advantage of the lower purchase price available.
6. Issue any senior security (as such term is defined in Section 18(f)
of the 1940 Act). A Fund's investments permitted under Investment Restriction
Nos. 1, 3, 9 and 10 are not considered senior securities for purposes of this
Investment Restriction.
7. Purchase securities on margin, but each Fund may make margin
deposits in connection with transactions in options, forward contracts, futures
contracts, including those relating to indexes, and options on futures contracts
or indexes.
8. Invest in the securities of a company for the purpose of exercising
management or control, but each Fund will vote the securities it owns as a
shareholder in accordance with its views.
9. Pledge, mortgage or hypothecate its assets, except to the extent
necessary to secure permitted borrowings and to the extent related to the
purchase of securities on a when-issued or forward commitment basis and the
deposit of assets in escrow in connection with writing covered put and call
options and collateral and initial or variation margin arrangements with respect
to options, forward contracts, futures contracts, including those relating to
indexes, and options on futures contracts or indexes.
10. Purchase, sell or write puts, calls or combinations thereof,
except as may be described in the Funds' Prospectus and this Statement of
Additional Information.
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 10% 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.
The following investment restriction number 13 is a non-fundamental
policy which applies to each Fund, except the Prime Money Market Fund and
Treasury Money Market Fund. None of these Funds may:
13. Purchase securities of any company having less than three years'
continuous operations (including operations of any predecessors) if such
purchase would cause the value of the Fund's investments in all such companies
to exceed 5% of the value of its total assets.
The following investment restrictions numbered 14 and 15 are
fundamental policies which apply only to the Prime Money Market Fund. The Prime
Money Market Fund may not:
14. Invest more than 5% of its assets in the obligations of any one
issuer, except that up to 25% of the value of the Prime Money Market Fund's
total assets may be invested without regard to any such limitation, provided
that not more than 10% of its assets may be invested in securities issued or
guaranteed by any single guarantor of obligations held by the Prime Money Market
Fund.
15. Invest less than 25% of its total assets in securities issued by
banks or invest more than 25% of its assets in the securities of issuers in any
other industry, provided that there shall be no limitation on the purchase of
obligations issued or guaranteed by the U.S. Government, its agencies or
instrumentalities. Notwithstanding the foregoing, for temporary defensive
purposes the Prime Money Market Fund may invest more than 25% of its assets in
bank obligations.
The following investment restriction number 16 is a fundamental policy
which applies to each Fund, except the Prime Money Market Fund. None of these
Funds may:
16. Invest more than 25% of its assets in the securities of issuers in
any single industry, provided that, in the case of the Tennessee Tax-Exempt Fund
and Limited Term Tennessee Tax-Exempt Fund, there shall be no such limitation on
the purchase of tax exempt municipal obligations and, in the case of each Fund,
there shall be no limitation on the purchase of obligations issued or guaranteed
by the U.S. Government, its agencies or instrumentalities.
For purposes of Investment Restriction No. 16, industrial development
bonds, where the payment of principal and interest is the ultimate
responsibility of companies within the same industry, are grouped together as an
"industry."
If a percentage restriction is adhered to at the time of investment, a
later change in percentage resulting from a change in values or assets will not
constitute a violation of such restriction.
MANAGEMENT OF THE COMPANY
Directors and officers of the Company, together with information as to
their principal business occupations during at least the last five years, are
shown below. Each Director who is an "interested person" of the Company, as
defined in the 1940 Act, is indicated by an asterisk.
DIRECTORS OF THE COMPANY
*WILLIAM B. BLUNDIN, PRESIDENT AND CHAIRMAN OF THE BOARD OF DIRECTORS. An
employee of BISYS Fund Services, Inc., BISYS' general partner. Mr.
Blundin also is an officer of other investment companies administered
by BISYS or its affiliates. He is 60 years old and his address is 90
Park Avenue, New York, New York 10016.
NORMA A. COLDWELL, DIRECTOR. International Economist and Consultant;
Executive Vice President of Coldwell Financial Consultants; Trustee
and Treasurer of Meridian House International (International Education
and Cultural Group); Member of the Board of Advisors of Meridian
International Center and Emerging Capital Markets, S.A. (Montevideo,
Uruguay); formerly, Chief International Economist of Riggs National
Bank, Washington, D.C. She is 72 years old and her address is 3330
Southwestern Boulevard, Dallas, Texas 75225.
RICHARD H. FRANCIS, DIRECTOR. Former Executive Vice President and Chief
Financial Officer of Pan American World Airways, Inc. (currently,
debtor-in-possession under the U.S. Bankruptcy Code), March 1988 to
October 1991; Senior Vice President and Chief Financial Officer of
American Standard Inc., 1960 to March 1988. Mr. Francis is a director
of Allendale Mutual Insurance and The Indonesia Fund, Inc. He is 66
years old and his address is 40 Grosvenor Road, Short Hills, New
Jersey 07078.
WILLIAM W. McINNES, DIRECTOR. Private investor. From July 1978 to February
1993, he was Vice-President--Finance and Treasurer of Hospital Corp.
of America. He is also a director of Gulf South Medical Supply and
Diversified Trust Co. He is 48 years old and his address is 116 30th
Avenue South, Nashville, Tennessee 37212.
ROBERT A. ROBINSON, DIRECTOR. Private investor. Since 1991, President
Emeritus, and from 1968 to 1991, President of The Church Pension
Group, NYC. From 1956 to 1966, Senior Vice President of Colonial Bank
& Trust Co. He is also a director of Mariner Institutional Funds,
Inc., Mariner Tax-Free Institutional Funds, Inc., UST Master Funds,
UST Master Tax Exempt Funds, H.B. and F.H. Bugher Foundation,
Morehouse-Barlow Co. Publishers, The Canterbury Cathedral Trust in
America, The Living Church Foundation and Hoosac School. He is 71
years old and his address is 2 Hathaway Common, New Canaan,
Connecticut 06840.
OFFICERS OF THE COMPANY
JEFFREY C. CUSICK, VICE PRESIDENT AND ASSISTANT SECRETARY. An employee of
BISYS Fund Services, Inc. since July 1995, and an officer of other
investment companies administered by BISYS or its affiliates. From
September 1993 to July 1995, he was Assistant Vice President and, from
1989 to September 1993, he was Manager--Client Services, of Federated
Administrative Services. He is 38 years old and his address is 3435
Stelzer Road, Columbus, Ohio 43219.
WILLIAM TOMKO, VICE PRESIDENT. An employee of BISYS Fund Services, Inc. and an
officer of other investment companies administered by BISYS or its
affiliates. He is 38 years old and his address is 3435 Stelzer Road,
Columbus, Ohio 43219.
GARY R. TENKMAN, TREASURER. An employee of BISYS Fund Services, Inc. since
April 1998, and an officer of other investment companies administered
by BISYS or its affiliates. For more than five years prior thereto, he
was an audit manager with Ernst & Young LLP. He is 34 years old and
his address is 3435 Stelzer Road, Columbus, Ohio 43219.
ROBERT L. TUCH, ASSISTANT SECRETARY. An employee of BISYS Fund Services, Inc.
since June 1991, and an officer of other investment companies
administered by BISYS or its affiliates. From July 1990 to June 1991,
he was Vice President and Associate General Counsel with National
Securities Research Corp. Prior thereto, he was an Attorney with the
Securities and Exchange Commission. He is 45 years old and his address
is 3435 Stelzer Road, Columbus, Ohio 43219.
ALAINA METZ, ASSISTANT SECRETARY. An employee of BISYS Fund Services, Inc.
and an officer of other investment companies administered by BISYS or
its affiliates. She is 29 years old and her address is 3435 Stelzer
Road, Columbus, Ohio 43219.
For so long as the Distribution Plan described in the section
captioned "Management Arrangements--Distribution Plan" remains in effect, the
Directors who are not "interested persons" of the Company, as defined in the
1940 Act, will be selected and nominated by the Directors who are not
"interested persons" of the Company.
Directors and officers of the Company, as a group, owned less than 1%
of any Fund's shares of common stock outstanding on December 31, 1998.
The Company does not pay any remuneration to its officers and
Directors other than fees and expenses to those Directors who are not directors,
officers or employees of the Adviser or BISYS or any of their affiliates. The
aggregate amount of compensation paid to each such Director by the Company for
year ended December 31, 1997 was as follows:
Total Compensation
Aggregate From Company
Name of Board Compensation from and Fund Complex Paid
Member Company* to Board Member
Norma A. Coldwell $18,000 $18,000
Richard H. Francis $18,000 $18,000
William W. McInnes $18,000 $18,000
Robert A. Robinson $18,000 $18,000
- -------------
* Amount does not include reimbursed expenses for attending Board
meetings, which amounted to $13,422 for all Directors as a group.
MANAGEMENT ARRANGEMENTS
THE FOLLOWING INFORMATION SUPPLEMENTS AND SHOULD BE READ IN
CONJUNCTION WITH THE SECTION IN THE PROSPECTUS ENTITLED "MANAGEMENT OF THE
FUNDS."
INVESTMENT ADVISORY AGREEMENT. The Adviser provides investment
advisory services pursuant to the Investment Advisory Agreement (the
"Agreement") dated February 15, 1994 with the Company. As to each Fund, the
Agreement is subject to annual approval by (i) the Company's Board of Directors
or (ii) vote of a majority (as defined in the 1940 Act) of the outstanding
voting securities of such Fund, provided that in either event the continuance
also is approved by a majority of the Directors who are not "interested persons"
(as defined in the 1940 Act) of the Company or the Adviser, by vote cast in
person at a meeting called for the purpose of voting on such approval. The
Agreement was last approved by the Company's Board of Directors, including a
majority of the Directors who are not "interested persons" of any party to the
Agreement, at a meeting held on November 11, 1997. As to each Fund, the
Agreement is terminable without penalty, on 60 days' notice, by the Company's
Board of Directors or by vote of the holders of a majority of such Fund's
shares, or, on not less than 90 days' notice, by the Adviser. The Agreement will
terminate automatically, as to the relevant Fund, in the event of its assignment
(as defined in the 1940 Act).
As compensation for the Adviser's services, the Company has agreed to
pay the Adviser a monthly investment advisory fee at the annual rate of .50 of
1% of the value of Limited Term Income Fund's, Income Fund's, Tennessee
Tax-Exempt Fund's, Limited Term Tennessee Tax-Exempt Fund's and Limited Term
U.S. Government Fund's average daily net assets, .65 of 1% of the value of the
Capital Growth Fund's and Equity Income Fund's average daily net assets, and .25
of 1% of the value of the Prime Money Market Fund's and Treasury Money Market
Fund's average daily net assets. Prior to January 30, 1998, the fee payable by
the Prime Money Market Fund to the Adviser was .25 of 1% of the value of such
Fund's average daily net assets, less any amount payable by the Prime Money
Market Fund to Barnett Capital Advisors, Inc. (the "Sub-Adviser"), the Fund's
sub-investment adviser prior to such date. Pursuant to a Sub- Investment
Advisory Agreement among the Company, the Adviser and the Sub-Adviser, which was
terminated as of January 30, 1998, the Company agreed to pay the Sub-Adviser a
monthly fee at the annual rate of .15 of 1% of the value of the Prime Money
Market Fund's average daily net assets. For the fiscal years ended December 31,
1995, 1996 and 1997, $491,561, $519,442 and $496,933, respectively, was payable
by the Limited Term Income Fund, and $463,502, $456,926 and $502,268,
respectively, was payable by the Tennessee Tax-Exempt Fund pursuant to the
Agreement. The Adviser waived $72,002 and $78,469 of such fees payable for the
fiscal year ended December 31, 1997 by the Limited Term Income Fund and
Tennessee Tax-Exempt Fund, respectively, resulting in net fees being paid to the
Adviser of $424,931 by the Limited Term Income Fund and $423,799 by the
Tennessee Tax-Exempt Fund during 1997. For the period April 1, 1996
(commencement of operations) through December 31, 1996, and for the fiscal year
ended December 31, 1997, $214,961 and $783,646, respectively, was payable by the
Capital Growth Fund and $136,354 and $328,302, respectively, was payable by the
Income Fund pursuant to the Agreement. The Adviser waived $141,465 and $55,665
of such fees payable for the fiscal year ended December 31, 1997 by the Capital
Growth Fund and Income Fund, respectively, resulting in net fees being paid to
the Adviser of $642,181 by the Capital Growth Fund and $272,637 by the Income
Fund during 1997. For the fiscal years ended December 31, 1995, 1996 and 1997,
$64,959, $74,618 and $80,064, respectively, was payable by the Prime Money
Market Fund and $358,127, $459,479 and $474,129, respectively, was payable by
the Treasury Money Market Fund pursuant to the Agreement. For the fiscal years
ended December 31, 1995, 1996 and 1997, $97,438, $111,623 and $120,097,
respectively, was payable by the Prime Money Market Fund to the Sub-Adviser. For
the period February 27, 1997 (commencement of operations) through December 31,
1997, $332,185 was payable by the Equity Income Fund, $81,110 was payable by the
Limited Term U.S. Government Fund and $93,669 was payable by the Limited Term
Tennessee Tax-Exempt Fund pursuant to the Agreement. The Adviser waived $65,601,
$41,559 and $34,669 of such fees payable for the period ended December 31, 1997
by the Equity Income Fund, Limited Term U.S. Government Fund and Limited Term
Tennessee Tax-Exempt Fund, respectively, resulting in net fees being paid to the
Adviser of $266,584 by the Equity Income Fund, $39,551 by the Limited Term U.S.
Government Fund and $59,000 by the Limited Term Tennessee Tax-Exempt Fund during
1997.
ADMINISTRATION AGREEMENT. BISYS provides certain administrative
services pursuant to the Administration Agreement (the "Administration
Agreement") dated October 29, 1998 with the Company. As to each Fund, the
Administration Agreement will continue until October 31, 2003 and thereafter is
subject to annual approval by (i) the Company's Board of Directors or (ii) vote
of a majority (as defined in the 1940 Act) of the outstanding voting securities
of such Fund, provided that in either event the continuance also is approved by
a majority of the Directors who are not "interested persons" (as defined in the
1940 Act) of the Company or BISYS, by vote cast in person at a meeting called
for the purpose of voting such approval. The Administration Agreement was last
approved by the Company's Board of Directors, including a majority of the
Directors who are not "interested persons" of any party to the Administration
Agreement, at a meeting held on August 12, 1998. As to each Fund, the
Administration Agreement is terminable without penalty, at any time if for
cause, by the Company's Board of Directors or by vote of the holders of a
majority of such Fund's outstanding voting securities, or, on not less than 90
days' notice, by BISYS. The Administration Agreement will terminate
automatically, as to the relevant Fund, in the event of its assignment (as
defined in the 1940 Act).
As compensation for BISYS' services, the Company has agreed to pay
BISYS a monthly administration fee at the annual rate of .10 of 1% of the value
of the Prime Money Market Fund's and Treasury Money Market Fund's average daily
net assets and .15 of 1% of the value of each other Fund's average daily net
assets. For the fiscal years ended December 31, 1995, 1996 and 1997, $147,468,
$155,644 and $149,081, respectively, was payable to BISYS or the Funds'
predecessor administrator during such periods by the Limited Term Income Fund,
and $139,051, $137,079 and $150,681, respectively, was payable to BISYS or the
Funds' predecessor administrator by the Tennessee Tax-Exempt Fund pursuant to
the Administration Agreement. For the period April 1, 1996 (commencement of
operations) through December 31, 1996 and for the fiscal year ended December 31,
1997, $49,609 and $180,842, respectively, was payable by the Capital Growth Fund
and $40,906 and $98,491, respectively, was payable by the Income Fund pursuant
to the Administration Agreement. For the fiscal years ended December 31, 1995,
1996 and 1997, $64,959, $74,618 and $80,064, respectively, was payable to BISYS
or the Funds' predecessor administrator during such periods by the Prime Money
Market Fund and $143,251, $183,791 and $189,650, respectively, was payable to
BISYS or the Funds' predecessor administrator by the Treasury Money Market Fund.
For the period February 27, 1997 (commencement of operations) through December
31, 1997, $76,658 was payable to BISYS by the Equity Income Fund, $24,333 was
payable to BISYS by the Limited Term U.S. Government Fund and $28,101 was
payable to BISYS by the Limited Term Tennessee Tax-Exempt Fund pursuant to the
Administration Agreement. BISYS waived $17,844 and $20,607 of such fee payable
by the Limited Term U.S. Government Fund and Limited Term Tennessee Tax-Exempt
Fund, respectively, resulting in net fees paid to BISYS of $6,489 by the Limited
Term U.S. Government Fund and $7,494 by the Limited Term Tennessee Tax-Exempt
Fund during 1997.
DISTRIBUTION AGREEMENT. BISYS acts as the exclusive distributor of
each Fund's shares on a best efforts basis pursuant to a Distribution Agreement
(the "Distribution Agreement") dated November 11, 1997, with the Company. Shares
are sold on a continuous basis by BISYS as agent, although BISYS is not obliged
to sell any particular amount of shares. No compensation is payable by the
Company to BISYS for its distribution services.
For fiscal years ended December 31, 1995 and 1996, BISYS did not
retain any amounts from sales loads on shares of any Fund. For the fiscal year
ended December 31, 1997, BISYS retained $28,514 and re-allowed $28,434 to
affiliated broker/dealers of the Company from sales loads on Class A Shares.
DISTRIBUTION PLAN. (Applicable only with respect to Class A Shares of
each Fund other than the Prime Money Market Fund and Treasury Money Market Fund
and Class B Shares of each Fund offering Class B Shares) Rule 12b-1 (the "Rule")
adopted by the Securities and Exchange Commission under the 1940 Act provides,
among other things, that an investment company may bear expenses of distributing
its shares only pursuant to a plan adopted in accordance with the Rule. The
Company's Directors have adopted such a plan (the "Distribution Plan") with
respect to Class A Shares of each Fund other than the Prime Money Market Fund
and Treasury Money Market Fund and Class B Shares of each Fund offering Class B
Shares pursuant to which each such Fund pays BISYS for advertising, marketing
and distributing Class A Shares and Class B Shares at an annual rate of .25% and
.75% of the value of Class A Shares and Class B Shares, respectively. The
Company's Directors believe that there is a reasonable likelihood that the
Distribution Plan will benefit each such Fund and the holders of its Class A
Shares and Class B Shares.
A quarterly report of the amounts expended under the Distribution
Plan, and the purposes for which such expenditures were incurred, must be made
to the Directors for their review. In addition, the Distribution Plan provides
that it may not be amended to increase materially the costs which holders of the
Class A Shares and Class B Shares may bear for distribution pursuant to the
Distribution Plan without approval of such shareholders and that other material
amendments of the Distribution Plan must be approved by the Board of Directors,
and by the Directors who are neither "interested persons" (as defined in the
1940 Act) of the Company nor have any direct or indirect financial interest in
the operation of the Distribution Plan or in the related Distribution Plan
agreements, by vote cast in person at a meeting called for the purpose of
considering such amendments. The Distribution Plan and related agreements are
subject to annual approval by such vote of the Directors cast in person at a
meeting called for the purpose of voting on the Distribution Plan. The
Distribution Plan was last so approved on November 11, 1997. As to each Class,
the Distribution Plan is terminable at any time by vote of a majority of the
Directors who are not "interested persons" and who have no direct or indirect
financial interest in the operation of the Distribution Plan or in the
Distribution Plan agreements or by vote of the holders of a majority of Class A
Shares or Class B Shares, as the case may be, voting separately as a Class. A
Distribution Plan agreement is terminable without penalty, at any time, by such
vote of the Directors, upon not more than 60 days' written notice to the parties
to such agreement or by vote of the holders of a majority of the Fund's Class A
Shares or Class B Shares, as the case may be, voting separately as a Class. A
Distribution Plan agreement will terminate automatically, as to the relevant
Class, in the event of its assignment (as defined in the 1940 Act).
For the fiscal year ended December 31, 1997, with respect to Class A
Shares pursuant to the Distribution Plan, $193,649 was payable by the Limited
Term Income Fund, of which amount BISYS waived receipt of $192,875, $189,842 was
payable by the Tennessee Tax-Exempt Fund, of which amount BISYS waived receipt
of $189,623, $46,847 was payable by the Limited Term Tennessee Tax-Exempt Fund,
all of which was waived by BISYS, $88,282 was payable by the Equity Income Fund,
of which amount BISYS waived receipt of $88,242, $214,963 was payable by the
Capital Growth Fund, of which amount BISYS waived receipt of $214,887, $120,305
was payable by the Income Fund, of which amount BISYS waived receipt of
$120,300, and $40,554 was payable by the Limited Term U.S. Government Fund, all
of which was waived by BISYS.
SHAREHOLDER SERVICES PLAN. The Company's Directors have adopted a
shareholder services plan (the "Shareholder Services Plan") pursuant to which
each such Fund pays BISYS for the provision of certain services to the holders
of such shares at an annual rate of .15% of the value of the average daily net
assets represented by Institutional Shares and Class A Shares (.25% in the case
of the Prime Money Market Fund and Treasury Money Market Fund) and at an annual
rate of .25% of the value of the average daily net assets represented by Class B
Shares. The Company's Directors believe that there is a reasonable likelihood
that the Shareholder Services Plan will benefit each Fund and its shareholders.
A quarterly report of the amounts expended under the Shareholder
Services Plan, and the purposes for which such expenditures were incurred, must
be made to the Directors for their review. In addition, the Shareholder Services
Plan provides that material amendments of the Plan must be approved by the Board
of Directors, and by the Directors who are neither "interested persons" (as
defined in the 1940 Act) of the Company nor have any direct or indirect
financial interest in the operation of the Shareholder Services Plan or in the
related Shareholder Services Plan agreements, by vote cast in person at a
meeting called for the purpose of considering such amendments. The Shareholder
Services Plan and related agreements are subject to annual approval by such vote
of the Directors cast in person at a meeting called for the purpose of voting on
the Shareholder Services Plan. The Shareholder Services Plan was last so
approved on November 11, 1997. The Shareholder Services Plan is terminable at
any time by vote of a majority of the Directors who are not "interested persons"
and who have no direct or indirect financial interest in the operation of the
Shareholder Services Plan or in the Shareholder Services Plan agreements. A
Shareholder Services Plan agreement is terminable without penalty, at any time,
by such vote of the Directors. A Shareholder Services Plan agreement will
terminate automatically in the event of its assignment (as defined in the 1940
Act).
For the fiscal year ended December 31, 1997, fees paid pursuant to the
Shareholder Services Plan with respect to Class A Shares by the Prime Money
Market Fund and Treasury Money Market Fund amounted to $93,044 and $201,894,
respectively.
EXPENSES. All expenses incurred in the operation of the Company are
borne by the Company, except to the extent specifically assumed by others. The
expenses borne by the Company include: organizational costs, taxes, interest,
brokerage fees and commissions, if any, fees of Directors who are not officers,
directors, employees or holders of 5% or more of the outstanding voting
securities of the Adviser or BISYS or any of their affiliates, Securities and
Exchange Commission fees, state Blue Sky qualification fees, advisory and
administration fees, charges of custodians, transfer and dividend disbursing
agents' fees, certain insurance premiums, industry association fees, auditing
and legal expenses, costs of maintaining corporate existence, costs of
independent pricing services, costs attributable to investor services
(including, without limitation, telephone and personnel expenses), costs of
calculating the net asset value of each Fund's shares, costs of shareholders'
reports and corporate meetings, costs of preparing and printing certain
prospectuses and statements of additional information, and any extraordinary
expenses. Expenses attributable to a Fund are charged against the assets of that
Fund; other expenses of the Company are allocated among the Funds on the basis
determined by the Board of Directors, including, but not limited to,
proportionately in relation to the net assets of each Fund.
PURCHASE AND REDEMPTION OF SHARES
THE FOLLOWING INFORMATION SUPPLEMENTS AND SHOULD BE READ IN
CONJUNCTION WITH THE SECTIONS IN THE PROSPECTUS ENTITLED "HOW TO BUY SHARES" AND
"HOW TO REDEEM SHARES."
TERMS OF PURCHASE. The Company reserves the right to reject any
purchase order and to change the amount of the minimum investment and subsequent
purchases in the Funds.
SALES LOADS. (Applicable to Class A Shares of each Fund other than the
Prime Money Market Fund and Treasury Money Market Fund) The scale of sales loads
applies to purchases of Class A Shares of each Fund other than the Prime Money
Market Fund and Treasury Money Market Fund made by any "purchaser," which term
includes an individual and/or spouse purchasing securities for his, her or their
own account or for the account of any minor children, or a trustee or other
fiduciary purchasing securities for a single trust estate or a single fiduciary
account trust estate or a single fiduciary account (including a pension,
profit-sharing or other employee benefit trust created pursuant to a plan
qualified under Section 401 of the Internal Revenue Code of 1986, as amended
(the "Code")) although more than one beneficiary is involved; or a group of
accounts established by or on behalf of the employees of an employer or
affiliated employers pursuant to an employee benefit plan or other program
(including accounts established pursuant to Sections 403(b), 408(k) and 457 of
the Code); or an organized group which has been in existence for more than six
months, provided that it is not organized for the purpose of buying redeemable
securities of a registered investment company and provided that the purchases
are made through a central administration or a single dealer, or by other means
which result in economy of sales effort or expense.
Set forth below are examples of the method of computing the offering
price of Class A Shares. The examples assume a purchase of Class A Shares of the
indicated Fund aggregating less than $50,000 subject to the current schedule of
sales charges set forth in the Funds' Prospectus for Class A Shares at a price
based upon the net asset value of the Fund's Class A Shares on December 31,
1997:
CAPITAL GROWTH FUND*:
Net Asset Value per Share $12.80
Per Share Sales Charge - 4.75%
of offering price (4.99% of
net asset value per share) $ 0.64
------
Per Share Offering Price to
the Public $13.44
======
EQUITY INCOME FUND*:
Net Asset Value per Share $10.37
Per Share Sales Charge - 4.75%
of offering price (4.99% of
net asset value per share) $ 0.52
------
Per Share Offering Price to
the Public $10.89
======
- -----------
* Class A Shares of the Capital Growth Fund and Equity Income Fund
purchased by shareholders beneficially owning Class A Shares of such
Funds on September 30, 1997 are subject to a different sales load
schedule, as described under "How to Buy Shares" in the Funds'
Prospectus.
LIMITED TERM INCOME FUND:
Net Asset Value per Share $ 9.99
Per Share Sales Charge - 3.00%
of offering price (3.09% of
net asset value per share) $ 0.31
------
Per Share Offering Price to
the Public $10.30
======
LIMITED TERM U.S. GOVERNMENT FUND:
Net Asset Value per Share $10.12
Per Share Sales Charge - 3.00%
of offering price (3.09% of
net asset value per share) $ 0.31
------
Per Share Offering Price to
the Public $10.43
======
LIMITED TERM TENNESSEE TAX-EXEMPT FUND:
Net Asset Value per Share $10.13
Per Share Sales Charge - 3.00%
of offering price (3.09% of
net asset value per share) $ 0.31
------
Per Share Offering Price to
the Public $10.44
======
TENNESSEE TAX-EXEMPT FUND:
Net Asset Value per Share $10.18
Per Share Sales Charge - 3.00%
of offering price (3.09% of
net asset value per share) $ 0.31
------
Per Share Offering Price to
the Public $10.49
======
INCOME FUND:
Net Asset Value per Share $10.25
Per Share Sales Charge - 3.00%
of offering price (3.09% of
net asset value per share) $ 0.32
------
Per Share Offering Price to the Public $10.57
------
"SWEEP" PROGRAM. (Applicable to the Prime Money Market Fund and
Treasury Money Market Fund Only) Shares of the Prime Money Market Fund and
Treasury Money Market Fund may be purchased through the "sweep" program
established by certain financial institutions under which a portion of their
customers' accounts may be automatically invested in the Fund. The customer
becomes the beneficial owner of specific shares of the Fund which may be
purchased, redeemed and held by the financial institution in accordance with the
customer's instructions and may fully exercise all rights as a shareholder. The
shares will be held by BISYS Fund Services Ohio, Inc. (the "Transfer Agent") in
book- entry form. A statement with regard to the customer's shares is generally
supplied to the customer monthly, and confirmations of all transactions for the
account of the customer ordinarily are available to the customer promptly on
request. In addition, each customer is sent proxies, periodic reports and other
information from the Company with regard to shares of the Funds. The customer's
shares are fully assignable and may be encumbered by the customer. The "sweep"
agreement can be terminated by the customer at any time, without affecting its
beneficial ownership of the shares.
To obtain the benefits of this service, a customer typically is
required to maintain a minimum balance subject to a monthly maintenance fee, or
a higher minimum balance for which no monthly fee would be imposed. In either
case, a penalty fee is imposed if the minimum should not be maintained. In
general, the automatic investment in the Fund's shares occurs on the same day
that withdrawals are made by the financial institution, at the next determined
net asset value after the order is received.
All agreements which relate to the service are with the financial
institution. Neither BISYS nor the Company is a party to any of those agreements
and no part of the compensation received by the financial institution flows to
the Company or to BISYS or to any of their affiliates, either directly or
indirectly. Further information concerning this program and any related charges
or fees is provided by the financial institution prior to any purchase of the
Fund's shares. Any fees charged by the financial institution effectively reduces
the Fund's yield for those customers.
REOPENING AN ACCOUNT. An investor may reopen an account with a minimum
investment of $100 without filing a new Account Application during the calendar
year the account is closed or during the following calendar year, provided the
information on the old Account Application is still applicable.
STOCK CERTIFICATES; SIGNATURES. Any certificate representing Fund
shares to be redeemed must be submitted with the redemption request. Written
redemption requests must be signed by each shareholder, including each holder of
a joint account, and each signature must be guaranteed. Signatures on endorsed
certificates submitted for redemption also must be guaranteed. The Transfer
Agent has adopted standards and procedures pursuant to which
signature-guarantees in proper form generally will be accepted from domestic
banks, brokers, dealers, credit unions, national securities exchanges,
registered securities associations, clearing agencies and savings associations,
as well as from participants in the New York Stock Exchange Medallion Signature
Program, the Securities Transfer Agents Medallion Program ("STAMP") and the
Stock Exchanges Medallion Program. Signature-guaranties may not be provided by
notaries public. If the signature is guaranteed by a broker or dealer, such
broker or dealer must be a member of a clearing corporation and maintain net
capital of at least $100,000. Guarantees must be signed by an authorized
signatory of the guarantor and "Signature-Guaranteed" must appear with the
signature.
REDEMPTION COMMITMENT. Each Fund has committed itself to pay in cash
all redemption requests by any shareholder of record, limited in amount during
any 90-day period to the lesser of $250,000 or 1% of the value of such Fund's
net assets at the beginning of such period. Such commitment is irrevocable
without the prior approval of the Securities and Exchange Commission. In the
case of requests for redemption in excess of such amount, the Board of Directors
reserves the right to make payments in whole or in part in securities or other
assets in case of an emergency or any time a cash distribution would impair the
liquidity of the Fund to the detriment of the existing shareholders. In this
event, the securities would be valued in the same manner as the Fund is valued.
If the recipient sold such securities, brokerage charges might be incurred.
SUSPENSION OF REDEMPTIONS. The right of redemption may be suspended or
the date of payment postponed (a) during any period when the New York Stock
Exchange is closed (other than customary weekend and holiday closing), (b) when
trading in the markets the Fund normally utilizes is restricted, or when an
emergency exists as determined by the Securities and Exchange Commission so that
disposal of the Fund's investments or determination of its net asset value is
not reasonably practicable, or (c) for such other periods as the Securities and
Exchange Commission by order may permit to protect the Fund's shareholders.
DETERMINATION OF NET ASSET VALUE
THE FOLLOWING INFORMATION SUPPLEMENTS AND SHOULD BE READ IN
CONJUNCTION WITH THE SECTION IN THE PROSPECTUS ENTITLED "HOW TO BUY SHARES."
GENERAL. Expenses and fees, including the advisory fee and fees paid
pursuant to the Distribution Plan and Shareholder Services Plan, are accrued
daily and taken into account for the purpose of determining the net asset value
of the relevant Class of Fund shares.
CAPITAL GROWTH FUND AND EQUITY INCOME FUND. Each of these Funds'
securities, including covered call options written by the Fund, are valued at
the last sale price on the securities exchange or national securities market on
which such securities primarily are traded. Securities not listed on an exchange
or national securities market, or securities in which there were no
transactions, are valued at the average of the most recent bid and asked prices,
except in the case of open short positions where the asked price is used for
valuation purposes. Bid price is used when no asked price is available. Any
assets or liabilities initially expressed in terms of foreign currency will be
translated into dollars at the midpoint of the New York interbank market spot
exchange rate as quoted on the day of such translation by the Federal Reserve
Bank of New York or if no such rate is quoted on such date, at the exchange rate
previously quoted by the Federal Reserve Bank of New York or at such other
quoted market exchange rate as may be determined to be appropriate by the
Adviser. Debt securities maturing in 60 days or less are carried at amortized
cost, which approximates value, except where to do so would not reflect
accurately their fair value, in which case such securities would be valued at
their fair value as determined under the supervision of the Board of Directors.
Any securities or other assets for which recent market quotations are not
readily available are valued at fair value as determined in good faith by the
Company's Board of Directors.
Restricted securities, as well as securities or other assets for which
market quotations are not readily available, or are not valued by a pricing
service approved by the Board of Directors, are valued at fair value as
determined in good faith by the Board of Directors. The Board of Directors will
review the method of valuation on a current basis. In making their good faith
valuation of restricted securities, the Directors generally will take the
following factors into consideration: restricted securities which are, or are
convertible into, securities of the same class of securities for which a public
market exists usually will be valued at market value less the same percentage
discount at which purchased. This discount will be revised periodically by the
Board of Directors if the Directors believe that it no longer reflects the value
of the restricted securities. Restricted securities not of the same class as
securities for which a public market exists usually will be valued initially at
cost. Any subsequent adjustment from cost will be based upon considerations
deemed relevant by the Board of Directors.
INCOME FUND, LIMITED TERM INCOME FUND AND LIMITED TERM U.S. GOVERNMENT
FUND. Each of these Funds' investments are valued each business day using
available market quotations or at fair value as determined by one or more
independent pricing services (collectively, the "Service") approved by the Board
of Directors. The Service may use available market quotations, employ electronic
data processing techniques and/or a matrix system to determine valuations. The
Service's procedures are reviewed by the Company's officers under the general
supervision of the Board of Directors.
TENNESSEE TAX-EXEMPT FUND AND LIMITED TERM TENNESSEE TAX- EXEMPT FUND.
Each of these Funds' investments are valued by the Service. When, in the
judgment of the Service, quoted bid prices for investments are readily available
and are representative of the bid side of the market, these investments are
valued at the mean between the quoted bid prices (as obtained by the Service
from dealers in such securities) and asked prices (as calculated by the Service
based upon its evaluation of the market for such securities). Other investments
(which constitute a majority of the Fund's securities) are carried at fair value
as determined by the Service, based on methods which include consideration of:
yields or prices of municipal bonds of comparable quality, coupon, maturity and
type; indications as to values from dealers; and general market conditions. The
Service may employ electronic data processing techniques and/or a matrix system
to determine valuations. The Service's procedures are reviewed by the Company's
officers under the general supervision of the Board of Directors.
PRIME MONEY MARKET FUND AND TREASURY MONEY MARKET FUND. The valuation
of each of these Funds' investment securities is based upon their amortized cost
which does not take into account unrealized capital gains or losses. This
involves valuing an instrument at its cost 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. While this
method provides certainty in valuation, it may result in periods during which
value, as determined by amortized cost, is higher or lower than the price the
Fund would receive if it sold the instrument.
The Board of Directors has agreed, as a particular responsibility
within the overall duty of care owed to each of these Funds' investors, to
establish procedures reasonably designed to stabilize each such Fund's price per
share as computed for the purpose of purchases and redemptions at $1.00. Such
procedures include review of the Fund's investment holdings by the Board of
Directors, at such intervals as it deems appropriate, to determine whether such
Fund's net asset value calculated by using available market quotations or market
equiva lents deviates from $1.00 per share based on amortized cost. In such
review, investments for which market quotations are readily available will be
valued at the most recent bid price or yield data for such securities or for
securities of comparable maturity, quality and type, as obtained from one or
more of the major market makers for the securities to be valued. Other
investments and assets will be valued at fair value as determined in good faith
by the Board of Directors.
The extent of any deviation between a Fund's net asset value based
upon available market quotations or market equivalents and $1.00 per share based
on amortized cost will be examined by the Board of Directors. If such deviation
exceeds 1/2 of 1%, the Board of Directors promptly will consider what action, if
any, will be initiated. In the event the Board of Directors determines that a
deviation exists which may result in material dilution or other unfair results
to investors or existing shareholders, it has agreed to take such corrective
action as it regards as necessary and appropriate, including: selling portfolio
instruments prior to maturity to realize capital gains or losses or to shorten
average portfolio maturity; withholding dividends or paying distributions from
capital or capital gains; redeeming shares in kind; or establishing a net asset
value per share by using available market quotations or market equivalents.
PERFORMANCE INFORMATION
THE FOLLOWING INFORMATION SUPPLEMENTS AND SHOULD BE READ IN
CONJUNCTION WITH THE SECTION IN THE PROSPECTUS ENTITLED "PERFORMANCE
INFORMATION."
Current yield is computed pursuant to a formula which operates as
follows: The amount of the Fund's expenses accrued for the 30-day period (net of
reimbursements) is subtracted from the amount of the dividends and interest
earned by the Fund during the period. That result is then divided by the product
of: (a) the average daily number of shares outstanding during the period that
were entitled to receive dividends, and (b) the maximum offering price per share
on the last day of the period less any undistributed earned income per share
reasonably expected to be declared as a dividend shortly thereafter. The
quotient is then added to 1, and that sum is raised to the 6th power, after
which 1 is subtracted. The current yield is then arrived at by multiplying the
result by 2.
The current yield for Class A Shares of each indicated Fund for the
30-day period ended December 31, 1997 was as follows:
NET OF ABSORBED
NAME OF FUND CURRENT YIELD EXPENSES
Equity Income Fund 2.10% 1.25%
Limited Term U.S.
Government Fund 5.46% 4.90%
Limited Term Income Fund 5.92% 5.21%
Limited Term Tennessee
Tax-Exempt Fund 3.78% 3.30%
Income Fund 5.89% 5.18%
Tennessee Tax-Exempt Fund 4.14% 3.44%
Based upon a combined 1997 Federal and Tennessee income tax rate of
40.89%, the tax equivalent yield for Class A Shares of the Limited Term
Tennessee Tax-Exempt Fund and Tennessee Tax- Exempt Fund for the 30-day period
ended December 31, 1997 was as follows:
NAME OF FUND TAX EQUIVALENT NET OF ABSORBED
YIELD EXPENSES
Limited Term Tennessee
Tax-Exempt Fund 6.28% 5.48%
Tennessee Tax-Exempt Fund 7.00% 5.82%
Tax equivalent yield is computed by dividing that portion of the
current yield (calculated as described above) which is tax exempt by 1 minus a
stated tax rate and adding the quotient to that portion, if any, of the yield of
the Fund that is not tax exempt.
The tax equivalent yield quoted above represents the application of
the highest Federal and State of Tennessee marginal personal income tax rates
presently in effect. For Federal personal income tax purposes, a 39.60% tax rate
has been used. For Tennessee personal income tax purposes, a 6.00% tax rate has
been used. For the fiscal period ended December 31, 1997, 78.5% of the Tennessee
Tax-Exempt Fund's assets and 96.95% of the Limited Term Tennessee Tax-Exempt
Fund's assets were invested in Tennessee Municipal Obligations, which reduced
the effect of the State's tax rate to 1.29% and 0.19%, respectively. The tax
equivalent figure, however, does not include the potential effect of any local
(including, but not limited to, county, district or city) taxes, including
applicable surcharges. In addition, there may be pending legislation which could
affect such stated tax rates or yield. Each investor should consult its tax
adviser, and consider its own factual circumstances and applicable tax laws, in
order to ascertain the relevant tax equivalent yield.
Average annual total return is calculated by determining the ending
redeemable value of an investment purchased with a hypothetical $1,000 payment
made at the beginning of the period (assuming the reinvestment of dividends and
distributions), dividing by the amount of the initial investment, taking the
"n"th root of the quotient (where "n" is the number of years in the period) and
subtracting 1 from the result. A Class's average annual total return figures
calculated in accordance with such formula assume that in the case of Class A
the maximum sales load has been deducted from the hypothetical initial
investment at the time of purchase or, in the case of Class B, the maximum
applicable contingent deferred sales charge ("CDSC") has been paid upon
redemption at the end of the period.
The average annual total return for Class A Shares of each Fund for
the indicated period ended December 31, 1997 was as follows:
<PAGE>
NAME OF FUND 1-YEAR 5-YEARS 10-YEARS
Capital Growth Fund(1) 24.62% 15.41% 13.43%
Equity Income Fund(1) 26.22% 14.36% 13.44%
Limited Term U.S. Government
Fund(1) 2.97% 4.45% 6.50%
Limited Term Income Fund 3.26% 4.79%(2) N/A
Limited Term Tennessee
Tax-Exempt Fund(1) 2.22% 3.24% 4.73%
Income Fund(1) 5.40% 5.69% 7.36%
Tennessee Tax-Exempt Fund 3.87% 3.78%(2) N/A
- ---------------------
1 The Capital Growth Fund and Income Fund commenced operations on April 1,
1996, and the Equity Income Fund, Limited Term Tennessee Tax-Exempt Fund
and Limited Term U.S. Government Fund commence operations on February 28,
1997, through a transfer of assets from common trust funds managed by the
Adviser, using substantially the same investment objective, policies,
restrictions and methodologies as the corresponding Fund. The performance
information set forth above for each such Fund includes the performance of
its predecessor common trust fund for the period prior to the commencement
of operations of the Fund, as adjusted to reflect the maximum operating
expenses that may be charged the respective Fund. The common trust funds
did not charge any expenses. This performance information is not
necessarily indicative of the future performance of a Fund. Because each
Fund is actively managed, its investments will vary from time to time and
will not be identical to the past Fund investments of the predecessor.
Moreover, the predecessor common trust funds were not registered under the
1940 Act and therefore were not subject to certain investment restrictions
that are imposed by the 1940 Act, which, if imposed, could have adversely
affected the common trust funds' performance.
2 For the period March 28, 1994 (commencement of operations) through December
31, 1997.
Total return is calculated by subtracting the amount of the maximum
offering price per share at the beginning of a stated period from the net asset
value per share at the end of the period (after giving effect to the
reinvestment of dividends and distributions during the period and any applicable
CDSC), and dividing the result by the maximum offering price per share at the
beginning of the period. Total return also may be calculated based on the net
asset value per share at the beginning of the period for Class A Shares or
without giving effect to any applicable CDSC at the end of the period for Class
B Shares. In such cases, the calculation would not reflect the deduction of the
sales load with respect to Class A Shares or any applicable CDSC with respect to
Class B Shares, which, if reflected, would reduce the performance quoted.
The total return for Class A Shares of each Fund for the period from
commencement of operations of the Fund through December 31, 1997 was as follows:
BASED ON MAXIMUM BASED ON NET
NAME OF FUND OFFERING PRICE ASSET VALUE
Capital Growth Fund(1) 41.00% 48.06%
Equity Income Fund(2) 18.29% 24.20%
Limited Term U.S.
Government Fund(2) 2.37% 5.54%
Limited Term Income Fund(3) 21.42% 23.98%
Limited Term Tennessee
Tax-Exempt Fund(2) 1.13% 4.26%
Income Fund(1) 9.74% 13.14%
Tennessee Tax-Exempt Fund(3) 16.32% 19.92%
- -----------------------
1 For the period from April 1, 1996 (commencement of operations) through
December 31, 1997.
2 For the period from February 28, 1997 (commencement of operations) through
December 31, 1997.
3 For the period from March 28, 1994 (commencement of operations) through
December 31, 1997.
For the seven-day period ended December 31, 1997, the Prime Money
Market Fund's yield was 5.10% for Class A Shares and 5.35% for Institutional
Shares, and its effective yield was 5.22% for Class A Shares and 5.48% for
Institutional Shares. The U.S. Treasury Money Market Fund's yield for such
period was 4.82% for Class A Shares and 5.07% for Institutional Shares, and its
effective yield was 4.93% for Class A Shares and 5.19% for Institutional Shares.
Yield will be computed in accordance with a standardized method which involves
determining the net change in the value of a hypothetical pre-existing Fund
account having a balance of one share at the beginning of a seven calendar day
period for which yield is to be quoted, dividing the net change by the value of
the account at the beginning of the period to obtain the base period return, and
annualizing the results (i.e., multiplying the base period return by 365/7). The
net change in the value of the account reflects the value of additional shares
purchased with dividends declared on the original share and any such additional
shares and fees that may be charged to shareholder accounts, in proportion to
the length of the base period and the Fund's average account size, but does not
include realized gains and losses or unrealized appreciation and depreciation.
Effective annualized yield is computed by adding 1 to the base period return
(calculated as described above), raising that sum to a power equal to 365
divided by 7, and subtracting 1 from the result.
Yields will fluctuate and are not necessarily representative of future
results. The investor should remember that yield is a function of the type and
quality of the instruments held, their maturity and operating expenses. An
investor's principal in the Fund is not guaranteed. See "Determination of Net
Asset Value" for a discussion of the manner in which each Fund's price per share
is determined.
From time to time, advertising materials for a Fund may refer to or
discuss current or past business, political, economic or financial conditions,
such as U.S. monetary or fiscal policies and actual or proposed tax legislation.
In addition, from time to time, advertising materials for a Fund may include
information concerning retirement and investing for retirement, average life
expectancy and pension and social security benefits.
No performance figures are provided for Class B Shares which had not
been offered as of the date of the financial information.
DIVIDENDS, DISTRIBUTION AND TAXES
THE FOLLOWING INFORMATION SUPPLEMENTS AND SHOULD BE READ IN
CONJUNCTION WITH THE SECTION IN THE PROSPECTUS ENTITLED "DIVIDENDS,
DISTRIBUTIONS AND TAXES."
The Adviser believes that each Fund qualified as a "regulated
investment company" under the Code for the fiscal year ended December 31, 1997.
Each Fund intends to continue to so qualify if such qualification is in the best
interests of its shareholders. To qualify as a regulated investment company, the
Fund must pay out to its shareholders at least 90% of its net income (consisting
of net investment income from tax exempt obligations and net short-term capital
gain), and must meet certain asset diversification and other requirements.
Qualification as a regulated investment company relieves the Fund from any
liability for Federal income taxes to the extent its earnings are distributed in
accordance with the applicable provisions of the Code. The term "regulated
investment company" does not imply the supervision of management or investment
practices or policies by any government agency.
Any dividend or distribution paid shortly after an investor's purchase
may have the effect of reducing the aggregate net asset value of his shares
below the cost of his investment. Such a distribution would be a return on
investment in an economic sense although taxable as stated in "Dividends,
Distributions and Taxes" in the Prospectus. In addition, the Code provides that
if a shareholder holds shares for six months or less and has received a capital
gain dividend with respect to such shares, any loss incurred on the sale of such
shares will be treated as a long-term capital loss to the extent of the capital
gain dividend received.
Depending upon the composition of a Fund's income, the entire amount
or a portion of the dividends paid by the Fund from net investment income may
qualify for the dividends received deduction allowable to qualifying U.S.
corporate shareholders ("dividends received deduction"). In general, dividend
income from a Fund distributed to qualifying corporate shareholders will be
eligible for the dividends received deduction only to the extent that such
Fund's income consists of dividends paid by U.S. corporations. However, Section
246(c) of the Code generally provides that if a qualifying corporate shareholder
has disposed of Fund shares held for less than 46 days, which 46 days generally
must be during the 90-day period commencing 45 days before the shares become
ex-dividend, and has received a dividend from net investment income with respect
to such shares, the portion designated by the Fund as qualifying for the
dividends received deduction will not be eligible for such shareholder's
dividends received deduction. In addition, the Code provides other limitations
with respect to the ability of a qualifying corporate shareholder to claim the
dividends received deduction in connection with holding Fund shares.
Ordinarily, gains and losses realized from portfolio transactions will
be treated as capital gains and losses. However, a portion of the gain or loss
realized from the disposition of non-U.S. dollar denominated securities
(including debt instruments, certain financial futures and options, and certain
preferred stock) may be treated as ordinary income or loss under Section 988 of
the Code. In addition, all or a portion of the gain realized from the
disposition of market discount bonds will be treated as ordinary income under
Section 1276 of the Code. A market discount bond is defined as any bond
purchased by a Fund after April 30, 1993, and after its original issuance, at a
price below its face or accredited value. Finally, all or a portion of the gain
realized from engaging in "conversion transactions" may be treated as ordinary
income under Section 1258. "Conversion transactions" are defined to include
certain forward, futures, option and "straddle" transactions, transactions
marketed or sold to produce capital gains, or transactions described in Treasury
regulations to be issued in the future.
Under Section 1256 of the Code, any gain or loss realized by the Fund
from certain financial futures and options transactions (other than those taxed
under Section 988 of the Code) will be treated as 60% long-term capital gain or
loss and 40% short-term capital gain or loss. Gain or loss will arise upon the
exercise or lapse of such futures and options as well as from closing
transactions. In addition, any such futures or options remaining unexercised at
the end of the Fund's taxable year will be treated as sold for their then fair
market value, resulting in additional gain or loss to the Fund characterized in
the manner described above.
Offsetting positions held by a Fund involving financial futures and
options may constitute "straddles." Straddles are defined to include "offsetting
positions" in actively traded personal property. The tax treatment of straddles
is governed by Sections 1092 and 1258 of the Code, which, in certain
circumstances, override or modify the provisions of Sections 988 and 1256 of the
Code. If the Fund was treated as entering into straddles by reason of its
futures or options transactions, such straddles could be characterized as "mixed
straddles" if the futures or options transactions comprising such straddles were
governed by Section 1256. The Fund may make one or more elections with respect
to "mixed straddles." Depending upon which election is made, if any, the results
to the Fund may differ. If no election is made, to the extent the straddle rules
apply to positions established by the Fund, losses realized by the Fund will be
deferred to the extent of unrealized gain in any offsetting positions. Moreover,
as a result of the straddle rules, short-term capital loss on straddle positions
may be recharacterized as long-term capital loss, and long-term capital gain on
straddle positions may be treated as short-term capital gain or ordinary income.
The Taxpayer Relief Act of 1997 included constructive sale provisions
that generally will apply if a Fund either (1) holds an appreciated financial
position with respect to stock, certain debt obligations, or partnership
interests ("appreciated financial position") and then enters into a short sale,
futures, forward, or offsetting notional principal contract (collectively, a
"Contract") respecting the same or substantially identical property or (2) holds
an appreciated financial position that is a Contract and then acquires property
that is the same as or substantially identical to the underlying property. In
each instance, with certain exceptions, the Fund generally will be taxed as if
the appreciated financial position were sold at its fair market value on the
date the Fund enters into the financial position or acquires the property,
respectively. Transactions that are identified hedging or straddle transactions
under other provisions of the Code can be subject to the constructive sale
provisions.
Investment by a Fund in securities issued or acquired at a discount,
or providing for deferred interest or for payment of interest in the form of
additional obligations could under special tax rules affect the amount, timing
and character of distributions to shareholders by causing such Fund to recognize
income prior to the receipt of cash payments. For example, the Fund could be
required to accrue a portion of the discount (or deemed discount) at which the
securities were issued each year and to distribute such income in order to
maintain its qualifica tion as a regulated investment company. In such case, the
Fund may have to dispose of securities which it might otherwise have continued
to hold in order to generate cash to satisfy these distribution requirements.
PORTFOLIO TRANSACTIONS
GENERAL. Transactions are allocated to various dealers by the Funds'
investment personnel in their best judgment. The primary consideration is prompt
and effective execution of orders at the most favorable price. Subject to that
primary consideration, dealers may be selected to act on an agency basis for
research, statistical or other services to enable the Adviser to supplement its
own research and analysis with the views and information of other securities
firms. No brokerage commissions have been paid to date, except as noted below.
To the extent research services are furnished by brokers through which
a Fund effects securities transactions, the Adviser may use such information in
advising other funds or accounts it advises and, conversely, to the extent
research services are furnished to the Adviser by brokers in connection with
other funds or accounts the Adviser advises, the Adviser also may use such
information in advising the Funds. Although it is not possible to place a dollar
value on these services, if they are provided, it is the opinion of the Adviser
that the receipt and study of any such services should not reduce the overall
expenses of its research department.
CAPITAL GROWTH FUND AND EQUITY INCOME FUND. Brokers also are selected
because of their ability to handle special executions such as are involved in
large block trades or broad distributions, provided the primary consideration is
met. Large block trades may, in certain cases, result from two or more clients
the Adviser might advise being engaged simultaneously in the purchase or sale of
the same security. Portfolio turnover may vary from year to year, as well as
within a year. It is anticipated that in any fiscal year, the turnover rate for
each of these Funds generally should be less than 100%. Higher turnover rates
are likely to result in comparatively greater brokerage expenses. The overall
reasonableness of brokerage commissions paid is evaluated by the Adviser based
upon its knowledge of available information as to the general level of
commissions paid by other institutional investors for comparable services.
When transactions are executed in the over-the-counter market, the
Adviser will deal with the primary market makers unless a more favorable price
or execution otherwise is obtainable.
The Company's Board of Directors has determined, in accordance with
Section 17(e) of the 1940 Act and Rule 17e-1 thereunder, that any portfolio
transaction for the Fund may be executed by certain brokers that are affiliates
of the Adviser when such broker's charge for the transaction does not exceed the
usual and customary level.
For the period April 1, 1996 (commencement of operations) through
December 31, 1996 and the fiscal year ended December 31, 1997, the Capital
Growth Fund paid total brokerage commissions of $88,860 and $360,208,
respectively, none of which was paid to affiliates of the Adviser or BISYS. For
the period February 27, 1997 (commencement of operations) through December 31,
1997, the Equity Income Fund paid total brokerage commissions of $16,678, none
of which was paid to affiliates of the Adviser of BISYS. There were no gross
spreads or concessions on principal transactions for the period. The Equity
Income Fund has not completed its first fiscal year.
INCOME FUND, LIMITED TERM INCOME FUND, TENNESSEE TAX- EXEMPT FUND,
LIMITED TERM TENNESSEE TAX-EXEMPT FUND, LIMITED TERM U.S. GOVERNMENT FUND, PRIME
MONEY MARKET FUND AND TREASURY MONEY MARKET FUND. Purchases and sales of Fund
securities usually are principal transactions. Portfolio securities ordinarily
are purchased directly from the issuer or from an underwriter or market maker.
Usually no brokerage commissions are paid by the Fund for such purchases and
sales. The prices paid to underwriters of newly-issued securities usually
include a concession paid by the issuer to the underwriter, and purchases of
securities from market makers may include the spread between the bid and asked
price.
INFORMATION ABOUT THE FUNDS
THE FOLLOWING INFORMATION SUPPLEMENTS AND SHOULD BE READ IN
CONJUNCTION WITH THE SECTION IN THE PROSPECTUS ENTITLED "GENERAL INFORMATION."
Each Fund share has one vote and, when issued and paid for in
accordance with the terms of the offering, is fully paid and non-assessable.
Shares have no preemptive or subscription rights and are freely transferable.
Rule 18f-2 under the 1940 Act provides that any matter required to be
submitted under the provisions of the 1940 Act or applicable state law or
otherwise, to the holders of the outstanding voting securities of an investment
company, such as the Company, will not be deemed to have been effectively acted
upon unless approved by the holders of a majority of the outstanding shares of
each portfolio affected by such matter. Rule 18f-2 further provides that a
portfolio shall be deemed to be affected by a matter unless it is clear that the
interests of each portfolio in the matter are identical or that the matter does
not affect any interest of such portfolio. However, the Rule exempts the
election of directors from the separate voting requirements of the Rule.
Each Fund will send annual and semi-annual financial statements to all
its shareholders.
As of March 27, 1998, the following shareholders owned of record 5% or
more of the outstanding shares of the indicated Fund and Class:
PERCENT OF TOTAL SHARES
NAME AND ADDRESS OF CLASS OUTSTANDING
CAPITAL GROWTH FUND:
JC Bradford Company 27.26% (Class A Shares)
F/B/O Robert Jernigan
330 Commerce Street
Nashville, TN 37201
FTC & Company 21.61% (Class A Shares)
Attn: Datalynx No. 106
P.O. Box 173736
Denver, CO 80217
BHC Securities, Inc. 6.14% (Class A Shares)
Attn: Cash Sweeps Dept. 64.21% (Class B Shares)
2005 Market Street, 12th Floor
Philadelphia, PA 19103
First American National Bank 6.05% (Class A Shares)
Attn: AmeriStar Investment Management 98.32% (Institutional Shares)
and Trust
800 First American Center
Nashville, TN 37237
INCOME FUND:
First American National Bank 80.76% (Class A Shares)
Attn: AmeriStar Investment Management 99.99% (Institutional Shares)
and Trust
800 First American Center
Nashville, TN 37237
BHC Securities, Inc. 19.23% (Class A Shares)
Attn: Cash Sweeps Dept. 91.69% (Class B Shares)
2005 Market Street, 12th Floor
Philadelphia, PA 19103
EQUITY INCOME FUND:
BHC Securities, Inc. 44.30% (Class A Shares)
Attn: Cash Sweeps Dept. 68.93% (Class B Shares)
2005 Market Street, 12th Floor
Philadelphia, PA 19103
First American National Bank 17.67% (Class A Shares)
Attn: AmeriStar Investment Management 98.71% (Institutional Shares)
and Trust
800 First American Center
Nashville, TN 37237
LIMITED TERM INCOME FUND:
FTC & Company 54.74% (Class A Shares)
Attn: Datalynx No. 106
P.O. Box 173736
Denver, CO 80217
CoreLink Financial Inc. 38.29% (Class A Shares)
1855 Gateway Blvd. Suite 500
P.O. Box 4054
Concord, CA 94520
BHC Securities, Inc. 97.47% (Class B Shares)
Attn: Cash Sweeps Dept.
2005 Market Street, 12th Floor
Philadelphia, PA 19103
First American National Bank 99.99% (Institutional Shares)
Attn: AmeriStar Investment Management
and Trust
800 First American Center
Nashville, TN 37237
LIMITED TERM U.S. GOVERNMENT FUND:
First American National Bank 95.96% (Class A Shares)
Attn: AmeriStar Investment Management
and Trust
800 First American Center
Nashville, TN 37237
BHC Securities, Inc. 99.98% (Class B Shares)
Attn: Cash Sweeps Dept.
2005 Market Street, 12th Floor
Philadelphia, PA 19103
LIMITED TERM TENNESSEE TAX-EXEMPT
FUND:
First American National Bank 99.96% (Class A Shares)
Attn: AmeriStar Investment Management
and Trust
800 First American Center
Nashville, TN 37237
BHC Securities, Inc. 99.99% (Class B Shares)
Attn: Cash Sweeps Dept.
2005 Market Street, 12th Floor
Philadelphia, PA 19103
TENNESSEE TAX-EXEMPT FUND:
JC Bradford Company 29.60% (Class A Shares)
F/B/O Robert Jernigan
330 Commerce Street
Nashville, TN 37201
BHC Securities, Inc. 22.73% (Class A Shares)
Attn: Cash Sweeps Dept. 99.99% (Class B Shares)
2005 Market Street, 12th Floor
Philadelphia, PA 19103
CoreLink Financial Inc. 19.32% (Class A Shares)
1855 Gateway Blvd. Suite 500
P.O. Box 4054
Concord, CA 94520
First American National Bank 8.12% (Class A Shares)
Attn: AmeriStar Investment Management 96.38% (Institutional Shares)
and Trust
800 First American Center
Nashville, TN 37237
PRIME MONEY MARKET FUND:
BHC Securities, Inc. 51.68% (Class A Shares)
Attn: Cash Sweeps Dept.
2005 Market Street
Philadelphia, PA 19103
First American National Bank 46.60% (Class A Shares)
Attn: AmeriStar Investment 94.74% (Insitutional Shares)
Management and Trust
800 First American Center
Nashville, TN 37237
TREASURY MONEY MARKET FUND:
First American National Bank 54.07% (Class A Shares)
Attn: AmeriStar Investment 97.67% (Institutional Shares)
Management and Trust
800 First American Center
Nashville, TN 37237
Hare & Co. 37.76% (Class A Shares)
c/o The Bank of New York
Attn: Stif/Master Note
One Wall Street
New York, NY 10286
A shareholder who beneficially owns, directly or indirectly, more than
25% of a Fund's voting securities may be deemed a "control person" (as defined
in the 1940 Act) of the Fund.
<PAGE>
CUSTODIAN, TRANSFER AND DIVIDEND DISBURSING AGENT, COUNSEL
AND INDEPENDENT AUDITORS
The Bank of New York, 90 Washington Street, New York, New York 10286,
acts as custodian of each Fund's investments. BISYS Fund Services Ohio, Inc., an
affiliate of BISYS, 3435 Stelzer Road, Columbus, Ohio 43219, acts as the
Company's transfer and dividend disbursing agent. Under the transfer agency
agreement with the Company, the Transfer Agent maintains shareholder account
records for each Fund, handles certain communications between shareholders and
the Fund and pays dividends and distributions payable by the Fund. For these
services, the Transfer Agent receives a monthly fee compiled on the basis of the
number of shareholder accounts it maintains for the Company during the month,
and is reimbursed for certain out- of-pocket expenses. Neither The Bank of New
York nor BISYS Fund Services Ohio, Inc. has any part in determining the
investment policies of any Fund or which securities are to be purchased or sold
by a Fund.
Stroock & Stroock & Lavan LLP, 180 Maiden Lane, New York, New York
10038-4982, as counsel for the Company, has rendered its opinion as to certain
legal matters regarding the due authorization and valid issuance of the shares
of Common Stock being sold pursuant to the Prospectus.
KPMG Peat Marwick LLP, Two Nationwide Plaza, Columbus, Ohio 43215,
independent auditors, have been selected as each Fund's auditors.
FINANCIAL STATEMENTS
The Funds' Annual Report to Shareholders for the fiscal year ended
December 31, 1997 is a separate document supplied with this Statement of
Additional Information, and the financial statements, accompanying notes and
report of independent auditors appearing therein are incorporated by reference
into this Statement of Additional Information.
<PAGE>
APPENDIX
Description of certain ratings assigned by Standard & Poor's Ratings
Group ("S&P"), Moody's Investors Service, Inc. ("Moody's"), Fitch IBCA, Inc.
("Fitch"), Duff & Phelps Credit Rating Co. ("Duff") and Thomson BankWatch,
Inc.("BankWatch"):
S&P
BOND RATINGS
AAA
Bonds rated AAA have the highest rating assigned by S&P. Capacity to
pay interest and repay principal is extremely strong.
AA
Bonds rated AA have a very strong capacity to pay interest and repay
principal and differ from the highest rated issues only in small degree.
A
Bonds rated A have a strong capacity to pay interest and repay
principal although they are somewhat more susceptible to the adverse effects of
changes in circumstances and economic conditions than obligations in higher
rated categories.
BBB
Bonds rated BBB are regarded as having an adequate capacity to pay
interest and repay principal. Whereas they normally exhibit 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
bonds in this category than for bonds in higher rated categories.
BB
Bonds rated BB have less near-term vulnerability to default than other
speculative grade debt. 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 payment.
S&P's letter ratings may be modified by the addition of a plus (+) or
minus (-) sign designation, which is used to show relative standing within the
major rating categories, except in the AAA (Prime Grade) category.
COMMERCIAL PAPER RATING
The designation A-1 by S&P indicates that the degree of safety
regarding timely payment is either overwhelming or very strong. Those issues
determined to possess overwhelming safety characteristics are denoted with a
plus sign (+) designation. Capacity for timely payment on issues with an A-2
designation is strong. However, the relative degree of safety is not as high as
for issues designated A-1.
Moody's
BOND RATINGS
Aaa
Bonds which are rated Aaa are judged to be of the best quality. They
carry the smallest degree of investment risk and are generally referred to as
"gilt edge." Interest payments are protected by a large or 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.
Aa
Bonds which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what generally are 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.
A
Bonds which are rated A possess many favorable investment attributes
and are to be considered as upper medium grade obligations. Factors giving
security to principal and interest are considered adequate, but elements may be
present which suggest a susceptibility to impairment sometime in the future.
Baa
Bonds which are rated Baa are considered as medium grade obligations,
I.E., they are neither highly protected nor poorly secured. Interest payments
and principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.
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 therefore not well
safeguarded during both good and bad times over the future. Uncertainty of
position characterizes bonds in this class.
Moody's applies the numerical modifiers 1, 2 and 3 to show relative
standing within the major rating categories, except in the Aaa category. The
modifier 1 indicates a ranking for the security in the higher end of a rating
category; the modifier 2 indicates a mid-range ranking; and the modifier 3
indicates a ranking in the lower end of a rating category.
COMMERCIAL PAPER RATING
The rating Prime-1 (P-1) is the highest commercial paper rating
assigned by Moody's. Issuers of P-1 paper must have a superior capacity for
repayment of short-term promissory obligations, and ordinarily will be evidenced
by leading market positions in well established industries, high rates of return
on funds employed, conservative capitalization structures with moderate reliance
on debt and ample asset protection, broad margins in earnings coverage of fixed
financial charges and high internal cash generation, and well established access
to a range of financial markets and assured sources of alternate liquidity.
Issuers (or relating supporting institutions) rated Prime-2 (P-2) have
a strong capacity for repayment of short-term promissory obligations. This
ordinarily will be evidenced by many of the characteristics cited above but to a
lesser degree. Earnings trends and coverage ratios, while sound, will be more
subject to variation. Capitalization characteristics, while still appropriate,
may be more affected by external conditions. Ample alternate liquidity is
maintained.
Fitch
BOND RATINGS
The ratings represent Fitch's assessment of the issuer's ability to
meet the obligations of a specific debt issue or class of debt. The ratings take
into consideration special features of the issue, its relationship to other
obligations of the issuer, the current financial condition and operative
performance of the issuer and of any guarantor, as well as the political and
economic environment that might affect the issuer's future financial strength
and credit quality.
AAA
Bonds rated AAA are considered to be investment grade and of the
highest credit quality. The obligor has an exceptionally strong ability to pay
interest and repay principal, which is unlikely to be affected by reasonably
foreseeable events.
AA
Bonds rated AA are considered to be investment grade and of very high
credit quality. The obligor's ability to pay interest and repay principal is
very strong, although not quite as strong as bonds rated AAA. Because bonds
rated in the AAA and AA categories are not significantly vulnerable to
foreseeable future developments, short-term debt of these issuers is generally
rated F-1+.
A
Bonds rated A are considered to be investment grade and of high credit
quality. The obligor's ability to pay interest and repay principal is considered
to be strong, but may be more vulnerable to adverse changes in economic
conditions and circumstances than bonds with higher ratings.
BBB
Bonds rated BBB are considered to be investment grade and of
satisfactory credit quality. The obligor's ability to pay interest and repay
principal is considered to be adequate. Adverse changes in economic conditions
and circumstances, however, are more likely to have an adverse impact on these
bonds and, therefore, impair timely payment. The likelihood that the ratings of
these bonds will fall below investment grade is higher than for bonds with
higher ratings.
BB
Bonds rated BB are considered speculative. The obligor's ability to
pay interest and repay principal may be affected over time by adverse economic
changes. However, business and financial alternatives can be identified which
could assist the obligor in satisfying its debt service requirements.
Plus (+) and minus (-) signs are used with a rating symbol to indicate
the relative position of a credit within the rating category.
SHORT-TERM RATINGS
Fitch's short-term ratings apply to debt obligations that are payable
on demand or have original maturities of up to three years, including commercial
paper, certificates of deposit, medium-term notes, and municipal and investment
notes.
Although the credit analysis is similar to Fitch's bond rating
analysis, the short-term rating places greater emphasis than bond ratings on the
existence of liquidity necessary to meet the issuer's obligations in a timely
manner.
F-1+
EXCEPTIONALLY STRONG CREDIT QUALITY. Issues assigned this rating are
regarded as having the strongest degree of assurance for timely payment.
F-1
VERY STRONG CREDIT QUALITY. Issues assigned this rating reflect an
assurance of timely payment only slightly less in degree than issues rated F-1+.
F-2
GOOD CREDIT QUALITY. Issues carrying this rating have a satisfactory
degree of assurance for timely payments, but the margin of safety is not as
great as the F-1+ and F-1 categories.
Duff
BOND RATINGS
AAA
Bonds rated AAA are considered highest credit quality. The risk
factors are negligible, being only slightly more than for risk-free U.S.
Treasury debt.
AA
Bonds rated AA are considered high credit quality. Protection factors
are strong. Risk is modest but may vary slightly from time to time because of
economic conditions.
A
Bonds rated A have protection factors which are average but adequate.
However, risk factors are more variable and greater in periods of economic
stress.
BBB
Bonds rated BBB are considered to have below average protection
factors but still considered sufficient for prudent investment. Considerable
variability in risk exists during economic cycles.
BB
Bonds rated BB are below investment grade but are deemed by Duff as
likely to meet obligations when due. Present or prospective financial protection
factors fluctuate according to industry conditions or company fortunes. Overall
quality may move up or down frequently within the category.
Plus (+) and minus (-) signs are used with a rating symbol (except
AAA) to indicate the relative position of a credit within the rating category.
COMMERCIAL PAPER RATING
The rating Duff-1 is the highest commercial paper rating assigned by
Duff. Paper rated Duff-1 is regarded as having very high certainty of timely
payment with excellent liquidity factors which are supported by ample asset
protection. Risk factors are minor. Paper rated Duff-2 is regarded as having
good certainty of timely payment, good access to capital markets and sound
liquidity factors and company fundamentals. Risk factors are small.
BankWatch
COMMERCIAL PAPER AND SHORT-TERM OBLIGATIONS RATINGS
The rating TBW-1 is the highest short-term obligation rating assigned
by BankWatch. Obligations rated TBW-1 are regarded as having the strongest
capacity for timely repayment. Obligations rated TBW-2 are supported by a strong
capacity for timely repayment, although the degree of safety is not as high as
for issues rated TBW-1.
INTERNATIONAL AND U.S. BANK RATINGS
In addition to its ratings of short-term obligations, BankWatch
assigns a rating to each issuer it rates, in gradations of A through E.
BankWatch examines all segments of the organization, including, where
applicable, the holding company, member banks or associations, and other
subsidiaries. In those instances where financial disclosure is incomplete or
untimely, a qualified rating (QR) is assigned to the institution. BankWatch also
assigns, in the case of foreign banks, a country rating which represents an
assessment of the overall political and economic stability of the country in
which the bank is domiciled.
