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BB&T MUTUAL FUNDS GROUP
STATEMENT OF ADDITIONAL INFORMATION
JANUARY 2, 1997
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This Statement of Additional Information is not a Prospectus, but should be read
in conjunction with the Prospectuses of the BB&T U.S. Treasury Money Market
Fund, the BB&T Short-Intermediate U.S. Government Income Fund, the BB&T
Intermediate U.S. Government Bond Fund, the BB&T Growth and Income Stock Fund,
the BB&T North Carolina Intermediate Tax-Free Fund, the BB&T Balanced Fund, the
BB&T Small Company Growth Fund, the BB&T International Equity Fund, the BB&T
Capital Manager Conservative Growth Fund, the BB&T Capital Manager Moderate
Growth Fund, and the BB&T Capital Manager Growth Fund, which is dated the same
date hereof (the "Prospectus"). This Statement of Additional Information is
incorporated by reference in its entirety into the Prospectuses. Copies of the
Prospectuses may be obtained by writing BB&T Mutual Funds Group at 3435 Stelzer
Road, Columbus, Ohio 43219, or by telephoning toll free (800) 228- 1872.
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TABLE OF CONTENTS
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BB&T MUTUAL FUNDS GROUP...................................................................................... B-1
INVESTMENT OBJECTIVES AND POLICIES........................................................................... B-1
Additional Information on Portfolio Instruments.......................................................... B-1
Puts ................................................................................................ B-13
Investment Restrictions.................................................................................. B-15
Portfolio Turnover....................................................................................... B-18
VALUATION.................................................................................................... B-19
Valuation of the U.S. Treasury Fund...................................................................... B-19
Valuation of the Growth and Income Fund, North Carolina Fund, Short-Intermediate
Fund, Intermediate Bond Fund, Balanced Fund, Small Company Growth Fund,
and the Funds of Funds.......................................................................... B-20
Valuation of the International Equity Fund............................................................... B-21
ADDITIONAL PURCHASE AND REDEMPTION INFORMATION............................................................... B-21
Purchase of Class A and Class B Shares................................................................... B-22
Matters Affecting Redemption............................................................................. B-23
ADDITIONAL TAX INFORMATION................................................................................... B-23
Additional Tax Information Concerning the International Equity Fund...................................... B-25
Additional Tax Information Concerning the North Carolina Fund............................................ B-26
MANAGEMENT OF BB&T MUTUAL FUNDS GROUP........................................................................ B-34
Officers ................................................................................................ B-34
Investment Adviser....................................................................................... B-36
Investment Sub-Advisers.................................................................................. B-37
Portfolio Transactions................................................................................... B-38
Glass-Steagall Act....................................................................................... B-40
Manager and Administrator................................................................................ B-41
Expenses ................................................................................................ B-42
Distributor.............................................................................................. B-43
Custodian................................................................................................ B-45
Independent Accountants.................................................................................. B-45
Legal Counsel............................................................................................ B-45
PERFORMANCE INFORMATION...................................................................................... B-45
Yields of the U.S. Treasury Fund......................................................................... B-45
Yields of the Other Funds of the Group................................................................... B-
Calculation of Total Return.............................................................................. B-48
Performance Comparisons.................................................................................. B-49
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ADDITIONAL INFORMATION....................................................................................... B-54
Organization and Description of Shares................................................................... B-54
Shareholder and Trustee Liability........................................................................ B-55
Miscellaneous............................................................................................ B-55
FINANCIAL STATEMENTS......................................................................................... B-64
Independent Auditors Report.............................................................................. B-64
Audited Financial Statements as of September 30, 1996.................................................... B-64
APPENDIX..................................................................................................... B-65
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STATEMENT OF ADDITIONAL INFORMATION
BB&T MUTUAL FUNDS GROUP
BB&T Mutual Funds Group (the "Group") is an open-end management
investment company. The Group consists of eight series of units of beneficial
interest ("Shares") offered to the public, each representing interests in one of
eight separate investment portfolios (each a "Fund"): the BB&T U.S. Treasury
Money Market Fund (the "U.S. Treasury Fund"), the BB&T Short-Intermediate U.S.
Government Income Fund (the "Short-Intermediate Fund"), the BB&T Intermediate
U.S. Government Bond Fund (the "Intermediate Bond Fund"), the BB&T Growth and
Income Stock Fund (the "Growth and Income Fund"), the BB&T North Carolina
Intermediate Tax-Free Fund (the "North Carolina Fund"), the BB&T Balanced Fund
(the "Balanced Fund"), the BB&T Small Company Growth Fund (the "Small Company
Growth Fund" and the BB&T International Equity Fund (the "International Equity
Fund"). The Group also offers three additional series of Shares, the BB&T
Capital Manager Conservative Growth Fund, the BB&T Capital Manager Moderate
Growth Fund, and the BB&T Capital Manager Growth Fund (the "Funds of Funds")
which offer Shareholders a professionally-managed investment program by
purchasing shares of existing mutual funds of the Group (the "Underlying Funds")
which are managed by BB&T (each Fund and the Funds of Funds are collectively,
"Funds"). Each Fund, except for the Funds of Funds, offers to the public three
classes of Shares: Class A Shares, Class B Shares and Trust Shares. The Funds of
Funds offers Trust Shares only. Much of the information contained in this
Statement of Additional Information expands on subjects discussed in the
Prospectuses. Capitalized terms not defined herein are defined in the
Prospectuses. No investment in Shares of a Fund should be made without first
reading the applicable Prospectuses.
INVESTMENT OBJECTIVES AND POLICIES
Additional Information on Portfolio Instruments
The following policies supplement the information pertaining to
portfolio instruments of each Fund as set forth in the Prospectuses.
The Appendix to this Statement of Additional Information identifies
nationally recognized statistical ratings organizations ("NRSROs") that may be
used by BB&T , PNC Bank, National Association ("PNC Bank") and
CastleInternational Asset Management Limited ("CastleInternational") with regard
to portfolio investments for the Funds and provides a description of relevant
ratings assigned by each such NRSRO. A rating by an NRSRO may be used only where
the NRSRO is neither controlling, controlled by, nor under common control with
the issuer of, or any issuer, guarantor, or provider of credit support for, the
instrument.
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Bankers' Acceptances and Certificates of Deposit. All of the Funds
except the U.S. Treasury Fund may invest in bankers' acceptances, certificates
of deposit, and demand and time deposits. Bankers' acceptances are negotiable
drafts or bills of exchange typically drawn by an importer or exporter to pay
for specific merchandise, which are "accepted" by a bank, meaning, in effect,
that the bank unconditionally agrees to pay the face value of the instrument on
maturity. Certificates of deposit are negotiable certificates issued against
funds deposited in a commercial bank or a savings and loan association for a
definite period of time and earning a specified return.
Bankers' acceptances will be those guaranteed by domestic and foreign
banks, if at the time of investment such banks have capital, surplus, and
undivided profits in excess of $100,000,000 (as of the date of their most
recently published financial statements). Certificates of deposit and demand and
time deposits will be those of domestic and foreign banks and savings and loan
associations, if (a) at the time of investment they have capital, surplus, and
undivided profits in excess of $100,000,000 (as of the date of their most
recently published financial statements) or (b) the principal amount of the
instrument is insured in full by the Federal Deposit Insurance Corporation.
Commercial Paper. Each Fund, except for the U.S. Treasury Fund, may
invest in commercial paper. Commercial paper consists of unsecured promissory
notes issued by corporations. Issues of commercial paper normally have
maturities of less than nine months and fixed rates of return.
Commercial paper purchasable by the International Equity Fund includes
"Section 4(2) paper," a term that includes debt obligations issued in reliance
on the "private placement" exemption from registration afforded by Section 4(2)
of the Securities Act of 1933. Section 4(2) paper is restricted as to
disposition under the Federal securities laws, and is frequently sold (and
resold) to institutional investors such as the Fund through or with the
assistance of investment dealers who make a market in the Section 4(2) paper,
thereby providing liquidity. Certain transactions in Section 4(2) paper may
qualify for the registration exemption provided in Rule 144A under the
Securities Act of 1933.
Variable Amount Master Demand Notes. Variable amount master demand
notes, in which the Growth and Income Fund, Small Company Growth Fund,
Short-Intermediate Fund, Intermediate Bond Fund and Balanced Fund (the
Short-Intermediate Fund and the Intermediate Bond Fund are sometimes referred to
collectively as the "Fixed Income Funds") and the Funds of Funds may invest, are
unsecured demand notes that permit the indebtedness thereunder to vary and
provide for periodic adjustments in the interest rate according to the terms of
the instrument. They are also referred to as variable rate demand notes. Because
these notes are direct lending arrangements between the Fund and the issuer,
they are not normally traded. Although there may be no secondary market in the
notes, the Fund may demand payment of principal and accrued interest at any time
or during specified periods not exceeding one year, depending upon the
instrument involved, and may resell the note at any time to a third party.
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The absence of such an active secondary market, however, could make it difficult
for the Fund to dispose of a variable amount master demand note if the issuer
defaulted on its payment obligations or during periods when the Fund is not
entitled to exercise their demand rights, and the Fund could, for this or other
reasons, suffer a loss to the extent of the default. While the notes are not
typically rated by credit rating agencies, issuers of variable amount master
demand notes must satisfy the criteria for commercial paper. BB&T (or PNC Bank,
with respect to the Small Company Growth Fund) will consider the earning power,
cash flow, and other liquidity ratios of the issuers of such notes and will
continuously monitor their financial status and ability to meet payment on
demand. Where necessary to ensure that a note is of "high quality," the Fund
will require that the issuer's obligation to pay the principal of the note be
backed by an unconditional bank letter or line of credit, guarantee or
commitment to lend. In determining dollar-weighted average portfolio maturity, a
variable amount master demand note will be deemed to have a maturity equal to
the period of time remaining until the principal amount can be recovered from
the issuer through demand.
Foreign Investment. The Growth and Income Fund, Balanced Fund, Small
Company Growth Fund, International Equity Fund and the Funds of Funds may invest
in certain obligations or securities of foreign issuers. Permissible investments
include Eurodollar Certificates of Deposit ("ECDs") which are U.S. dollar
denominated certificates of deposit issued by branches of foreign and domestic
banks located outside the United States, Yankee Certificates of Deposit ("Yankee
CDs") which are certificates of deposit issued by a U.S. branch of a foreign
bank, denominated in U.S. dollars and held in the United States, Eurodollar Time
Deposits ("ETD's") which are U.S. dollar denominated deposits in a foreign
branch of a U.S. bank or a foreign bank, and Canadian Time Deposits ("CTD's")
which are U.S. dollar denominated certificates of deposit issued by Canadian
offices of major Canadian Banks, Canadian Commercial Paper, which is commercial
paper issued by a Canadian corporation or a Canadian counterpart of a U.S.
corporation, and European commercial paper, which is U.S. dollar denominated
commercial paper of an issuer located in Europe. The Funds may invest in foreign
commercial paper, including Canadian and European commercial paper as described
above.
Investments in securities issued by foreign branches of U.S. banks,
foreign banks, or other foreign issuers, including American Depository Receipts
("ADRs") and securities purchased on foreign securities exchanges, may subject
the Fund to investment risks that differ in some respects from those related to
investment in obligations of U.S. domestic issuers or in U.S. securities
markets. Such risks include future adverse political and economic developments,
possible seizure, currency blockage, nationalization or expropriation of foreign
investments, less stringent disclosure requirements, the possible establishment
of exchange controls or taxation at the source, and the adoption of other
foreign governmental restrictions.
Additional risks include currency exchange risks, less publicly
available information, the risk that companies may not be subject to the
accounting, auditing and financial reporting standards and requirements of U.S.
companies, the risk that foreign securities markets may
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have less volume and therefore many securities traded in these markets may be
less liquid and their prices more volatile than U.S. securities, and the risk
that custodian and brokerage costs may be higher. Foreign issuers of securities
or obligations are often subject to accounting treatment and engage in business
practices different from those respecting domestic issuers of similar securities
or obligations. Foreign branches of U.S. banks and foreign banks may be subject
to less stringent reserve requirements than those applicable to domestic
branches of U.S. banks. The Growth and Income Fund, Balanced Fund, Small Company
Growth Fund, and the Funds of Funds will acquire such securities only when BB&T
(or PNC Bank, with respect to the Small Company Growth Fund) believes the risks
associated with such investments are minimal.
Foreign Currency Transactions. The International Equity Fund may use
forward foreign currency exchange contracts. Forward foreign currency exchange
contracts involve an obligation to purchase or sell a specified currency at a
future date at a price set at the time of the contract. Forward currency
contracts do not eliminate fluctuations in the values of portfolio securities
but rather allow a Fund to establish a rate of exchange for a future point in
time. The Fund may use forward foreign currency exchange contracts to hedge
against movements in the value of foreign currencies (including the "ECU" used
in the European Community) relative to the U.S. dollar in connection with
specific portfolio transactions or with respect to portfolio positions. The Fund
may enter into forward foreign currency exchange contracts when deemed advisable
by its sub-adviser under two circumstances. First, when entering into a contract
for the purchase or sale of a security, the Fund may enter into a forward
foreign currency exchange contract for the amount of the purchase or sale price
to protect against variations, between the date the security is purchased or
sold and the date on which payment is made or received, in the value of the
foreign currency relative to the U.S.
dollar or other foreign currency.
Second, when the Fund's sub-adviser anticipates that a particular
foreign currency may decline relative to the U.S. dollar or other leading
currencies, in order to reduce risk, the Fund may enter into a forward contract
to sell, for a fixed amount, the amount of foreign currency approximating the
value of some or all of the Fund's securities denominated in such foreign
currency. With respect to any forward foreign currency contract, it will not
generally be possible to match precisely the amount covered by the contract and
the value of the securities involved due to the changes in the values of such
securities resulting from market movements between the date the forward contract
is entered into and the date it matures. In addition, while forward contracts
may offer protection from losses resulting from declines in the value of a
particular foreign currency, they also limit potential gains which might result
from increases in the value of such currency. The Fund will also incur costs in
connection with forward foreign currency exchange contracts and conversions of
foreign currencies and U.S. dollars.
A separate account of a Fund consisting of liquid assets equal to the
amount of the Fund's assets that could be required to consummate forward
contracts entered into under the
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second circumstance, as set forth above, will be established with the Fund's
custodian. For the purpose of determining the adequacy of the securities in the
account, the deposited securities will be valued at market or fair value. If the
market or fair value of such securities declines, additional cash or securities
will be placed in the account daily so that the value of the account will be
equal the amount of such commitments by the Fund.
Repurchase Agreements. Securities held by each of the Funds may be
subject to repurchase agreements. Under the terms of a repurchase agreement, a
Fund would acquire securities from member banks of the Federal Deposit Insurance
Corporation with capital, surplus, and undivided profits of not less than
$100,000,000 (as of the date of their most recently published financial
statements) and from registered broker-dealers which BB&T deems creditworthy
under guidelines approved by the Board of Trustees, subject to the seller's
agreement to repurchase such securities at a mutually agreed-upon date and
price. The repurchase price would generally equal the price paid by the Fund
plus interest negotiated on the basis of current short-term rates, which may be
more or less than the rate on the underlying portfolio securities. The seller
under a repurchase agreement will be required to maintain the value of
collateral held pursuant to the agreement at not less than the repurchase price
(including accrued interest) and BB&T (or PNC Bank, with respect to the Small
Company Growth Fund or CastleInternational, with respect to the International
Equity Fund) will monitor the collateral's value to ensure that it equals or
exceeds the repurchase price (including accrued interest). In addition,
securities subject to repurchase agreements will be held in a segregated
account.
If the seller were to default on its repurchase obligation or become
insolvent, the Fund holding such obligation would suffer a loss to the extent
that the proceeds from a sale of the underlying portfolio securities were less
than the repurchase price under the agreement, or to the extent that the
disposition of such securities held by the Fund were delayed pending court
action. Additionally, if the seller should be involved in bankruptcy or
insolvency proceedings, a Fund may incur delay and costs in selling the
underlying security or may suffer a loss of principal and interest if the Fund
is treated as an unsecured creditor and required to return the underlying
security to the seller's estate. Securities subject to repurchase agreements
will be held by the Group's custodian or another qualified custodian or in the
Federal Reserve/Treasury book-entry system. Repurchase agreements are considered
to be loans by a Fund under the Investment Company Act of 1940 (the "1940 Act").
Reverse Repurchase Agreements. As discussed in the Prospectus, each of
the Funds may borrow funds for temporary purposes by entering into reverse
repurchase agreements in accordance with the Fund's investment restrictions.
Pursuant to such agreements, a Fund would sell portfolio securities to financial
institutions such as banks and broker-dealers, and agree to repurchase the
securities at a mutually agreed-upon date and price. Each Fund intends to enter
into reverse repurchase agreements only to avoid otherwise selling securities
during unfavorable market conditions to meet redemptions. At the time a Fund
enters into a reverse repurchase agreement, it will place in a segregated
custodial account assets consistent
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with the Fund's investment restrictions having a value equal to the repurchase
price (including accrued interest), and will subsequently monitor the account to
ensure that such equivalent value is maintained. Such assets will include U.S.
Government securities or other liquid high quality debt securities or high grade
debt securities. Reverse repurchase agreements involve the risk that the market
value of the securities sold by a Fund may decline below the price at which a
Fund is obligated to repurchase the securities. Reverse repurchase agreements
are considered to be borrowings by a Fund under the 1940 Act.
U.S. Government Obligations. The U.S. Treasury Fund will invest
exclusively in bills, notes and bonds issued or guaranteed by the U.S. Treasury.
Such obligations are supported by the full faith and credit of the U.S.
Government. Each of the other Funds may invest in such obligations and in other
obligations issued or guaranteed by the U.S. Government, its agencies and
instrumentalities. Such other obligations may include those which are supported
by the full faith and credit of the U.S. Government; others which are supported
by the right of the issuer to borrow from the Treasury; others which are
supported by the discretionary authority of the U.S. Government to purchase the
agency's obligations; and still others which are supported only by the credit of
the instrumentality. No assurance can be given that the U.S. Government would
provide financial support to U.S. Government- sponsored agencies and
instrumentalities if it is not obligated to do so by law. A Fund will invest in
the obligations of such agencies and instrumentalities only when BB&T (and PNC
Bank, with respect to the Small Company Growth Fund or CastleInternational, with
respect to the International Equity Fund) believes that the credit risk with
respect thereto is minimal.
Supranational Organizational Obligations. The Small Company Growth Fund
and the International Equity Fund may purchase debt securities of supranational
organizations such as the European Coal and Steel Community, the European
Economic Community and the World Bank, which are chartered to promote economic
development.
Investment Grade Debt Obligations. The Small Company Growth Fund and
the International Equity Fund may invest in "investment grade securities," which
are securities rated in the four highest rating categories of an NRSRO. It
should be noted that debt obligations rated in the lowest of the top four
ratings (i.e., "Baa" by Moody's or "BBB" by S&P) are considered to have some
speculative characteristics and are more sensitive to economic change than
higher rated securities.
Rights Offerings and Warrants to Purchase. The Small Company Growth
Fund and the International Equity Fund may participate in rights offerings and
may purchase warrants, which are privileges issued by corporations enabling the
owners to subscribe to and purchase a specified number of shares of the
corporation at a specified price during a specified period of time. Subscription
rights normally have a short life span to expiration. The purchase of rights or
warrants involves the risk that the Fund could lose the purchase value of a
right or warrant if the right to subscribe to additional shares is not exercised
prior to the rights' and warrants' expiration. Also, the purchase of rights
and/or warrants involves the
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risk that the effective price paid for the right and/or warrant added to the
subscription price of the related security may exceed the value of the
subscribed security's market price such as when there is no movement in the
level of the underlying security. A Fund will not invest more than 5% of its net
assets, taken at market value, in warrants, or more than 2% of its net assets,
taken at market value, in warrants not listed on the New York or American Stock
Exchanges. Warrants acquired by a Fund in units or attached to other securities
are not subject to this restriction.
Variable and Floating Rate Notes. The North Carolina Fund may acquire
variable and floating rate notes, subject to the Fund's investment objective,
policies, and restrictions. A variable rate note is one whose terms provide for
the adjustment of its interest rate on set dates and which, upon such
adjustment, can reasonably be expected to have a market value that approximates
its par value. A floating rate note is one whose terms provide for the
adjustment of its interest rate whenever a specified interest rate changes and
which, at any time, can reasonably be expected to have a market value that
approximates its par value. Such notes are frequently not rated by credit rating
agencies; however, unrated variable and floating rate notes purchased by the
North Carolina Fund will be determined by BB&T under guidelines established by
the Group's Board of Trustees to be of comparable quality at the time of
purchase to rated instruments eligible for purchase under the Fund's investment
policies. In making such determinations, BB&T will consider the earning power,
cash flow and other liquidity ratios of the issuers of such notes (such issuers
include financial, merchandising, bank holding and other companies) and will
continuously monitor their financial condition. Although there may be no active
secondary market with respect to a particular variable or floating rate note
purchased by the North Carolina Fund, the Fund may resell the note at any time
to a third party. The absence of an active secondary market, however, could make
it difficult for the North Carolina Fund to dispose of a variable or floating
rate note in the event the issuer of the note defaulted on its payment
obligations and the North Carolina Fund could, as a result or for other reasons,
suffer a loss to the extent of the default. Variable or floating rate notes may
be secured by bank letters of credit.
Variable or floating rate notes acquired by the North Carolina Fund may
have maturities of more than three years, as follows:
1. A note that is issued or guaranteed by the United States Government
or any agency thereof which has a variable rate of interest readjusted no less
frequently than annually will be deemed by the North Carolina Fund to have a
maturity equal to the period remaining until the next readjustment of the
interest rate.
2. A variable rate note, the principal amount of which is scheduled on
the face of the instrument to be paid in one year or less, will be deemed by the
North Carolina Fund to have a maturity equal to the period remaining until the
next readjustment of the interest rate.
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3. A variable rate note that is subject to a demand feature will be
deemed by the North Carolina Fund to have a maturity equal to the longer of the
period remaining until the next readjustment of the interest rate or the period
remaining until the principal amount can be recovered through demand.
4. A floating rate note that is subject to a demand feature will be
deemed by the North Carolina Fund to have a maturity equal to the period
remaining until the principal amount can be recovered through demand.
As used above, a note is "subject to a demand feature" where the North
Carolina Fund is entitled to receive the principal amount of the note either at
any time on no more than 30 days' notice or at specified intervals not exceeding
three years in the case of the North Carolina Fund.
Tax-Exempt Obligations. Under normal market conditions, the North
Carolina Fund will invest at least 90% of its total assets in high grade
obligations issued by or on behalf of the State of North Carolina and its
political subdivisions, the interest on which, in the opinion of the issuer's
bond counsel at the time of issuance, is exempt both from federal income tax and
North Carolina personal income tax and not treated as a preference item for
purposes of the federal alternative minimum tax for individuals ("North Carolina
Tax-Exempt Obligations"). In addition to North Carolina Tax-Exempt Obligations,
the North Carolina Fund may invest in Tax-Exempt Obligations issued by or on
behalf of states other than North Carolina, territories and possessions of the
United States, the District of Columbia and their respective authorities,
agencies, instrumentalities, and political subdivisions, the interest on which,
in the opinion of the issuer's counsel at the time of issuance, is exempt from
federal income tax and is not treated as a preference item for individuals for
purposes of the federal alternative minimum tax. Such securities and North
Carolina Tax-Exempt Obligations are hereinafter collectively referred to as
"Tax-Exempt Obligations."
Tax-Exempt Obligations include debt obligations issued by governmental
entities to obtain funds for various public purposes, such as the construction
of a wide range of public facilities, the refunding of outstanding obligations,
the payment of general operating expenses, and the extension of loans to other
public institutions and facilities. Private activity bonds that are issued by or
on behalf of public authorities to finance various privately-operated facilities
are included within the term Tax-Exempt Obligations if the interest paid thereon
is both exempt from federal income tax and not treated as a preference item for
individuals for purposes of the federal alternative minimum tax.
Tax-Exempt Obligations may also include General Obligation Notes, Tax
Anticipation Notes, Bond Anticipation Notes, Revenue Anticipation Notes, Project
Notes, Tax-Exempt Commercial Paper, Construction Loan Notes and other forms of
short-term tax-exempt loans. Such instruments are issued with a short-term
maturity in anticipation of the receipt of tax funds, the proceeds of bond
placements or other revenues.
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Project Notes are issued by a state or local housing agency and are
sold by the Department of Housing and Urban Development. While the issuing
agency has the primary obligation with respect to its Project Notes, they are
also secured by the full faith and credit of the United States through
agreements with the issuing authority which provide that, if required, the
federal government will lend the issuer an amount equal to the principal of and
interest on the Project Notes.
As described in the Prospectus, the two principal classifications of
Tax-Exempt Obligations consist of "general obligation" and "revenue" issues. The
North Carolina Fund is permitted to invest in Tax-Exempt Obligations and may
also acquire "moral obligation" issues, which are normally issued by special
purpose authorities. There are, of course, variations in the quality of
Tax-Exempt Obligations, both within a particular classification and between
classifications, and the yields on Tax-Exempt Obligations depend upon a variety
of factors, including general money market conditions, the financial condition
of the issuer, general conditions of the municipal bond market, the size of a
particular offering, the maturity of the obligation and the rating of the issue.
The ratings of Moody's and S&P represent their opinions as to the quality of
Tax-Exempt Obligations. It should be emphasized, however, that ratings are
general and are not absolute standards of quality, and Tax-Exempt Obligations
with the same maturity, interest rate and rating may have different yields,
while Tax-Exempt Obligations of the same maturity and interest rate with
different ratings may have the same yield. Subsequent to purchase by the North
Carolina Fund, an issue of Tax-Exempt Obligations may cease to be rated or its
rating may be reduced below the minimum rating required for purchase by the
Funds. Neither event would under all circumstances require the elimination of
such an obligation from the North Carolina Fund's investment portfolio. However,
the obligation generally would be retained only if such retention was determined
by the Board of Trustees to be in the best interests of the North Carolina Fund.
An issuer's obligations for its Tax-Exempt Obligations are subject to
the provisions of bankruptcy, insolvency, and other laws affecting the rights
and remedies of creditors, such as the federal bankruptcy code, and laws, if
any, which may be enacted by Congress or state legislatures extending the time
for payment of principal or interest, or both, or imposing other constraints
upon the enforcement of such obligations or upon the ability of municipalities
to levy taxes. The power or ability of an issuer to meet its obligations for the
payment of interest on and principal of its Tax-Exempt Obligations may be
materially adversely affected by litigation or other conditions.
Although lease obligations do not constitute general obligations of the
issuer for which the lessee's unlimited taxing power is pledged, the lease
obligation is frequently assignable and backed by the lessee's covenant to
budget for, appropriate, and make the payments due under the lease obligation.
However, certain lease obligations contain "non-appropriation" clauses which
provide that the lessee has no obligation to make lease or installment purchase
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
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property in the event of foreclosure might prove difficult. These securities
represent a relatively new type of financing that has not yet developed the
depth of marketability associated with more conventional securities. Certain
investments in lease obligations may be illiquid. Under guidelines established
by the Board of Trustees, the following factors will be considered when
determining the liquidity of a lease obligation: (1) the frequency of trades and
quotes for the obligation; (2) the number of dealers willing to purchase or sell
the obligation and the number of potential buyers; (3) the willingness of
dealers to undertake to make a market in the obligation; and (4) the nature of
the marketplace trades.
When-Issued Securities. As discussed in the Prospectuses, each Fund,
except the U.S. Treasury Fund, may purchase securities on a when-issued basis.
In addition, the Small Company Growth Fund and the International Equity Fund may
purchase and sell securities on a forward commitment basis (i.e., for delivery
beyond the normal settlement date at a stated price and yield), including "TBA"
(to be announced) purchase commitments. When these Funds agree to purchase
securities on a when-issued or forward commitment basis, the Funds' custodian
will set aside cash or liquid portfolio securities equal to the amount of the
commitment in a separate account. Normally, the custodian will set aside
portfolio securities to satisfy the purchase commitment, and in such a case, a
Fund may be required subsequently to place additional assets in the separate
account in order to assure that the value of the account remains equal to the
amount of the Fund's commitment. It may be expected that any such Fund's net
assets will fluctuate to a greater degree when it sets aside portfolio
securities to cover such purchase commitments than when it sets aside cash.
When a Fund engages in when-issued or forward commitment transactions,
it relies on the seller to consummate the trade. Failure of the seller to do so
may result in the Fund incurring a loss or missing the opportunity to obtain a
price considered to be advantageous. In addition, the purchase of securities on
a when-issued or forward commitment basis involves a risk of loss if the value
of the security to be purchased declines prior to the settlement date. Each of
the Funds does not intend to purchase when-issued securities for speculative
purposes but only in furtherance of its investment objective.
Calls. The Growth and Income Fund, Balanced Fund and the Funds of Funds
may write (sell) "covered" call options and purchase options to close out
options previously written by it. Such options must be listed on a National
Securities Exchange and issued by the Options Clearing Corporation. The purpose
of writing covered call options is to generate additional premium income for the
Growth and Income and Balanced Funds. This premium income will serve to enhance
each Fund's total return and will reduce the effect of any price decline of the
security involved in the option. Covered call options will generally be written
on securities which, in BB&T's opinion, are not expected to make any major price
moves in the near future but which, over the long term, are deemed to be
attractive investments for the Funds.
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A call option gives the holder (buyer) the "right to purchase" a
security at a specified price (the exercise price) at any time until a certain
date (the expiration date). So long as the obligation of the writer of a call
option continues, he or she may be assigned an exercise notice by the
broker-dealer through whom such option was sold, requiring the writer to deliver
the underlying security against payment of the exercise price. This obligation
terminates upon the expiration of the call option, or such earlier time at which
the writer effects a closing purchase transaction by repurchasing an option
identical to that previously sold. To secure the writer's obligation to deliver
the underlying security in the case of a call option, a writer is required to
deposit in escrow the underlying security or other assets in accordance with the
rules of the Options Clearing Corporation. The Funds will write only covered
call options. This means that a Fund will only write a call option on a security
which it already owns. In order to comply with the requirements of the
securities laws in several states, a Fund will not write a covered call option
if, as a result, the aggregate market value of all portfolio securities covering
call options or subject to put options exceeds 25% of the market value of its
net assets.
As described in the Prospectuses, the Small Company Growth Fund and the
International Equity Fund will write call options only if they are "covered" and
may buy call options. In the case of a call option on a security, the option is
"covered" if the Fund owns the security underlying the call or has an absolute
and immediate right to acquire that security without additional cash
consideration (or, if additional cash consideration is required, cash or cash
equivalents in such amount as are held in a segregated account by its custodian)
upon conversion or exchange of other securities held by it. For a call option on
an index, the option is covered if the Fund maintains with its custodian cash or
cash equivalents equal to the contract value. A call option is also covered if
the Fund holds a call on the same security or index as the call written where
the exercise price of the call held is (i) equal to or less than the exercise
price of the call written, or (ii) greater than the exercise price of the call
written provided the difference is maintained by the Fund in cash or cash
equivalents in a segregated account with its custodian.
Fund securities on which call options may be written will be purchased
solely on the basis of investment considerations consistent with a Fund's
investment objectives. The writing of covered call options is a conservative
investment technique believed to involve relatively little risk (in contrast to
the writing of naked or uncovered options which the Funds will not do), but
capable of enhancing a Fund's total return. When writing a covered call option,
a Fund, in return for the premium, gives up the opportunity for profit from a
price increase in the underlying security above the exercise price, but retains
the risk of loss should the price of the security decline. Unlike one who owns
securities not subject to an option, a Fund does not have any control over the
point at which it may be required to sell the underlying securities, because it
may be assigned an exercise notice at any time prior to the expiration of its
obligation as a writer. If a call option which a Fund has written expires, a
Fund will realize a gain in the amount of the premium; however, such gain may be
offset by a decline in the market value of the underlying security during the
option period. If the call option is
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exercised, a Fund will realize a gain or loss from the sale of the underlying
security. The security covering the call will be maintained in a segregated
account of a Fund's custodian. A Fund does not consider a security covered by a
call to be "pledged" as that term is used in its policy which limits the
pledging or mortgaging of its assets.
The premium received is the market value of an option. The premium a
Fund will receive from writing a call option will reflect, among other things,
the current market price of the underlying security, the relationship of the
exercise price to such market price, the historical price volatility of the
underlying security, and the length of the option period. Once the decision to
write a call option has been made, BB&T (or PNC Bank, with respect to the Small
Company Growth Fund or CastleInternational, with respect to the International
Equity Fund), in determining whether a particular call option should be written
on a particular security, will consider the reasonableness of the anticipated
premium and the likelihood that a liquid secondary market will exist for those
options. The premium received by a Fund for writing covered call options will be
recorded as a liability in a Fund's statement of assets and liabilities. This
liability will be readjusted daily to the option's current market value, which
will be the latest sale price at the time at which the net asset value per share
of a Fund is computed (close of the New York Stock Exchange), or, in the absence
of such sale, the latest asked price (or, with respect to the International
Equity Fund, the mean between the last bid and asked prices). The liability will
be extinguished upon expiration of the option, the purchase of an identical
option in the closing transaction, or delivery of the underlying security upon
the exercise of the option.
Closing transactions will be effected in order to realize a profit on
an outstanding call option, to prevent an underlying security from being called,
or to permit the sale of the underlying security. Furthermore, effecting a
closing transaction will permit a Fund to write another call option on the
underlying security with either a different exercise price or expiration date or
both. If a Fund desires to sell a particular security from its portfolio on
which it has written a call option, it will seek to effect a closing transaction
prior to, or concurrently with, the sale of the security. There is, of course,
no assurance that a Fund will be able to effect such closing transactions at a
favorable price. If a Fund cannot enter into such a transaction, it may be
required to hold a security that it might otherwise have sold, in which case it
would continue to be at market risk on the security. This could result in higher
transaction costs. A Fund will pay transaction costs in connection with the
writing of options to close out previously written options. Such transaction
costs are normally higher than those applicable to purchases and sales of
portfolio securities.
Call options written by a Fund will normally have expiration dates of
less than nine months from the date written. The exercise price of the options
may be below, equal to, or above the current market values of the underlying
securities at the time the options are written. From time to time, a Fund may
purchase an underlying security for delivery in accordance with an exercise
notice of a call option assigned to it, rather than delivering such security
from its portfolio. In such cases, additional costs will be incurred.
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A Fund will realize a profit or loss from a closing purchase
transaction if the cost of the transaction is less or more than the premium
received from the writing of the option. Because increases in the market price
of a call option will generally reflect increases in the market price of the
underlying security, any loss resulting from the repurchase of a call option is
likely to be offset in whole or in part by appreciation of the underlying
security owned by a Fund.
Puts. The North Carolina Fund may acquire "puts" with respect to
Tax-Exempt Obligations held in its portfolio and the Funds of Funds may acquire
puts with respect to the securities in its portfolio. A put is a right to sell a
specified security (or securities) within a specified period of time at a
specified exercise price. Each of these Funds may sell, transfer, or assign a
put only in conjunction with the sale, transfer, or assignment of the underlying
security or securities.
The amount payable to a Fund upon its exercise of a "put" is normally
(i) the Fund's acquisition cost of the securities subject to the put (excluding
any accrued interest which the Fund paid on the acquisition), less any amortized
market premium or plus any amortized market or original issue discount during
the period the Fund owned the securities, plus (ii) all interest accrued on the
securities since the last interest payment date during that period.
Puts may be acquired by the North Carolina Fund and the Funds of Funds
to facilitate the liquidity of their portfolio assets or to shorten the maturity
of underlying assets. Puts may also be used to facilitate the reinvestment of
assets at a rate of return more favorable than that of the underlying security.
The North Carolina Fund and the Funds of Funds will generally acquire
puts only where the puts are available without the payment of any direct or
indirect consideration. However, if necessary or advisable, a Fund may pay for
puts either separately in cash or by paying a higher price for portfolio
securities which are acquired subject to the puts (thus reducing the yield to
maturity otherwise available for the same securities).
The North Carolina Fund and the Funds of Funds intend to enter into
puts only with dealers, banks, and broker-dealers which, in BB&T's opinion,
present minimal credit risks.
See "Options and Futures" in the Prospectus regarding the Small Company
Growth Fund's and the International Equity Fund's investment policy with respect
to puts.
Risk Factors Relating to Options. There are several risks associated
with transactions in put and call options. For example, there are significant
differences between the securities and options markets that could result in an
imperfect correlation between these markets, causing a given transaction not to
achieve its objectives. In addition, a liquid secondary market for particular
options, whether traded over-the-counter or on a national securities exchange
("Exchange") may be absent for reasons which include the following: there may be
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insufficient trading interest in certain options, restrictions may be imposed by
an Exchange on opening transactions or closing transactions or both; trading
halts, suspensions or other restrictions may be imposed with respect to
particular classes or series of options or underlying securities; unusual or
unforeseen circumstances may interrupt normal operations on an Exchange; the
facilities of an Exchange or the Options Clearing Corporation may not at all
times be adequate to handle current trading volume; or one or more Exchanges
could, for economic or other reasons, decide or be compelled at some future date
to discontinue the trading of options (or a particular class or series of
options), in which event the secondary market on that Exchange (or in that class
or series of options) would cease to exist, although outstanding options that
had been issued by the Options Clearing Corporation as a result of trades on
that Exchange would continue to be exercisable in accordance with their terms.
In addition, the success of a hedging strategy based on options transactions may
depend on the ability of the Fund's investment adviser or investment sub-adviser
to predict movements in the prices of individual securities, fluctuations in
markets and movements in interest rates.
Futures Contracts and Related Options. The Small Company Growth Fund,
the International Equity Fund, and the Funds of Funds may invest in futures
contracts and options thereon (interest rate futures contracts or index futures
contracts, as applicable). Positions in futures contracts may be closed out only
on an exchange which provides a secondary market for such futures. However,
there can be no assurance that a liquid secondary market will exist for any
particular futures contract at any specific time. Thus, it may not be possible
to close a futures position. In the event of adverse price movements, the Fund
would continue to be required to make daily cash payments to maintain its
required margin. In such situations, if a Fund has insufficient cash, it may
have to sell portfolio securities to meet daily margin requirements at a time
when it may be disadvantageous to do so. In addition, a Fund may be required to
make delivery of the instruments underlying futures contracts it holds. The
inability to close options and futures positions also could have an adverse
impact on a Fund's ability to effectively hedge.
Successful use of futures by the Funds is also subject to an adviser's
or sub-adviser's ability to correctly predict movements in the direction of the
market. For example, if a Fund has hedged against the possibility of a decline
in the market adversely affecting securities held by it and securities prices
increase instead, a Fund will lose part or all of the benefit to the increased
value of its securities which it has hedged because it will have approximately
equal offsetting losses in its futures positions. In addition, in some
situations, if a Fund has insufficient cash, it may have to sell securities to
meet daily variation margin requirements. Such sales of securities may be, but
will not necessarily be, at increased prices which reflect the rising market. A
Fund may have to sell securities at a time when it may be disadvantageous to do
so.
The risk of loss in trading futures contracts in some strategies can be
substantial, due both to the low margin deposits required, and the extremely
high degree of leverage involved in futures pricing. As a result, a relatively
small price movement in a futures contract may
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<PAGE> 18
result in immediate and substantial loss (as well as gain) to the investor. For
example, if at the time of purchase, 10% of the value of the futures contract is
deposited as margin, a subsequent 10% decrease in the value of the futures
contract would result in a total loss of the margin deposit, before any
deduction for the transaction costs, if the account were then closed out. A 15%
decrease would result in a loss equal to 150% of the original margin deposit,
before any deduction for the transaction costs, if the contract were closed out.
Thus, a purchase or sale of a futures contract may result in losses in excess of
the amount invested in the contract.
Utilization of futures transactions by a Fund involves the risk of loss
by a Fund of margin deposits in the event of bankruptcy of a broker with whom a
Fund has an open position in a futures contract or related option.
Most futures exchanges limit the amount of fluctuation permitted in
futures contract prices during a single trading day. The daily limit establishes
the maximum amount that the price of a futures contract may vary either up or
down from the previous day's settlement price at the end of a trading session.
Once the daily limit has been reached in a particular type of contract, no
trades may be made on that day at a price beyond that limit. The daily limit
governs only price movement, during a particular trading day and therefore does
not limit potential losses, because the limit may prevent the liquidation of
unfavorable positions. Futures contract prices have occasionally moved to the
daily limit for several consecutive trading days with little or no trading,
thereby preventing prompt liquidation of futures positions and subjecting some
futures traders to substantial losses.
The trading of futures contracts is also subject to the risk of trading
halts, suspensions, exchange or clearing house equipment failures, government
intervention, insolvency of a brokerage firm or clearing house or other
disruptions of normal trading activity, which could at times make it difficult
to impossible to liquidate existing positions or to recover excess variation
margin payments.
Investment Restrictions
Except as provided otherwise, the following investment restrictions may
be changed with respect to a particular Fund only by a vote of a majority of the
outstanding Shares of that Fund (as defined under "GENERAL INFORMATION -
Miscellaneous" in the Prospectus).
None of the Funds of the Group (other than the International Equity
Fund) may:
1. Purchase securities on margin, sell securities short, participate on
a joint or joint and several basis in any securities trading account, or
underwrite the securities of other issuers, except to the extent that a Fund may
be deemed to be an underwriter under certain securities laws in the disposition
of "restricted securities" acquired in accordance with such Fund's investment
objectives and policies;
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2. Purchase or sell commodities, commodity contracts (including futures
contracts, with respect to each Fund other than the Small Company Growth Fund
and the Funds of Funds, which may purchase futures contracts) oil, gas or
mineral exploration or development programs, or real estate (although
investments by the Growth and Income Fund, North Carolina Fund,
Short-Intermediate Fund, Intermediate Bond Fund, Balanced Fund, Small Company
Growth Fund, and the Funds of Funds in marketable securities of companies
engaged in such activities and in securities secured by real estate or interests
therein are not hereby precluded);
None of the Funds (except the Funds of Funds) may:
1. Invest in securities of other investment companies, except as such
securities may be acquired as part of a merger, consolidation, reorganization,
or acquisition of assets; provided, however, that (i) the Growth and Income
Fund, North Carolina Fund, Short-Intermediate Fund, Intermediate Bond Fund,
Balanced Fund, Small Company Growth Fund, and the International Equity Fund may
purchase securities of a money market fund, including securities of the U.S.
Treasury Fund; (ii) the North Carolina Fund may purchase securities of a money
market fund which invests primarily in high quality short-term obligations
exempt from federal income tax, if, with respect to the Fund, immediately after
such purchase, the acquiring Fund does not own in the aggregate (a) more than 3%
of the acquired company's outstanding voting securities, (b) securities issued
by the acquired company having an aggregate value in excess of 5% of the value
of the total assets of the acquiring Fund, or (c) securities issued by the
acquired company and all other investment companies (other than Treasury stock
of the acquiring Fund) having an aggregate value in excess of 10% of the value
of the acquiring Fund's total assets; (iii) the Small Company Growth Fund and
the International Equity Fund may purchase shares of other investment companies
in accordance with the provisions of the Investment Company Act of 1940, as
amended, and the rules and regulations promulgated thereunder; and (iv) this
restriction (iii) is not fundamental with respect to the Small Company Growth
Fund and the International Equity Fund and may therefore be changed by a vote of
a majority of the Trustees of the Group.
The U.S. Treasury Fund may not buy common stocks or voting securities,
or state, municipal, or private activity bonds. The U.S. Treasury Fund, North
Carolina Fund, Short- Intermediate Fund, and Intermediate Bond Fund may not
write or purchase call options. Each of the Funds may not write put options. The
U.S. Treasury Fund, Short-Intermediate Fund and Intermediate Bond Fund may not
purchase put options. The North Carolina Fund may not invest in private activity
bonds where the payment of principal and interest are the responsibility of a
company (including its predecessors) with less than three years of continuous
operation.
The International Equity Fund may not:
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1. Purchase or sell real estate, except that the Fund may purchase
securities of issuers which deal in real estate and may purchase securities
which are secured by interests in real estate.
2. Act as an underwriter of securities within the meaning of the
Securities Act of 1933 except to the extent that the purchase of obligations
directly from the issuer thereof, or the disposition of securities, in
accordance with the Fund's investment objective, policies and limitations may be
deemed to be underwriting.
3. Write or sell unsecured put options, call options, straddles,
spreads, or any combination thereof, except for transactions in options on
securities, securities indices, futures contracts and options on futures
contracts.
4. Purchase securities on margin, make short sales of securities or
maintain a short position, except that (a) this investment limitation shall not
apply to a Fund's transactions in futures contracts and related options or a
Fund's sale of securities short against the box, and (b) a Fund may obtain
short-term credit as may be necessary for the clearance or purchases and sales
of portfolio securities.
5. Purchase or sell commodity contracts, or invest in oil, gas or
mineral exploration or development programs, except that the Fund may, to the
extent appropriate to its investment policies, purchase securities of companies
engaging in whole or in part in such activities and may enter into futures
contracts and related options.
The following investment restrictions are considered non-fundamental
and therefore may be changed by a vote of a majority of the Trustees of the
Group:
None of the Funds may:
1. Enter into a repurchase agreement with a maturity in excess of seven
days if such investment, together with other instruments in the Fund which are
not readily marketable, exceeds 15% of such Fund's net assets except that the
U.S. Treasury Fund will limit its investment in such securities to 10% of its
net assets;
2. Invest more than 10% of total assets in the securities of issuers
which together with any predecessors have a record of less than three years of
continuous operation;
3. Invest in any issuer for purposes of exercising control or
management; and
4. Purchase or retain securities of any issuer if the officers or
Trustees of the Group or the officers or directors of its investment adviser
owning beneficially more than one-half of 1% of the securities of such issuer
together own beneficially more than 5% of such securities.
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If any percentage restriction described above is satisfied at the time
of investment, a later increase or decrease in such percentage resulting from a
change in net asset value will not constitute a violation of such restriction.
Portfolio Turnover
The portfolio turnover rate for each of the Group's Funds is calculated
by dividing the lesser of a Fund's purchases or sales of portfolio securities
for the year by the monthly average value of the portfolio securities. The
calculation excludes all securities whose maturities at the time of acquisition
were one year or less. For the fiscal years ended September 30, 1996, and
September 30, 1995, the portfolio turnover rates for each of the Funds other
than the U.S. Treasury Fund were as follows: Short-Intermediate Fund: 54.82% and
106.81%, respectively; Intermediate Bond Fund: 76.29% and 68.91%, respectively;
Growth and Income Fund: 19.82% and 8.73%, respectively; North Carolina Fund:
20.90% and 9.38%, respectively; and Balanced Fund: 15.01% with respect to the
common stock portion of its portfolio and 4.86% with respect to the fixed
income portion of its portfolio and 23.68%; respectively. For the fiscal year
ended September 30, 1996 and the period from commencement of operations,
December 7, 1994, to September 30, 1995, the portfolio turnover rate for the
Small Company Growth Fund was 71.62% and 46.97%, respectively. High turnover
rates will generally result in higher transaction costs to the Funds and may
result in higher levels of taxable realized gains to a Fund's shareholders. The
portfolio turnover rate may vary greatly from year to year as well as within a
particular year, and may also be affected by cash requirements for redemptions
of Shares. A higher portfolio turnover rate for each of the Group's Funds other
than the U.S. Treasury Fund may lead to increased taxes and transaction costs.
Portfolio turnover will not be a limiting factor in making investment decisions.
Because the U.S. Treasury Fund intends to invest entirely in securities
with maturities of less than one year and because the Securities and Exchange
Commission requires such securities to be excluded from the calculation of the
portfolio turnover rate, the portfolio turnover with respect to the U.S.
Treasury Fund was zero percent for the fiscal years ended September 30, 1996 and
September 30, 1995, and is expected to remain zero percent for regulatory
purposes.
VALUATION
The net asset value of each of the Funds, other than the U.S. Treasury
Fund, is determined and its Shares are priced as of the close of regular trading
of the New York Stock Exchange (generally 4:00 p.m. Eastern Time) on each
Business Day ("Valuation Time"). The net asset value of the U.S. Treasury Fund
is determined and it Shares are priced as of 12:00
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p.m. and as of the close of regular trading of the New York Stock Exchange
(generally 4:00 p.m. Eastern Time) on each Business Day ("Valuation Times"). As
used herein a "Business Day" constitutes any day on which the New York Stock
Exchange (the "NYSE") is open for trading and any other day (other than a day
on which no Shares are tendered for redemption and no orders to purchase Shares
are received) during which there is sufficient trading in a Fund's portfolio
securities that a Fund's net asset value per Share might be materially
affected. Currently, the NYSE is closed on the customary national business
holidays of New Year's Day, Presidents' Day, Good Friday, Memorial Day,
Independence Day, Labor Day, Thanksgiving Day and Christmas Day.
Valuation of the U.S. Treasury Fund
The U.S. Treasury Fund has elected to use the amortized cost method of
valuation pursuant to Rule 2a-7 under the 1940 Act. This involves valuing an
instrument at its cost initially and thereafter assuming a constant amortization
to maturity of any discount or premium, regardless of the impact of fluctuating
interest rates on the market value of the instrument. This method may result in
periods during which value, as determined by amortized cost, is higher or lower
than the price the U.S. Treasury Fund would receive if it sold the instrument.
The value of securities in the U.S. Treasury Fund can be expected to vary
inversely with changes in prevailing interest rates.
Pursuant to Rule 2a-7, the U.S. Treasury Fund will maintain a
dollar-weighted average portfolio maturity appropriate to its objective of
maintaining a stable net asset value per Share, provided that the Fund will not
purchase any security with a remaining maturity of more than thirteen months
(securities subject to repurchase agreements may bear longer maturities) nor
maintain a dollar-weighted average portfolio maturity which exceeds 90 days. The
Group's Board of Trustees has also undertaken to establish procedures reasonably
designed, taking into account current market conditions and the U.S. Treasury
Fund's investment objective, to stabilize the net asset value per Share of the
U.S. Treasury Fund for purposes of sales and redemptions at $1.00. These
procedures include review by the Trustees, at such intervals as they deem
appropriate, to determine the extent, if any, to which the net asset value per
Share of the Fund calculated by using available market quotations deviates from
$1.00 per Share. In the event such deviation exceeds one-half of one percent,
Rule 2a-7 requires that the Board of Trustees promptly consider what action, if
any, should be initiated. If the Trustees believe that the extent of any
deviation from the Fund's $1.00 amortized cost price per Share may result in
material dilution or other unfair results to new or existing investors, they
will take such steps as they consider appropriate to eliminate or reduce to the
extent reasonably practicable any such dilution or unfair results. These steps
may include selling portfolio instruments prior to maturity, shortening the
dollar-weighted average portfolio maturity, withholding or reducing dividends,
reducing the number of the Fund's outstanding Shares
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without monetary consideration, or utilizing a net asset value per Share
determined by using available market quotations.
Valuation of the Growth and Income Fund, North Carolina Fund, Short-Intermediate
Fund, Intermediate Bond Fund, Balanced Fund, Small Company Growth Fund, and the
Funds of Funds
Portfolio securities for which market quotations are readily available
are valued based upon their current available bid prices in the principal market
(closing sales prices if the principal market is an exchange) in which such
securities are normally traded. Unlisted securities for which market quotations
are readily available will be valued at the current quoted bid prices. Other
securities and assets for which quotations are not readily available, including
restricted securities and securities purchased in private transactions, are
valued at their fair market value in BB&T's (or PNC Bank's, with respect to the
Small Company Growth Fund) best judgment under procedures established by, and
under the supervision of the Group's Board of Trustees. The Funds of Funds will
value their investments in mutual funds securities at the redemption price,
which is net asset value.
Among the factors that will be considered, if they apply, in valuing
portfolio securities held by the Funds are the existence of restrictions upon
the sale of the security by the Fund, the absence of a market for the security,
the extent of any discount in acquiring the security, the estimated time during
which the security will not be freely marketable, the expenses of registering or
otherwise qualifying the security for public sale, underwriting commissions if
underwriting would be required to effect a sale, the current yields on
comparable securities for debt obligations traded independently of any equity
equivalent, changes in the financial condition and prospects of the issuer, and
any other factors affecting fair market value. In making valuations, opinions of
counsel may be relied upon as to whether or not securities are restricted
securities and as to the legal requirements for public sale.
The Group may use a pricing service to value certain portfolio
securities where the prices provided are believed to reflect the fair market
value of such securities. A pricing service would normally consider such factors
as yield, risk, quality, maturity, type of issue, trading characteristics,
special circumstances and other factors it deems relevant in determining
valuations of normal institutional trading units of debt securities and would
not rely exclusively on quoted prices. The methods used by the pricing service
and the valuations so established will be reviewed by the Group under the
general supervision of the Group's Board of Trustees. Several pricing services
are available, one or more of which may be used by BB&T, PNC Bank, and
CastleInternational from time to time.
Investments in debt securities with remaining maturities of 60 days or
less may be valued based upon the amortized cost method.
Valuation of the International Equity Fund
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Valuation of securities of foreign issuers and those held by the
International Equity Fund is as follows: to the extent sale prices are
available, securities which are traded on a recognized stock exchange, whether
U.S. or foreign, are valued at the latest sale price on that exchange prior to
the time when assets are valued or prior to the close of regular trading hours
on the NYSE. In the event that there are no sales, the means between the last
available bid and asked prices will be used. If a security is traded on more
than one exchange, the latest sale price on the exchange where the stock is
primarily traded is used. An option or futures contract is valued at the last
sales price prior to 4:00 p.m. (Eastern Time), as quoted on the principal
exchange or board of trade on which such option or contract is traded, or in the
absence of a sale, the mean between the last bid and asked prices prior to 4:00
p.m. (Eastern Time). In the event that application of these methods of valuation
results in a price for a security which is deemed not to be representative of
the market value of such security, the security will be valued by, under the
direction of or in accordance with a method specified by the Board of Trustees
as reflecting fair value. The amortized cost method of valuation will be used
with respect to debt obligations with sixty days or less remaining to maturity
unless the investment adviser and/or sub-adviser under the supervision of the
Board of Trustees determines such method does not represent fair value. All
other assets and securities held by the Fund (including restricted securities)
are valued at fair value as determined in good faith by the Board of Trustees or
by someone under its direction. Any assets which are denominated in a foreign
currency are translated into U.S. dollars at the prevailing market rates.
Certain of the securities acquired by the International Equity Fund may
be traded on foreign exchanges or over-the-counter markets on days on which the
Fund's net asset value is not calculated. In such cases, the net asset value of
the Fund's shares may be significantly affected on days when investors can
neither purchase nor redeem shares of the Fund.
As discussed above, the International Equity Fund may use a pricing
service or market/dealer experienced in such matters to value the Fund's
securities.
ADDITIONAL PURCHASE AND REDEMPTION INFORMATION
Each class of Shares in each of the Group's Funds are sold on a
continuous basis by BISYS Fund Services ("BISYS"). In addition to purchasing
Shares directly from BISYS, Class A, Class B or Trust Shares may be purchased
through procedures established by BISYS in connection with the requirements of
accounts at BB&T, or BB&T's affiliated or correspondent banks. Customers
purchasing Shares of the Group may include officers, directors, or employees of
BB&T or BB&T's affiliated or correspondent banks.
B-21
<PAGE> 25
Purchase of Class A and Class B Shares
As stated in the Class A and Class B Prospectus, the public offering
price of Class A Shares of the Growth and Income Fund, North Carolina Fund,
Short-Intermediate Fund, Intermediate Bond Fund, Balanced Fund, Small Company
Growth Fund, and the International Equity Fund is their net asset value next
computed after an order is received, plus a sales charge which varies based
upon the quantity purchased. The public offering price of such Class A Shares
of the Group is calculated by dividing net asset value by the difference
(expressed as a decimal) between 100% and the sales charge percentage of
offering price applicable to the purchase (see "How to Purchase and Redeem
Shares" in the Class A and Class B Prospectus). The offering price is rounded
to two decimal places each time a computation is made. The sales charge scale
set forth in the Class A and Class B Prospectus applies to purchases of Class A
Shares of such a Fund by a Purchaser.
As stated in the Class A and Class B Prospectus, shares of The U.S.
Treasury Fund and Class B Shares of each Fund are sold at their net asset value
per share, as next computed after an order is received. However, as discussed in
the Class A and Class B Prospectus, the Class B Shares are subject to a
Contingent Deferred Sales Charge if they are redeemed prior to the sixth
anniversary of purchase. Class B Shares of the U.S. Treasury Fund will be issued
only in exchange for Class B Shares of any of the other Funds. Shareholders
obtaining Class B Shares of the U.S. Treasury Fund upon an exchange of Class B
Shares of any other Fund, will be requested to participate in the Auto Exchange
Program in such a way that their Class B Shares have been withdrawn from the
U.S. Treasury Fund within two years of purchase.
Certain sales of Class A Shares are made without a sales charge, as
described in the Class A and Class B Prospectus under the caption "Sales Charge
Waivers," to promote goodwill with employees and others with whom BISYS, BB&T
and/or the Group have business relationships, and because the sales effort, if
any, involved in making such sales is negligible.
As the Group's principal underwriter, BISYS acts as principal in
selling Class A and Class B Shares of the Group to dealers. BISYS re-allows the
applicable sales charge as dealer discounts and brokerage commissions. Dealer
allowances expressed as a percentage of offering price for all offering prices
are set forth in the Class A and Class B Prospectus (see "How to Purchase and
Redeem Shares"). From time to time, BISYS will make expense reimbursements for
special training of a dealer's registered representatives in group meetings or
to help pay the expenses of sales contests. Neither BISYS nor dealers are
permitted to delay the placement of orders to benefit themselves by a price
change.
Matters Affecting Redemption
The Group may suspend the right of redemption or postpone the date of
payment for Shares during any period when (a) trading on the New York Stock
Exchange (the "Exchange") is restricted by applicable rules and regulations of
the Securities and Exchange Commission,
B-22
<PAGE> 26
(b) the Exchange is closed for other than customary weekend and holiday
closings, (c) the Securities and Exchange Commission has by order permitted such
suspension, or (d) an emergency exists as a result of which (i) disposal by the
Group of securities owned by it is not reasonably practical or (ii) it is not
reasonably practical for the Company to determine the fair market value of its
total net assets.
The Group may redeem any class of Shares involuntarily if redemption
appears appropriate in light of the Group's responsibilities under the 1940 Act.
See "Valuation of the Money Market Funds" above.
ADDITIONAL TAX INFORMATION
It is the policy of each of the Group's Funds to qualify for the
favorable tax treatment accorded regulated investment companies under Subchapter
M of the Code. By following such policy, each of the Group's Funds expects to
eliminate or reduce to a nominal amount the federal income taxes to which such
Fund may be subject.
In order to qualify for the special tax treatment accorded regulated
investment companies and their shareholders, a Fund must, among other things,
(a) derive at least 90% of its gross income from dividends, interest, payments
with respect to certain securities loans, and gains from the sale of stock,
securities, and foreign currencies, or other income (including but not limited
to gains from options, futures, or forward contracts) derived with respect to
its business of investing in such stock, securities, or currencies; (b) derive
less than 30% of its gross income from the sale or other disposition of certain
assets (including stocks and securities) held for less than three months; (c)
each year distribute at least 90% of its dividend, interest (including
tax-exempt interest), and certain other income and the excess, if any, of its
net short-term capital gains over its net long-term capital losses; and (d)
diversify its holdings so that, at the end of each fiscal quarter (i) at least
50% of the market value of its assets is represented by cash, cash items, U.S.
Government securities, securities of other regulated investment companies, and
other securities, limited in respect of any one issuer to a value not greater
than 5% of the value of the Fund's total assets and 10% of the outstanding
voting securities of such issuer, and (ii) not more than 25% of the value of its
assets is invested in the securities (other than those of the U.S. Government or
other regulated investment companies) of any one issuer or of two or more
issuers which the Fund controls and which are engaged in the same, similar, or
related trades or businesses. The 30% of gross income test described above may
restrict a Fund's ability to sell certain assets held (or considered under Code
rules to have been held) for less than three months and to engage in certain
hedging transactions (including hedging transactions in options and futures)
that in some circumstances could cause certain Fund assets to be treated as held
for less than three months.
A non-deductible excise tax is imposed on regulated investment
companies that do not distribute in each calendar year (regardless of whether
they have a non-calendar taxable year)
B-23
<PAGE> 27
an amount equal to 98% of their "ordinary income" (as defined) for the calendar
year plus 98% of their capital gain net income for the 1-year period ending on
October 31 of such calendar year plus any undistributed amounts from prior
years. For the foregoing purposes, a Fund is treated as having distributed any
amount on which it is subject to income tax for any taxable year ending in such
calendar year. If distributions during a calendar year by a Fund were less than
the required amount, the Fund would be subject to a non-deductible excise tax
equal to 4% of the deficiency.
Each of the Group's Funds will be required in certain cases to withhold
and remit to the United States Treasury 31% of taxable dividends and other
distributions paid to any Shareholder who has provided either an incorrect
taxpayer identification number or no number at all, who is subject to
withholding by the Internal Revenue Service for failure properly to report
payments of interest or dividends, or who fails to provide a certified statement
that he or she is not subject to "backup withholding."
A Fund's transactions in futures contracts, options, and
foreign-currency-denominated securities, and certain other investment and
hedging activities of the Fund, will be subject to special tax rules (including
"mark-to-market," "straddle," "wash sale," and "short sale" rules), the effect
of which may be to accelerate income to the Fund, defer losses to the Fund,
cause adjustments in the holding periods of the Fund's assets, convert
short-term capital losses into long-term capital losses, and otherwise affect
the character of the Fund's income. These rules could therefore affect the
amount, timing, and character of distributions to Shareholders. Income earned as
a result of these transactions would, in general, not be eligible for the
dividends received deduction or for treatment as exempt-interest dividends when
distributed to Shareholders. The Funds will endeavor to make any available
elections pertaining to these transactions in a manner believed to be in the
best interest of the Funds.
Investment by the Fund in "passive foreign investment companies" could
subject the Fund to a U.S. federal income tax or other charge on the proceeds
from the sale of its investment in such a company; however, this tax can be
avoided by making an election to mark such investments to market annually or to
treat the passive foreign investment company as a "qualified electing fund."
A "passive foreign investment company" is any foreign corporation: (i)
75 percent of more of the income of which for the taxable year is passive
income, or (ii) the average percentage of the assets of which (generally by
value, but by adjusted tax basis in certain cases) that produce or are held for
the production of passive income is at least 50 percent. Generally, passive
income for this purpose means dividends, interest (including income equivalent
to interest), royalties, rents, annuities, the excess of gains over losses from
certain property transactions and commodities transactions, and foreign currency
gains. Passive income for this purpose does not include rents and royalties
received by the foreign corporation from active business and certain income
received from related persons.
B-24
<PAGE> 28
Although each Fund expects to qualify as a "regulated investment
company" ("RIC") and to be relieved of all or substantially all Federal income
taxes, depending upon the extent of their activities in states and localities in
which their offices are maintained, in which their agents or independent
contractors are located, or in which they are otherwise deemed to be conducting
business, the Funds may be subject to the tax laws of such states or localities.
If for any taxable year a Fund does not qualify for the special Federal tax
treatment afforded a RIC, all of its taxable income will be subject to Federal
income tax at regular corporate rates at the Fund level (without any deduction
for distributions to its Shareholders). In addition, distributions to
Shareholders will be taxed as ordinary income even if the distributions are
attributable to capital gains or exempt interest earned by the Fund.
Information set forth in the Prospectuses and this Statement of
Additional Information which relates to Federal taxation is only a summary of
some of the important Federal tax considerations generally affecting purchasers
of Shares of the Group's Funds. No attempt has been made to present a detailed
explanation of the Federal income tax treatment of a Fund or its Shareholders
and this discussion is not intended as a substitute for careful tax planning.
Accordingly, potential purchasers of Shares of a Fund are urged to consult their
tax advisers with specific reference to their own tax situation. In addition,
the tax discussion in the Prospectuses and this Statement of Additional
Information is based on tax laws and regulations which are in effect on the date
of the Prospectuses and this Statement of Additional Information; such laws and
regulations may be changed by legislative or administrative action.
Additional Tax Information Concerning the International Equity Fund
Special rules govern the Federal income tax treatment of the portfolio
transactions of the International Equity Fund that are denominated in terms of a
currency other than the U.S. dollar or determined by reference to the value of
one or more currencies other than the U.S. dollar. The types of transactions
covered by the special rules include the following: (i) the acquisition of, or
becoming the obligor under, a bond or other debt instrument (including, to the
extent provided in Treasury regulations, certain preferred stock); (ii) the
accruing of certain trade receivables and payables; (iii) the entering into or
acquisition of any forward contract or similar financial instruments; and (iv)
the entering into or acquisition of any futures contract, option or similar
financial instrument, if such instrument is not marked-to-market. The
disposition of a currency other than the U.S. dollar by a U.S. taxpayer also is
treated as a transaction subject to the special currency rules. With respect to
such transactions, foreign currency gain or loss is calculated separately from
any gain or loss on the underlying transaction and is normally taxable as
ordinary gain or loss. A taxpayer may elect to treat as capital gain or loss
foreign currency gain or loss arising from certain identified forward contracts
that are capital assets in the hands of the taxpayer and which are not part of a
straddle ("Capital Asset Election"). In accordance with Treasury regulations,
certain transactions with respect to which the taxpayer has not made the Capital
Asset Election and that are part of a "Section 988 hedging transaction" (as
defined in the Code and the Treasury regulations) are integrated and treated as
a single transaction or otherwise treated consistently
B-25
<PAGE> 29
for purposes of the Code. "Section 988 hedging transactions" (as identified by
such Treasury regulations) are not subject to the market-to-market or loss
deferral rules under the Code. Some of the non-U.S. dollar-denominated
investments that the International Equity Fund may make (such as non-U.S.
dollar-denominated debt securities and obligations and preferred stock) and some
of the foreign currency contracts the International Equity Fund may enter into
will be subject to the special currency rules described above. Gain or loss
attributable to the foreign currency component of transactions engaged in by a
Fund which is not subject to the special currency rules (such as foreign equity
investments other than certain preferred stocks) will be treated as capital gain
or loss and will not be segregated from the gain or loss on the underlying
transaction.
In addition, certain forward foreign currency contracts held by the
International Equity Fund at the close of the Fund's taxable year will be
subject to "mark-to-market" treatment. If the Fund makes the Capital Asset
Election with respect to such contracts, the contract will be subject to the
40-60 rule described above. Otherwise, such gain or loss will be ordinary in
nature. To receive such Federal income tax treatment, a foreign currency
contract must meet the following conditions: (1) the contract must require
delivery of a foreign currency of a type in which regulated futures contracts
are traded or upon which the settlement value of the contract depends; (2) the
contract must be entered into at arm's length at a price determined by reference
to the price in the interbank market; and (3) the contract must be traded in the
interbank market. The Treasury Department has broad authority to issue
regulations under these provisions respecting foreign currency contracts. As of
the date of this Statement of Additional Information the Treasury has not issued
any such regulations. Forward foreign currency contracts entered into by the
International Equity Fund also may result in the creation of one or more
straddles for Federal income tax purposes, in which case certain loss deferral,
short sales, and wash sales rules and requirements to capitalize interest and
carrying charges may apply.
Additional Tax Information Concerning the North Carolina Fund
As indicated in the Prospectuses, the North Carolina Fund is designed
to provide North Carolina Shareholders with current tax-exempt interest income.
The Fund is not intended to constitute a balanced investment program and is not
designed for investors seeking capital appreciation or maximum tax-exempt income
irrespective of fluctuations in principal. Shares of the North Carolina Fund
would not be suitable for tax-exempt institutions and may not be suitable for
retirement plans qualified under Section 401 of the Code, so-called Keogh or
H.R. 10 plans, and individual retirement accounts. Such plans and accounts are
generally tax-exempt and, therefore, would not realize any additional benefit
from the dividends of the North Carolina Fund being tax-exempt, and such
dividends would be ultimately taxable to the beneficiaries when distributed to
them.
In addition, the North Carolina Fund may not be an appropriate
investment for Shareholders who are "substantial users" of facilities financed
by private activity bonds or
B-26
<PAGE> 30
"related persons" thereof. "Substantial user" is defined under U.S. Treasury
Regulations to include a non-exempt person who regularly uses a part of such
facilities in his trade or business, and whose gross revenues derived with
respect to the facilities financed by the issuance of bonds represent more than
5% of the total revenues derived by all users of such facilities, or who
occupies more than 5% of the usable area of such facilities, or for whom such
facilities or a part thereof were specifically constructed, reconstructed or
acquired. "Related person" includes certain related natural persons, affiliated
corporations, a partnership and its partners and an S Corporation and its
shareholders. Each Shareholder who may be considered a "substantial user" should
consult a tax adviser with respect to whether exempt- interest dividends would
retain the exclusion under Section 103 of the Code if the Shareholder were
treated as a "substantial user" or a "related person."
The Code permits a RIC which invests at least 50% of its total assets
in Tax-Exempt Obligations to pass through to its investors, tax-free, net
Tax-Exempt Obligations interest income. The policy of the North Carolina Fund is
to pay each year as dividends substantially all the Fund's Tax-Exempt
Obligations interest income net of certain deductions. An exempt- interest
dividend is any dividend or part thereof (other than a capital gain dividend)
paid by the North Carolina Fund and designated as an exempt-interest dividend in
a written notice mailed to Shareholders within sixty days after the close of the
Fund's taxable year, but not to exceed in the aggregate the net Tax-Exempt
Obligations interest received by the Fund during the taxable year. The
percentage of the total dividends paid for any taxable year which qualifies as
federal exempt-interest dividends will be the same for all Shareholders
receiving dividends from the North Carolina Fund during such year, regardless of
the period for which the Shares were held.
While the North Carolina Fund does not expect to realize any
significant amount of long-term capital gains, any net realized long-term
capital gains will be distributed annually. The North Carolina Fund will have no
tax liability with respect to such distributed gains, and the distributions will
be taxable to Shareholders as long-term capital gains, regardless of how long a
Shareholder has held the Shares of the North Carolina Fund. Such distributions
will be designated as a capital gains dividend in a written notice mailed by the
North Carolina Fund to Shareholders within sixty days after the close of the
Fund's taxable year.
Distributions of exempt-interest dividends, to the extent attributable
to interest on North Carolina Tax-Exempt Obligations and to interest on direct
obligations of the United States (including territories thereof), are not
subject to North Carolina individual or corporate income tax. Distributions of
gains attributable to certain obligations of the State of North Carolina and its
political subdivisions issued prior to July 1, 1995 are not subject to North
Carolina individual or corporate income tax; however, distributions of gains
attributable to such types of obligations that were issued after June 30, 1995
will be subject to North Carolina individual or corporate income tax.
B-27
<PAGE> 31
While the North Carolina Fund does not expect to earn any significant
amount of investment company taxable income, taxable income earned by the North
Carolina Fund will be distributed to Shareholders. In general, the investment
company taxable income will be the taxable income of the North Carolina Fund
(for example, short-term capital gains) subject to certain adjustments and
excluding the excess of any net long-term capital gains for the taxable year
over the net short-term capital loss, if any, for such year. Any such income
will be taxable to Shareholders as ordinary income (whether paid in cash or
additional Shares).
As indicated in the Prospectuses, the Fund may acquire puts with
respect to Tax- Exempt Obligations held in the portfolios. See "INVESTMENT
OBJECTIVES AND POLICIES - Additional Information on Portfolio Instruments -
Puts" in this Statement of Additional Information. The policy of the North
Carolina Fund is to limit the acquisition of puts to those under which the Fund
will be treated for Federal income tax purposes as the owner of the Tax-Exempt
Obligations acquired subject to the put and the interest on the Tax- Exempt
Obligations will be tax-exempt to the Fund. Although the Internal Revenue
Service has issued a published ruling that provides some guidance regarding the
tax consequences of the purchase of puts, there is currently no guidance
available from the Internal Revenue Service that definitively establishes the
tax consequences of many of the types of puts that the North Carolina Fund could
acquire under the 1940 Act. Therefore, although the North Carolina Fund will
only acquire a put after concluding that it will have the tax consequences
described above, the Internal Revenue Service could reach a different conclusion
from that of the North Carolina Fund. If the North Carolina Fund was not treated
as the owners of the Tax-Exempt Obligations, income from such securities would
probably not be tax exempt.
The foregoing is only a summary of some of the important Federal tax
considerations generally affecting purchasers of Shares of the North Carolina
Fund. No attempt has been made to present a detailed explanation of the Federal
or state income tax treatment of the North Carolina Fund or its Shareholders and
this discussion is not intended as a substitute for careful tax planning.
Accordingly, potential purchasers of Shares of the North Carolina Fund are urged
to consult their tax advisers with specific reference to their own tax
situation. In addition, the foregoing discussion is based on tax laws and
regulations which are in effect on the date of this Statement of Additional
Information; such laws and regulations may be changed by legislative or
administrative action.
SPECIAL CONSIDERATIONS REGARDING INVESTMENT IN NORTH CAROLINA TAX-EXEMPT
OBLIGATIONS
The concentration of investments in North Carolina Tax-Exempt
Obligations by the North Carolina Fund raises special investment considerations.
In particular, changes in the economic condition and governmental policies of
North Carolina and its political subdivisions, agencies, instrumentalities, and
authorities could adversely affect the value of the North Carolina Fund and its
portfolio securities. This section briefly describes current economic trends in
North Carolina. The information set forth below is derived from official
statements prepared in connection with the issuance of North Carolina Tax-Exempt
Obligations and other
B-28
<PAGE> 32
sources that are generally available to investors. The Group has not
independently verified this information.
The State of North Carolina has three major operating funds: the
General Fund , the Highway Fund, and the Highway Trust Fund . North Carolina
derives most of its revenue from taxes, including individual income tax,
corporation income tax, sales and use taxes, corporation franchise tax,
alcoholic beverage tax, insurance tax, inheritance tax, tobacco products tax,
and soft drink tax (currently being phased out). North Carolina receives other
non-tax revenues which are also deposited in the General Fund. The most
important are Federal funds collected by North Carolina agencies, university
fees and tuition, interest earned by the North Carolina Treasurer on investments
of General Fund moneys and revenues from the judicial branch. The proceeds from
the motor fuel tax, highway use tax and motor vehicle license tax are deposited
in the Highway Fund and the Highway Trust Fund.
During the 1989-92 budget years, growth of North Carolina tax revenues
slowed considerably, requiring tax increases and budget adjustments, including
hiring freezes and restrictions, spending constraints, changes in timing of
certain collections and payments, and other short-term budget adjustments
necessary to comply with North Carolina's constitutional mandate for a balanced
budget. Many areas of North Carolina government were affected. Reductions in
capital spending, local government aid, and the use of the budget stabilization
reserve, combined with other budget adjustments, brought the budget into
balance. Tax increases in the fiscal 1992 budget included a $.01 increase in the
North Carolina sales tax and increases in the personal and corporate income tax
rates, as well as increases in the tax on cigarettes and alcohol, among other
items.
Fiscal year 1992 ended with a positive fund balance of approximately
$164.8 million. By law, $41.2 million of such positive fund balance was required
to be reserved in the General Fund of North Carolina as part of a "Savings
Reserve," leaving an unrestricted General Fund balance at June 30, 1992 of
$123.6 million. Fiscal year 1993 ended with a positive General Fund balance of
approximately $537.3 million. Of this amount, $134.3 million was reserved in the
Savings Reserve and $57 million was reserved in a Reserve for Repair and
Renovation of State Facilities, leaving an unrestricted General Fund balance at
June 30, 1993 of $346 million. Fiscal year 1994 ended with a positive General
Fund balance of approximately $444.7 million. An additional $178 million was
available from a reserved fund balance. Of this aggregate amount, $155.7 million
was reserved in the Savings Reserve (bringing the total reserve to $210.6
million after prior withdrawals) and $60 million was reserved in the Reserve for
Repair and Renovation of State Facilities (bringing the total reserve to $60
million after prior withdrawals), leaving an unrestricted General Fund balance
at June 30, 1994 of $407 million.
Fiscal year 1995 ended with a positive General Fund balance of
approximately $343.4 million. An additional $269.9 million was available from a
reserved fund balance. Of this aggregate amount, $146.3 million was reserved in
the Savings Reserve (bringing the total
B-29
<PAGE> 33
reserve to $423.6 million after prior contributions) and $146.3 million was
reserved in the Reserve for Repair and Renovation of State Facilities (bringing
the total reserve to $146.3 million after prior withdrawals), leaving an
unrestricted general fund balance at June 30, 1995 of $292.6 million after
certain other reservations. Fiscal year 1996 ended with a positive General Fund
balance of approximately $573.4 million. An additional $153.1 million was
available from a reserved fund balance. Of this aggregate amount, $77.3 million
was reserved in the Savings Reserve (bringing the total reserve to $500.9
million) and $130.0 million was reserved in the Reserve for Repair and
Renovation of State Facilities (bringing the total reserve to $151.3 million
after prior withdrawals). An additional $47.1 million was transferred to a
newly-created Clean Water Management Trust Fund, $39.5 was reserved in a Capital
Improvement Reserve, and $26.2 was transferred to newly-created Federal Retiree
Refund and Administration Accounts, leaving an unrestricted General Fund balance
at June 30, 1996 of approximately $406.1 million.
The foregoing results are presented on a budgetary basis. Accounting
principles applied to develop data on a budgetary basis differ significantly
from those principles used to present financial statements in conformity with
generally accepted accounting principles. Based on a modified accrual basis, the
General Fund balance at June 30, 1993 , 1994, and 1995 was $681.5 million,
$900.6 million, and $1,024.6 million, respectively. The foregoing results for
fiscal year 1996 are based upon unaudited financial information supplied by the
Office of State Budget and Management. Modified accrual basis results were not
available as of the date this summary was prepared.
The 1995-97 biennium budget adopted by the General Assembly authorized
continuation funding from the General Fund of $9,512 million for fiscal 1996 and
$9,763 million for fiscal 1997. Expansion funds of $280 million for fiscal 1996
were approved, along with capital improvements of $114 million for such fiscal
year. For fiscal 1997, $267 million of expansion funds were approved, along with
$157 million of capital improvements. Tax reductions of approximately $363
million for fiscal 1996 and $400 million for fiscal 1997 were authorized,
principally through the repeal of North Carolina's intangible personal property
tax and reductions in North Carolina's unemployment and personal income taxes.
The General Assembly also took several measures that benefitted North Carolina's
Department of Corrections, including a reservation of $33 million to build new
prison beds. State workers generally received a 2% pay increase. The General
Assembly also passed a package of tort reform bills that included a cap on
punitive damage awards.
In the 1996 Special Session, the General Assembly reviewed and adjusted
the fiscal 1997 budget to take into account a General Fund surplus of over $700
million for the 1996 fiscal year. The General Assembly agreed to spend
approximately $415.4 million on new or expanded programs, apply approximately
$143 million to tax cuts and refunds, and reserve approximately $100 million in
various savings and other reserve accounts. Funding for education and salaries
for teachers and other state employees was increased.
B-30
<PAGE> 34
The tax cuts included a reduction in North Carolina's corporate income tax,
sales tax on food, and inheritance tax, among other tax cuts. Legislators also
significantly expanded North Carolina's industrial development policies,
including the adoption of four new tax credits designed to make North Carolina
more competitive in industrial recruitment. Overall, changes were made, or new
credits added, in the following areas: investment tax credit, business tax
credit, worker training tax credit, jobs creation tax credit, and research and
development tax credit. The tax cuts will reduce North Carolina revenues by
approximately $68.4 million for fiscal 1997 and by approximately $337 million
when all cuts are phased in by 2001. The General Assembly also created a Clean
Water Management Trust Fund, which will be used to finance projects to clean up
or prevent surface water pollution. The Fund will receive 6.5% of the General
Fund's unspent credit balance each year. The initial allocation to this Fund
from the fiscal 1996 credit balance was $47.1 million.
The North Carolina budget is based upon a number of existing and
assumed State and non-State factors, including State and national economic
conditions, international activity, Federal government policies and legislation
and the activities of the State's General Assembly. Such factors are subject to
change which may be material and affect the budget. The Congress of the United
States is considering a number of matters affecting the Federal government's
relationship with state governments that, if enacted into law, could affect
fiscal and economic policies of the states, including North Carolina.
During recent years North Carolina has moved from an agricultural to a
service and goods producing economy. According to the North Carolina Employment
Security Commission (the "Commission"), in June 1996, North Carolina ranked
eleventh among the states in non-agricultural employment and eighth in
manufacturing employment. The Commission estimated North Carolina's seasonally
adjusted unemployment rate in August 1996 to be 4.1% of the labor force, as
compared with an unemployment rate of 5.1% nationwide.
The following are certain cases pending in which the State of North
Carolina faces the risk of either a loss of revenue or an unanticipated
expenditure which, in the opinion of the North Carolina Department of State
Treasurer, would not materially adversely affect the State's ability to meet its
financial obligations:
1. Swanson v. State of North Carolina -- State Tax Refunds - Federal
Retirees. In Davis v. Michigan (1989), the United States Supreme Court ruled
that a Michigan income tax statute which taxed federal retirement benefits while
exempting those paid by state and local governments violated the constitutional
doctrine of intergovernmental tax immunity. At the time of the Davis decision,
North Carolina law contained similar exemptions in favor of state and local
retirees. Those exemptions were repealed prospectively, beginning with the 1989
tax year. All public pension and retirement benefits are now entitled to a
$4,000 annual exclusion.
B-31
<PAGE> 35
Following Davis, federal retirees filed a class action suit in federal
court in 1989 seeking damages equal to the North Carolina income tax paid on
federal retirement income by the class members. A companion suit was filed in
state court in 1990. The complaints alleged that the amount in controversy
exceeded $140 million. The North Carolina Department of Revenue estimate of
refunds and interest liability is $280.89 million as of June 30, 1994. In 1991,
the North Carolina Supreme Court ruled in favor of the State in the state court
action, concluding that Davis could only be applied prospectively and that the
taxes collected from the federal retirees were thus not improperly collected. In
1993, the United States Supreme Court vacated that decision and remanded the
case back to the North Carolina Supreme Court. The North Carolina Supreme Court
then ruled in favor of the State on the grounds that the federal retirees had
failed to comply with state procedures for challenging unconstitutional taxes.
The United States District Court ruled in favor of the defendants in the
companion federal case, and a petition for reconsideration was denied.
Plaintiffs appealed to the United States Court of Appeals, which concurred with
the lower court's ruling. The United States Supreme Court rejected an appeal,
ruling that the lawsuit was a state matter, leaving the North Carolina Supreme
Court's ruling in force. Despite these victories in court, the General Assembly
in its 1996 Special Session adopted legislation allowing for a refund of taxes
for federal retirees. Effective for tax years beginning on or after January 1,
1996, federal retirees are entitled to a North Carolina income tax credit for
taxes paid on their pension benefits during tax years 1985 through 1988. In the
alternative, a partial refund may be claimed in lieu of a credit for eligible
taxpayers.
An additional lawsuit was filed in 1995 in State court by Federal
pensioners to recover State income taxes paid on Federal retirement benefits.
This case grew out of a claim by Federal pensioners in the original Federal
court case in Swanson. In the new lawsuit, the plaintiffs allege that when the
State granted an increase in retirement benefits to State retirees in the same
legislation that equalized tax treatment between state and Federal retirees, the
increased benefits to State retirees constituted an indirect violation of Davis.
The lawsuit seeks a refund of taxes paid by Federal retirees on Federal
retirement benefits received in the years 1989 through 1993 and refunds or
monetary relief sufficient to equalize the alleged on-going discriminatory
treatment for those years. Potential refunds exceed $300 million. This case has
been suspended pending final judgment in Bailey (discussed below), and no court
date has been set. The North Carolina Attorney General believes that sound legal
authority and arguments support the denial of this claim.
2. Bailey v. State of North Carolina -- State Tax Refunds - State
Retirees. State and local governmental retirees filed a class action suit in
1990 as a result of the repeal of the income tax exemptions for state and local
government retirement benefits. The original suit was dismissed after the North
Carolina Supreme Court ruled in 1991 that the plaintiffs had failed to comply
with state law requirements for challenging unconstitutional taxes and the
United States Supreme Court denied review. In 1992, many of the same plaintiffs
filed a new lawsuit alleging essentially the same claims, including breach of
contract, unconstitutional
B-32
<PAGE> 36
impairment of contract rights by the State in taxing benefits that were
allegedly promised to be tax-exempt and violation of several state
constitutional provisions.
On May 31, 1995 the Superior Court issued an order ruling in favor of
the plaintiffs. Under the terms of the order, the Superior Court found that the
act of the General Assembly that repealed the tax exemption on State and local
government retirement benefits is null, void, and unenforceable and that
retirement benefits which were vested before August 1989 are exempt from
taxation. The North Carolina Attorney General has appealed this order.
The North Carolina Attorney General's Office estimates that the amount
in controversy is approximately $40-$45 million annually for the tax years 1989
through 1991. In addition, it is anticipated that the decision reached in this
case will govern the resolution of tax refund claims made by retired state and
local government employees for taxes paid on retirement benefit income for tax
years after 1991. Furthermore, if the order of the Superior Court is upheld, its
provisions would apply prospectively to prevent future taxation of State and
local government retirement benefits that were vested before August 1989.
3. Fulton Corp. v. Justus. The State's intangible personal property tax
levied on certain shares of stock was challenged by the plaintiff on grounds
that it violated the United States Constitution Commerce Clause by
discriminating against stock issued by corporations that do all or part of their
business outside the State. The plaintiff in the action was a North Carolina
corporation that did all or part of its business outside the State. The
plaintiff sought to invalidate the tax in its entirety and to recover tax paid
on the value of its shares in other corporations. The North Carolina Court of
Appeals invalidated the taxable percentage deduction and excised it from the
statute beginning with the 1994 tax year. The effect of this ruling was to
increase collections by rendering all stock taxable on 100% of its value. The
North Carolina Supreme Court reversed the Court of Appeals and held that the tax
WAS valid and constitutional. The United States Supreme Court reversed, ruled in
the plaintiff's favor that the tax was discriminatory, and ordered the case back
to the State Court for a ruling on the appropriate remedy. It is anticipated
that the State Court will order the State of North Carolina to pay refunds
aggregating between $130 million and $140 million, including interest, although
other alternative remedies are possible. In April 1995, the North Carolina
General Assembly repealed North Carolina's intangible personal property tax,
effective for taxable years beginning on or after January 1, 1995.
On November 2, 1993, a total of $740 million general obligation bonds
(consisting of $310 million University Improvement Bonds, $250 million Community
College Bonds, $145 million Clean Water Bonds, and $35 million State Parks
Bonds) were approved by the voters of the State. Pursuant to this authorization,
the State issued $400 million general obligation bonds (Capital Improvement
Bonds) in January, 1994. The proceeds of these Capital Improvement Bonds may be
used for any purpose for which the proceeds of the University Improvement Bonds,
Community College Bonds, and State Parks Bonds may be used (none of such
proceeds may be used for Clean Water purposes). An additional $60 million
general
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<PAGE> 37
obligation bonds (Clean Water Bonds) were issued in September and October, 1994.
The remaining $85 million in general obligation bonds (Clean Water Bonds) were
issued in June and July, 1995. The offering of the remaining $195 million of
these authorized bonds is anticipated to occur during January, 1997.
In its 1996 Short Session, the North Carolina General Assembly approved
additional North Carolina general obligation bonds in the amount of $950 million
for highways and $1.8 billion for schools. These bonds were approved by the
voters of the State in November, 1996.
Currently, Moody's Investors Service, Inc., Standard & Poor's Ratings
Group, and Fitch Investors Service, Inc. rate North Carolina general obligation
bonds Aaa, AAA, and AAA, respectively. See the Appendix to this Statement of
Additional Information.
MANAGEMENT OF BB&T MUTUAL FUNDS GROUP
Officers
The officers of each Fund of the Group, their current addresses, and
principal occupations during the past five years are as follows (if no address
is listed, the address is 3435 Stelzer Road, Columbus, Ohio 43219):
<TABLE>
<CAPTION>
Position(s) Held Principal Occupation
Name and Address With the Group During the Past 5 Years
- ---------------- -------------- -----------------------
<S> <C> <C>
J. David Huber Chairman and Trustee From December 1987 to present,
employee of BISYS Fund Services.
George R. Landreth Treasurer From December, 1992 to present,
employee of BISYS Fund Services; from
July, 1991 to December, 1992, employee of
PNC Financial Corp.; from October, 1984
to July, 1991, employee of The Central
Trust Co., N.A.
Richard B. Ille President and From July 1990 to present, employee of
Secretary BISYS Fund Services; from May 1989 to
July 1990, employee of BISYS Fund
Services Ohio, Inc.
Alaina V. Metz Assistant Secretary From June 1995 to present, employee,
BISYS Fund Services; from May 1989 -
June 1995, Supervisor, Mutual Fund Legal
Department, Alliance Capital Management.
</TABLE>
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<PAGE> 38
<TABLE>
<CAPTION>
Position(s) Held Principal Occupation
Name and Address With the Group During the Past 5 Years
- ---------------- -------------- -----------------------
<S> <C> <C>
Steven G. Mintos Vice President From January, 1987 to present, employee
and Limited Partner of BISYS Fund
Services; from 1988 to present, Vice
President of BISYS Fund Services Ohio,
Inc., in 1986, Vice President of BISYS
Fund Services Ohio, Inc.
D'Ray Moore Assistant Secretary From February, 1990 to present,
employee of BISYS Fund Services.
Carl Juckett Vice President From July, 1994 to present, employee
of BISYS Fund Services; from January,
1989-July, 1994, manager, Broker/
Dealer and Investment Accounting
Systems, Huntington Bank.
Dana Gentile Vice President From 1987 to present, employee of
BISYS Fund Services
</TABLE>
The officers of the Group receive no compensation directly from the
Group for performing the duties of their offices. BISYS Fund Services (formerly
known as The Winsbury Company) receives fees from the Group for acting as
Administrator and BISYS Fund Services Ohio, Inc. (formerly known as The Winsbury
Service Corporation) receives fees from the Group for acting as Transfer Agent
and for providing fund accounting services to the Group.
COMPENSATION TABLE (1)
<TABLE>
<CAPTION>
Aggregate Pension or Estimated Total
Compensation Retirement Benefits Annual Compensation
Name of Person, from the Accrued As Part Benefits Upon from the Group
Position Group of Fund Expenses Retirement Paid to Trustee
- -------- ----- ---------------- ---------- ---------------
<S> <C> <C> <C> <C>
J. David Huber None None None None
Chairman of the Board
W. Ray Long None None None None
Trustee
William E. Graham $7,500 None None $7,500
Trustee
Thomas W. Lambeth $7,500 None None $7,500
Trustee
Robert W. Stewart $7,500 None None $7,500
Trustee
Sean M. Kelly None None None None
Trustee
</TABLE>
B-35
<PAGE> 39
(1) Figures are for the Funds' fiscal year ended September 30, 1996. The
Group includes eleven separate series.
Investment Adviser
Investment advisory and management services are provided to each Fund
of the Group by BB&T pursuant to an Investment Advisory Agreement ("Advisory
Agreement") dated October 1, 1992.
The Advisory Agreement provides that BB&T shall not be liable for any
error of judgment or mistake of law or for any loss suffered by the Group in
connection with the performance of such Advisory Agreement, except a loss
resulting from a breach of fiduciary duty with respect to the receipt of
compensation for services or a loss resulting from willful misfeasance, bad
faith, or gross negligence on the part of BB&T in the performance of its duties,
or from reckless disregard by BB&T of its duties and obligations thereunder.
Unless sooner terminated, the Advisory Agreement will continue in
effect until September 30, 1997 as to each of the Funds and from year to year if
such continuance is approved at least annually by the Group's Board of Trustees
or by vote of the holders of a majority of the outstanding Shares of that Fund
(as defined under "GENERAL INFORMATION - Miscellaneous"). The Advisory Agreement
is terminable as to a particular Fund at any time upon 60 days' written notice
without penalty by the Trustees, by vote of the holders of a majority of the
outstanding Shares of that Fund, or by BB&T. The Advisory Agreement also
terminates automatically in the event of any assignment, as defined in the 1940
Act.
For the fiscal year ended September 30, 1996, the Funds paid the
following investment advisory fees to BB&T: U.S. Treasury Fund: $731,113;
Short-Intermediate U.S. Government Fund: $288,263 (which is $57,944 less than
the maximum amount of advisory fees, if charged); Intermediate U.S. Government
Fund: $531,655 (which is $106,977 less than the maximum amount of advisory fees,
if charged); Growth and Income Stock Fund $1,005,731 (which is $484,272 less
than the maximum amount of advisory fees, if charged); North Carolina Tax-Free
Fund: $179,367 (which is $35,889 less than the maximum amount of advisory fees,
if charged); Balanced Fund: $371,267 (which is $178,695 less than the maximum
amount of advisory fees, if charged) and Small Company Growth Fund: $307,915
(which is $796 less than the maximum amount of advisory fees, if charged). The
Funds of Funds and the International Equity Fund had not commenced operations as
of September 30, 1996.
For the fiscal year ended September 30, 1995, the Funds paid the
following investment advisory fees to BB&T: U.S. Treasury Fund: $388,183 (which
is $21,654 less than the maximum amount of advisory fees, if charged);
Short-Intermediate Fund: $228,774 (which
B-36
<PAGE> 40
is $74,712 less than the maximum amount of advisory fees, if charged);
Intermediate Bond Fund: $353,884 (which is $116,052 less than the maximum amount
of advisory fees, if charged); Growth and Income Fund $530,197 (which is
$328,103 less than the maximum amount of advisory fees, if charged); North
Carolina Fund: $170,331 (which is $56,780 less than the maximum amount of
advisory fees, if charged); and Balanced Fund: $224,803 (which is $144,035 less
than the maximum amount of advisory fees, if charged). For the period from
commencement of operations, December 7, 1994, to September 30, 1995 the Small
Company Growth Fund paid $67,765 in investment advisory fees to BB&T (which is
$497 less than the maximum amount of advisory fees, if charged). The Funds of
Funds and the International Equity Fund had not commenced operations as of
September 30, 1995.
For the fiscal year ended September 30, 1994, the Funds paid the
following investment advisory fees to BB&T: U.S. Treasury FUND: $204,566 (which
is $118,916 less than the maximum amount of advisory fees, if charged);
Short-Intermediate Fund: $130,609 (which is $180,250 less than the maximum
amount of advisory fees, if charged); Intermediate Bond Fund: $173,548 (which is
$237,363 less than the maximum amount of advisory fees, if charged); Growth and
Income Fund: $242,139 (which is $465,855 less than the maximum amount of
advisory fees, if charged); North Carolina Fund: $94,776 (which is $128,836 less
than the maximum amount of advisory fees, if charged); and Balanced Fund:
$96,932 (which is $173,034 less than the maximum amount of advisory fees, if
charged). The Small Company Growth Fund had not commenced operations as of
September 30, 1996.
Investment Sub-Advisers
Investment sub-advisory and management services are provided to the
Small Company Growth Fund by PNC Bank, National Association ("PNC Bank")
pursuant to a Sub-Advisory Agreement ("Sub-Advisory Agreement") dated as of
November 9, 1994 between BB&T and PNC Bank.
The Sub-Advisory Agreement provides that PNC Bank shall not be liable
for any error of judgment or mistake of law or for any loss suffered by the
Group in connection with the performance of such Sub-Advisory Agreement, except
a loss resulting from a breach of fiduciary duty with respect to the receipt of
compensation for services or a loss resulting from willful misfeasance, bad
faith, or gross negligence on the part of PNC Bank in the performance of its
duties, or from reckless disregard by PNC Bank of its duties and obligations
thereunder.
Unless sooner terminated, the Sub-Advisory Agreement will continue in
effect until September 30, 1997 and thereafter will continue from year to year
if such continuance is approved at least annually by the Group's Board of
Trustees or by vote of the holders of a majority of the outstanding Shares of
the Fund (as defined under "GENERAL INFORMATION - Miscellaneous"). The
Sub-Advisory Agreement is terminable at any time
B-37
<PAGE> 41
without penalty by the Trustees, by vote of the holders of a majority of the
outstanding Shares of the Fund, or, on 60 days' written notice, by PNC Bank or
by BB&T. The Advisory Agreement also terminates automatically in the event of
any assignment, as defined in the 1940 Act.
For the fiscal year ended September 30, 1996 and for the period from
commencement of operations, December 7, 1994, to September 30, 1995, the Small
Company Growth Fund paid $154,356 and $34,132, respectively, in investment
sub-advisory fees to PNC Bank.
From time to time, advertisements, supplemental sales literature and
information furnished to present or prospective shareholders of the Group may
include descriptions of the investment sub-adviser including, but not limited
to, (i) descriptions of the sub-adviser's operations; (ii) descriptions of
certain personnel and their functions; and (iii) statistics and rankings related
to the sub-adviser's operations.
Investment sub-advisory and management services are provided to the
International Equity Fund by CastleInternational Asset Management Limited
("CastleInternational"), an indirect wholly-owned subsidiary of PNC Bank Corp.,
pursuant to a Sub-Advisory Agreement ("Sub-Advisory Agreement") dated as of
January 2, 1997 between BB&T and CastleInternational.
Unless sooner terminated, the Sub-Advisory Agreement will continue in
effect until December 31, 1997 and thereafter will continue from year to year if
such continuance is approved at least annually by the Group's Board of Trustees
or by vote of the holders of a majority of the outstanding Shares of the Fund
(as defined under "GENERAL INFORMATION - Miscellaneous"). The Sub-Advisory
Agreement is terminable at any time without penalty, on 60 days' written notice
by the Trustees, by vote of the holders of a majority of the outstanding Shares
of the Fund, by CastleInternational, or by BB&T. The Advisory Agreement also
terminates automatically in the event of any assignment, as defined in the 1940
Act.
From time to time, advertisements, supplemental sales literature and
information furnished to present or prospective shareholders of the Group may
include descriptions of the investment sub-adviser including, but not limited
to, (i) descriptions of the sub-adviser's operations; (ii) descriptions of
certain personnel and their functions; and (iii) statistics and rankings related
to the sub-adviser's operations.
B-38
<PAGE> 42
Portfolio Transactions
Pursuant to the Advisory Agreement, BB&T (and PNC Bank, with respect to
the Small Company Growth Fund and CastleInternational, with respect to the
International Equity Fund) determines, subject to the general supervision of the
Board of Trustees of the Group and in accordance with each Fund's investment
objective and restrictions, which securities are to be purchased and sold by a
Fund, and which brokers are to be eligible to execute such Fund's portfolio
transactions. Purchases and sales of portfolio securities with respect to the
Growth and Income Fund, North Carolina Fund, Short-Intermediate Fund,
Intermediate Bond Fund, Small Company Growth Fund, International Equity Fund and
the Funds of Funds usually are principal transactions in which portfolio
securities are normally purchased directly from the issuer or from an
underwriter or market maker for the securities. Purchases from underwriters of
portfolio securities generally include (but not in the case of mutual fund
shares purchased by the Funds of Funds) a commission or concession paid by the
issuer to the underwriter and purchases from dealers serving as market makers
may include the spread between the bid and asked price. Transactions on stock
exchanges involve the payment of negotiated brokerage commissions. Transactions
in the over-the-counter market are generally principal transactions with
dealers. With respect to the over-the-counter market, the Group, where possible,
will deal directly with dealers who make a market in the securities involved
except in those circumstances where better price and execution are available
elsewhere. While BB&T (and PNC Bank, with respect to the Small Company Growth
Fund and CastleInternational with respect to the International Equity Fund)
generally seeks competitive spreads or commissions, the Group may not
necessarily pay the lowest spread or commission available on each transaction,
for reasons discussed below.
During the fiscal year ended September 30, 1996, the Growth and Income
Fund paid aggregate brokerage commissions in the amount of $173,852. During the
fiscal year ended September 30, 1996, BB&T directed brokerage transactions for
the Growth and Income Fund to brokers because of research services provided in
the following amounts: aggregate transactions --$77,196,850; aggregate
commissions: $145,882.
During the fiscal year ended September 30, 1996, the Balanced Fund
paid aggregate brokerage commissions in the amount of $39,945. During the
fiscal year ended September 30, 1996, BB&T directed brokerage transactions for
the Balanced Fund to brokers because of research services provided in the
following amounts: aggregate transactions -- $20,263,088; aggregate commissions:
$6,614.
During the fiscal year ended September 30, 1996, the Small Company
Growth Fund paid aggregate brokerage commissions in the amount of $18,046.
Allocation of transactions, including their frequency, to various
dealers is determined by BB&T (and PNC Bank, with respect to the Small Company
Growth Fund and CastleInternational, with respect to the International Equity
Fund) in its best judgment and in
B-39
<PAGE> 43
a manner deemed fair and reasonable to Shareholders. The major consideration in
allocating brokerage business is the assurance that the best execution is being
received on all transactions effected for all accounts. Brokerage will at times
be allocated to firms that supply research, statistical data and other services
when the terms of the transaction and the capabilities of different
broker/dealers are consistent with the guidelines set forth in Section 28(e) of
the Securities Exchange Act of 1934. Information so received is in addition to
and not in lieu of services required to be performed by BB&T (and PNC Bank, with
respect to the Small Company Growth Fund and CastleInternational, with respect
to the International Equity Fund) and does not reduce the advisory fees payable
to BB&T, PNC Bank, or CastleInternational. Such information may be useful to
BB&T, PNC Bank, or CastleInternational in serving both the Group and other
clients and, conversely, supplemental information obtained by the placement of
business of other clients may be useful to BB&T , PNC Bank, or
CastleInternational in carrying out its obligations to the Group.
Except as otherwise disclosed to the Shareholders of the Funds and as
permitted by applicable rules and regulations, BB&T, PNC Bank and
CastleInternational will not execute portfolio transactions on behalf of the
Funds through, acquire portfolio securities issued by, make savings deposits in,
or enter into repurchase or reverse repurchase agreements with BB&T, PNC Bank,
CastleInternational, BISYS Fund Services, or their affiliates, and will not give
preference to BB&T's or PNC Bank's correspondents with respect to such
transactions, securities, savings deposits, repurchase agreements, and reverse
repurchase agreements.
Investment decisions for each Fund of the Group are made independently
from those for the other Funds or any other investment company or account
managed by BB&T and PNC Bank and CastleInternational. Any such other investment
company or account may also invest in the same securities as the Group. When a
purchase or sale of the same security is made at substantially the same time on
behalf of a Fund and another Fund of the Group, investment company or account,
the transaction will be averaged as to price and available investments will be
allocated as to amount in a manner which BB&T, PNC Bank or CastleInternational
believes to be equitable to the Fund(s) and such other investment company or
account. In some instances, this investment procedure may adversely affect the
price paid or received by a Fund or the size of the position obtained by a Fund.
To the extent permitted by law, BB&T, PNC Bank or CastleInternational may
aggregate the securities to be sold or purchased for a Fund with those to be
sold or purchased for the other Funds or for other investment companies or
accounts in order to obtain best execution. As provided by the Advisory
Agreement and the Sub-Advisory Agreements, in making investment recommendations
for the Group, BB&T and PNC Bank will not inquire or take into consideration
whether an issuer of securities proposed for purchase or sale by the Group is a
customer of BB&T, PNC Bank, or their parents, subsidiaries, or affiliates, and,
in dealing with their customers, BB&T, PNC Bank and their parents, subsidiaries,
and affiliates will not inquire or take into consideration whether securities of
such customers are held by the Group.
B-40
<PAGE> 44
Glass-Steagall Act
In 1971, the United States Supreme Court held in Investment Company
Institute v. Camp that the Federal statute commonly referred to as the
Glass-Steagall Act prohibits a bank from operating a mutual fund for the
collective investment of managing agency accounts. Subsequently, the Board of
Governors of the Federal Reserve System (the "Board") issued a regulation and
interpretation to the effect that the Glass-Steagall Act and such decision: (a)
forbid a bank holding company registered under the Federal Bank Holding Company
Act of 1956 (the "Holding Company Act") or any non-bank affiliate thereof from
sponsoring, organizing, or controlling a registered, open-end investment company
continuously engaged in the issuance of its shares, but (b) do not prohibit such
a holding company or affiliate from acting as investment adviser, transfer
agent, and custodian to such an investment company. In 1981, the United States
Supreme Court held in Board of Governors of the Federal Reserve System v.
Investment Company Institute that the Board did not exceed its authority under
the Holding Company Act when it adopted its regulation and interpretation
authorizing bank holding companies and their non-bank affiliates to act as
investment advisers to registered closed-end investment companies. In the Board
of Governors case, the Supreme Court also stated that if a bank complied with
the restrictions imposed by the Board in its regulation and interpretation
authorizing bank holding companies and their non-bank affiliates to act as
investment advisers to investment companies, a bank performing investment
advisory services for an investment company would not violate the Glass-Steagall
Act.
BB&T, PNC Bank, and CastleInternational believe that they possess the
legal authority to perform the services for each Fund contemplated by the
Advisory Agreement and Sub- Advisory Agreements and described in the
Prospectuses and this Statement of Additional Information and has so represented
in the Advisory Agreement and Sub-Advisory Agreements. Future changes in either
federal or state statutes and regulations relating to the permissible activities
of banks or bank holding companies and the subsidiaries or affiliates of those
entities, as well as further judicial or administrative decisions or
interpretations of present and future statutes and regulations, could prevent or
restrict BB&T, PNC Bank, or CastleInternational from continuing to perform such
services for the Group. Depending upon the nature of any changes in the services
which could be provided by BB&T, PNC Bank, or CastleInternational, the Board of
Trustees of the Group would review the Group's relationship with BB&T, PNC Bank,
or CastleInternational and consider taking all action necessary in the
circumstances.
Should future legislative, judicial, or administrative action prohibit
or restrict the proposed activities of BB&T, PNC Bank, or CastleInternational or
their affiliated and correspondent banks (the "Banks") in connection with
Customer's purchases of Shares of the Group, the Banks might be required to
alter materially or discontinue the services offered by them to Customers. It is
not anticipated, however, that any change in the Group's method of operations
would affect its net asset value per Share or result in financial losses to any
Customer.
B-41
<PAGE> 45
Manager and Administrator
BISYS serves as administrator (the "Administrator") to each Fund
pursuant to the Management and Administration Agreement dated as of October 1,
1992, as amended (the "Administration Agreement"). The Administrator assists in
supervising all operations of each Fund (other than those performed by BB&T ,
PNC Bank and CastleInternational under the Advisory Agreement and Sub-Advisory
Agreements, those performed by Star Bank, N.A. and Bank of New York under
their custodial services agreements with the Group and those performed by BISYS
Fund Services Ohio, Inc. under its transfer agency and shareholder service and
fund accounting agreements with the Group). The Administrator is a
broker-dealer registered with the Securities and Exchange Commission, and is a
member of the National Association of Securities Dealers, Inc. The
Administrator provides financial services to institutional clients.
Under the Administration Agreement, the Administrator has agreed to
monitor the net asset value of the U.S. Treasury Fund, to maintain office
facilities for the Group, to maintain the Group's financial accounts and
records, and to furnish the Group statistical and research data and certain
bookkeeping services, and certain other services required by the Group. The
Administrator prepares annual and semi-annual reports to the Securities and
Exchange Commission, prepares Federal and state tax returns, prepares filings
with state securities commissions, and generally assists in supervising all
aspects of the Group's operations other than those performed by BB&T under the
Advisory Agreement, those by Star Bank, N.A. and Bank of New York under its
custodial services agreements with the Group and those performed by BISYS Fund
Services Ohio, Inc. under its transfer agency and shareholder service and fund
accounting agreements with the Group. Under the Administration Agreement, the
Administrator may delegate all or any part of its responsibilities thereunder.
Under the Administration Agreement for expenses assumed and services
provided as manager and administrator, the Administrator receives a fee from
each Fund equal to the lesser of (a) a fee computed at the annual rate of twenty
one-hundredths of one percent (.20%) of such Fund's average daily net assets or
(b) such fee as may from time to time be agreed upon in writing by the Group and
the Administrator. A fee agreed to in writing from time to time by the Group and
the Administrator may be significantly lower than the fee calculated at the
annual rate and the effect of such lower fee would be to lower a Fund's expenses
and increase the net income of such Fund during the period when such lower fee
is in effect.
For the fiscal years ended September 30, 1994 , September 30, 1995, and
September 30, 1996 each of the Funds paid the following administration fees to
the Administrator: U.S. Treasury Fund: $161,741, $204,919, and 365,557
respectively; Short-Intermediate Fund: $103,554, $101,143, and $115,305
respectively; Intermediate Bond Fund: $136,908, $156,602, and $212,620
respectively; Growth and Income Fund: $191,291, $231,669 (which is $282 less
than the maximum amount of administration fees, if charged), and $402,293
respectively; North Carolina Fund:
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<PAGE> 46
$22,474, $56,787 (which is $18,917 less than the maximum amount of
administration fees, if charged), and $53,810 (which is $17,942 less than the
maximum amount of administration fees, if charged) respectively; and Balanced
Fund: $71,791, $99,630, and $148,506, respectively. For the period from
commencement of operations to September 30, 1995 and for the fiscal year ended
September 30, 1996, the Small Company Growth Fund paid $13,553 in administration
fees to the Administrator (which is $95 less than the maximum amount of
administration fees, if charged) and $61,583, respectively. As of September 30,
1996, the Funds of Funds and the International Equity Fund had not yet commenced
operations and therefore paid no administration fees for any of the
above-mentioned periods.
The Administration Agreement shall, unless sooner terminated as
provided in the Administration Agreement (described below), will continue until
September 30, 1997. Thereafter, the Administration Agreement shall be renewed
automatically for successive five year terms, unless written notice not to renew
is given by the non-renewing party to the other party at least 60 days prior to
the expiration of the then-current term. The Administration Agreement is
terminable with respect to a particular Fund only upon mutual agreement of the
parties to the Administration Agreement and for cause (as defined in the
Administration Agreement) by the party alleging cause, on not less than 60 days
notice by the Group's Board of Trustees or by the Administrator.
The Administration Agreement provides that the Administrator shall not
be liable for any loss suffered by the Group in connection with the matters to
which the Administration Agreement relates, except a loss resulting from willful
misfeasance, bad faith, or gross negligence in the performance of its duties, or
from the reckless disregard by the Administrator of its obligations and duties
thereunder.
Expenses
If total expenses incurred by any of the Funds in any fiscal year
exceed expense limitations imposed by applicable state securities regulations,
BB&T, PNC Bank, CastleInternational, and the Administrator will reduce their own
fees by the amount of such excess in proportion to their respective fees. As of
the date of the Prospectuses and this Statement of Additional Information, there
are no state expense limitations applicable to the Group. Any fee reduction by
BB&T, PNC Bank, CastleInternational, and the Administrator will be estimated
daily and reconciled on a monthly basis. Fees imposed upon customer accounts by
BB&T, PNC Bank, or their affiliated or correspondent banks for cash management
services are not included within Group expenses for purposes of any such expense
limitation. Each Fund also bears expenses incurred in pricing securities owned
by the Fund.
B-43
<PAGE> 47
Distributor
BISYS serves as distributor to each Fund of the Group pursuant to a
Distribution Agreement dated October 1, 1993, (the "Distribution Agreement").
The Distribution Agreement provides that, unless sooner terminated it will
continue in effect for continuous one-year periods if such continuance is
approved at least annually (i) by the Group's Board of Trustees or by the vote
of a majority of the outstanding Shares of the Funds or Fund subject to such
Distribution Agreement, and (ii) by the vote of a majority of the Trustees of
the Group who are not parties to such Distribution Agreement or interested
persons (as defined in the 1940 Act) of any party to such Distribution
Agreement, cast in person at a meeting called for the purpose of voting on such
approval. The Distribution Agreement may be terminated in the event of any
assignment, as defined in the 1940 Act.
The fee of .50% of average daily net assets of Class A Shares of each
Fund (which has been voluntarily reduced to .25%) and the fee of 1.00% of
average daily net assets of Class B Shares of each Fund payable under the Fund's
Distribution Plan, to which Class A and Class B Shares of each Fund of the Group
are subject, is described in the Class A and Class B Prospectus.
For the fiscal years ended September 30, 1994 , September 30, 1995, and
September 30, 1996, each of the Funds paid the following fees under the
Distribution Plan for Investor Shares (now redesignated as Class A Shares): U.S.
Treasury Fund: $2,502, $14,832 (which is $14,832 less than the maximum amount of
fees under the Distribution Plan, if charged), and $52,079 (which is $56,370
less than the maximum amount of fees under the Distribution Plan, respectively;
Short-Intermediate Fund: $27,203, $19,162 (which is $19,117 less than the
maximum amount of fees under the Distribution Plan, if charged), and $16,736
(which is $16,727 less than the maximum amount of fees under the Distribution
Plan, respectively; Intermediate Bond Fund: $17,090, $15,210 (which is $15,187
less than the maximum amount of fees under the distribution plan, if charged),
and $10,896 (which is $10,876 less than the maximum amount of fees under the
Distribution Plan, respectively; Growth and Income Stock Fund: $18,374, $21,918
(which is $21,955 less than the maximum amount of fees under the Distribution
Plan, if charged), and $36,560 (which is $36,674 less than the maximum amount of
fees under the Distribution Plan, respectively; North Carolina Fund: $20,507,
$13,671 (which is $31,865 less than the maximum amount of fees under the
Distribution Plan, if charged), and $13,524 (which is $31,563 less than the
maximum amount of fees under the Distribution Plan, respectively; and Balanced
Fund: $16,172, $20,985 (which is $20,993 less than the maximum amount of fees
under the Distribution Plan, if charged), and $28,015 (which is $28,058 less
than the maximum amount of fees under the Distribution Plan, respectively. For
the fiscal year ended September 30, 1996 and for the period from commencement of
operations, December 7, 1994, to September 30, 1995, the Small Company Growth
Fund paid $935 in fees under the Distribution Plan for Class A Shares (which is
$950 less than the maximum amount of fees under the Distribution Plan, if
B-44
<PAGE> 48
charged) and $9,343 (which is $9,430 less than the maximum amount of fees under
the Distribution Plan.
For the period from January 1, 1996 to September 30, 1996, each of the
Funds paid the following fees under the Distribution Plan for Class B Share:
U.S. Treasury Fund: $5,530; Intermediate U.S. Government Fund: $1,386; Growth
and Income Stock Fund: $14,031; Balanced Fund: $11,185; and Small Company
Growth Fund: $10,500 which is $0 less than the maximum amount of fees under the
Distribution Plan.
The Distribution Plan was initially approved on August 18, 1992 by the
Fund's Board of Trustees, including a majority of the trustees who are not
interested persons of the Fund (as defined in the 1940 Act) and who have no
direct or indirect financial interest in the Distribution Plan (the "Independent
Trustees"). An Amended and Restated Distribution Plan reflecting the creation of
Class B Shares was approved on September 21, 1995. The Distribution Plan
provides for fees only upon the Class A and Class B Shares of each Fund.
On October 1, 1993, The Winsbury Company (now known as BISYS Fund
Services) and its affiliated companies, including The Winsbury Service
Corporation (now known as BISYS Fund Services Ohio, Inc.), were acquired by the
BISYS Group, Inc., a publicly held company which is a provider of information
processing, loan servicing and 401(k) administration and record-keeping services
to and through banking and other financial organizations.
The Distribution Agreement is the successor to the previous
distribution agreement, which terminated automatically by its terms upon
consummation of the acquisition of Winsbury by The BISYS Group, Inc. The
Distribution Agreement was unanimously approved by the Board of Trustees of the
Group, and is materially identical to the terminated distribution agreement.
In accordance with Rule 12b-1 under the 1940 Act, the Distribution Plan
may be terminated with respect to any Fund by a vote of a majority of the
Independent Trustees, or by a vote of a majority of the outstanding Class A or
Class B Shares of that Fund. The Distribution Plan may be amended by vote of the
Fund's Board of Trustees, including a majority of the Independent Trustees, cast
in person at a meeting called for such purpose, except that any change in the
Distribution Plan that would materially increase the distribution fee with
respect to a Fund requires the approval of the holders of that Fund's Class A
and Class B Shares. The Group's Board of Trustees will review on a quarterly and
annual basis written reports of the amounts received and expended under the
Distribution Plan (including amounts expended by the Distributor to
Participating Organizations pursuant to the Servicing Agreements entered into
under the Distribution Plan) indicating the purposes for which such expenditures
were made.
B-45
<PAGE> 49
Custodian
Star Bank, N.A. serves as the Group's Custodian. Bank of New York
serves as the International Equity Fund's Custodian.
Transfer Agent and Fund Accounting Services
BISYS Fund Services Ohio, Inc. (formerly known as The Winsbury Service
Corporation) serves as transfer agent to each Fund of the Group pursuant to a
Transfer Agency Agreement with the Group.
BISYS Fund Services Ohio, Inc. also provides fund accounting services
to each of the Funds pursuant to a Fund Accounting Agreement with the Group.
Under the Fund Accounting Agreement, BISYS Fund Services Ohio, Inc. receives a
fee from each Fund at the annual rate of .03% of such Fund's average daily net
assets, subject to a minimum annual fee.
Independent Accountants
KPMG Peat Marwick LLP ("KPMG") has been selected as independent
certified public accountants. KPMG's address is Two Nationwide Plaza, Suite
1600, Columbus, Ohio 43215.
Legal Counsel
Ropes & Gray, One Franklin Square, 1301 K Street, N.W., Suite 800 East,
Washington, DC 20005 are counsel to the Group.
PERFORMANCE INFORMATION
Yields of the U.S. Treasury Fund
As summarized in the Prospectuses of the U.S. Treasury Fund under the
heading "Performance Information," the "yield" of the U.S. Treasury Fund for a
seven-day period (a "base period") will be computed by determining the "net
change in value" (calculated as set forth below) of a hypothetical account
having a balance of one share at the beginning of the period, dividing the net
change in account value by the value of the account at the beginning of the base
period to obtain the base period return, and multiplying the base period return
by 365/7 with the resulting yield figure carried to the nearest hundredth of one
percent. Net changes in value of a hypothetical account will include the value
of additional shares purchased with dividends from the original share and
dividends declared on both the original share and any such additional shares,
but will not include realized gains or losses or unrealized appreciation or
depreciation on portfolio investments. Yield may also be calculated on a
compound basis (the "effective yield") which assumes that net income is
reinvested in Fund shares at the same rate as net income is earned for the base
period.
B-46
<PAGE> 50
The yield and effective yield of the U.S. Treasury Fund will vary in
response to fluctuations in interest rates and in the expenses of the Fund. For
comparative purposes the current and effective yields should be compared to
current and effective yields offered by competing financial institutions for
that base period only and calculated by the methods described above.
With respect to Investor Shares (now redesignated as Class A Shares),
for the seven-day period ended September 30, 1996, the yield and effective yield
of the U.S. Treasury Fund calculated as described above was 4.41% and 4.51%,
respectively. With respect to Trust Shares, for the seven-day period ended
September 30, 1996, the yield and effective yield of the U.S. Treasury Fund
calculated as described above was 4.61% and 4.71%, respectively. With respect to
the Class B Shares, for the seven-day period ended September 30, 1996, the yield
and effective yield of the U.S. Treasury Fund calculated as described above was
3.61% and 3.68%.
Yields of the Other Funds of the Group
As summarized in the Prospectuses under the heading "Performance
Information," yields of the Growth and Income Fund, North Carolina Fund,
Short-Intermediate Fund, Intermediate Bond Fund, Balanced Fund, Small Company
Growth Fund, International Equity Fund, and the Funds of Funds will be computed
by annualizing net investment income per share for a recent 30-day period and
dividing that amount by the maximum offering price per share (reduced by any
undeclared earned income expected to be paid shortly as a dividend) on the last
trading day of that period, according to the following formula:
a-b
30-Day Yield = 2[( ----- +1)(6)-1]
cd
In the above formula, "a" represents dividends and interest earned by a
particular class during the 30-day base period; "b" represents expenses accrued
to a particular class for the 30-day base period (net of reimbursements); "c"
represents the average daily number of shares of a particular class outstanding
during the 30-day base period that were entitled to receive dividends; and "d"
represents the maximum offering price per share of a particular class on the
last day of the 30-day base period.
Net investment income will reflect amortization of any market value
premium or discount of fixed income securities (except for obligations backed by
mortgages or other assets) and may include recognition of a pro rata portion of
the stated dividend rate of dividend paying portfolio securities. The yield of
each of the Funds will vary from time to time depending upon market conditions,
the composition of the Fund's portfolio and operating expenses of the Group
allocated to each Fund. These factors and possible differences in the methods
used in calculating yield should be considered when comparing a Fund's yield to
B-47
<PAGE> 51
yields published for other investment companies and other investment vehicles.
Yield should also be considered relative to changes in the value of the Fund's
shares and to the relative risks associated with the investment objectives and
policies of each Fund.
The North Carolina Fund may also advertise a "tax equivalent yield" and
a "tax equivalent effective yield." Tax equivalent yield will be computed by
dividing that portion of the North Carolina Fund's yield which is tax-exempt by
the difference between one and a stated income tax rate and adding the product
to that portion, if any, of the yield of the Fund that is not tax-exempt. The
tax equivalent effective yield for the North Carolina Fund is computed by
dividing that portion of the effective yield of the North Carolina Fund which is
tax-exempt by the difference between one and a stated income tax rate and adding
the product to that portion, if any, of the effective yield of the Fund that is
not tax-exempt.
With respect to Investor Shares (now redesignated as Class A Shares),
for the 30-day period ended September 30, 1996, the yields of the Funds were as
follows: Short- Intermediate Fund -- 5.17% (with maximum sales load) and 5.28%
(with no sales load); Intermediate Bond -- 5.44% (with maximum sales load) and
5.70% (with no sales load); North Carolina Tax-Free Fund -- 3.46% (with maximum
sales load) and 3.53% (with no sales load); and Balanced Fund -- 3.49% (with
maximum sales load) and 3.65% (with no sales load). With respect to Class A
Shares, the tax-equivalent yield for the North Carolina Fund for the same period
was 5.73% (with maximum sales load) and 5.85% (with no sales load).
With respect to Class B Shares for the 30-day period ended September
30, 1996, the yields of the Funds were as follows: Intermediate Bond -- 4.95%
and Balanced Fund --2.91%.
With respect to Trust Shares, for the 30-day period ended September 30,
1996, the yields of each of the Funds (with no sales load) were as follows:
Short-Intermediate Fund -- 5.93%; Intermediate Bond Fund -- 5.95%; North
Carolina Tax-Free Fund -- 3.68%; and Balanced Fund -- 3.90%. With respect to
Trust Shares, the tax-equivalent yield for the North Carolina Fund for the same
period was 6.10%.
There is no yield information available for the Funds of Funds and the
International Equity Fund which had not commenced operations as of the date of
this Statement of Additional Information.
Investors in the Growth and Income Fund, North Carolina Fund,
Short-Intermediate Fund, Intermediate Bond Fund, Balanced Fund, Small Company
Growth Fund, International Equity Fund, and Funds of Funds, are specifically
advised that share prices, expressed as the net asset values per share, will
vary just as yields will vary.
B-48
<PAGE> 52
Calculation of Total Return
Total Return is a measure of the change in value of an investment in a
Fund over the period covered, assuming the investor paid the current maximum
applicable sales charge on the investment and that any dividends or capital
gains distributions were reinvested in the Fund immediately rather than paid to
the investor in cash. The formula for calculating Total Return includes four
steps: (1) adding to the total number of shares purchased by a hypothetical
$1,000 investment in the Fund all additional shares which would have been
purchased if all dividends and distributions paid or distributed during the
period had been immediately reinvested; (2) calculating the value of the
hypothetical initial investment of $1,000 as of the end of the period by
multiplying the total number of shares owned at the end of the period by the net
asset value per share on the last trading day of the period; (3) assuming
redemption at the end of the period; and (4) dividing this account value for the
hypothetical investor by the initial $1,000 investment and annualizing the
result for periods of less than one year.
With respect to Investor Shares (now redesignated as Class A Shares),
for the one-year period ended September 30, 1996, average annual total returns
(with maximum sales load) for the Short-Intermediate, Intermediate Bond, Growth
and Income, North Carolina Tax-Free, Balanced, and Small Company Growth Funds
were 2.03%, -1.52%, 15.54%, .53%, 7.37% and 38.46%, respectively. For the same
period, average annual total returns (without sales load) for the
Short-Intermediate, Intermediate Bond, Growth and Income, North Carolina
Tax-Free, U.S. Treasury , Balanced, and Small Company Growth Funds were 4.09%,
3.17%, 20.97%, 2.61%, 4.49%, 12.43% and 44.94%, respectively.
With respect to Trust Shares, for the one-year period ended September
30, 1996, average annual total return for the Short-Intermediate, Intermediate
Bond, Growth and Income, North Carolina, U.S. Treasury, Balanced and Small
Company Growth Funds were 4.36%, 3.43%, 21.31%, 2.77%, 4.74%, 12.74% and 45.37%,
respectively. The Funds of Funds and the International Equity Fund had not
commenced operations as of September 30, 1996.
With respect to Class B Shares, for the period from January 1, 1996
through September 30, 1996, average annual total returns (with maximum sales
load) for the Intermediate Bond, Growth and Income, Balanced and Small Company
Growth Funds were -7.20%, 7.01%, .67% and 32.27%, respectively. For the same
period, average annual total returns (without sales load) for the Intermediate
Bond, Growth and Income, North Carolina, U.S. Treasury, Balanced and Small
Company Growth Funds were - 2.48%, 12.01%, 2.53%, 5.67% and 37.27%,
respectively.
B-49
<PAGE> 53
With respect to Investor Shares (now redesignated as Class A Shares),
for the period since commencement of operations of each of the Funds through
September 30, 1996, average annual total returns (with maximum sales load) for
the Short-Intermediate, Intermediate Bond, Growth and Income, North Carolina,
Balanced and Small Company Growth Funds were 4.27%, 4.06%, 13.69%, 3.33%, 8.27%
and 46.84%, respectively. For the same period, average annual total returns
(without sales load) for the Short-Intermediate, Intermediate Bond, Growth and
Income, North Carolina, U.S. Treasury, Balanced and Small Company Growth Funds
were 4.81%, 5.27%, 15.00%, 3.85%, 3.67%, 9.81% and 50.59%, respectively.
With respect to Trust Shares, for the period since commencement of
operations of each of the Funds through September 30, 1996, average annual total
return for the Short-Intermediate, Intermediate Bond, Growth and Income, North
Carolina, U.S. Treasury, Balanced and Small Company Growth Funds were 5.05%,
5.52%, 15.30%, 3.97%, 3.88%, 10.00% and 51.06%, respectively. The Funds of Funds
and the International Equity Fund had not commenced operations as of September
30, 1996.
With respect to Class B Shares, for the period since commencement of
operations of each of the Funds through September 30, 1996, average annual total
returns (with maximum sales load) for the Intermediate Bond, Growth and Income,
Balanced and Small Company Growth Funds were -7.20%, 7.01%, .67%, 32.27%,
respectively. For the same period, average annual total returns (without sales
load) for the Intermediate Bond, Growth and Income, North Carolina, U.S.
Treasury, Balanced and Small Company Growth Funds were -2.48%, 12.01%, 2.53%,
5.67% and 37.27%, respectively.
The yields, effective yields, tax-equivalent yields, tax-equivalent
effective yields, and total return set forth above were calculated for each
class of each Fund's Shares. No yield information is available for the Funds of
Funds or the International Equity Fund, which had not commenced operations as of
the date of this Statement of Additional Information.
At any time in the future, yields and total return may be higher or
lower than past yields, there can be no assurance that any historical results
will continue.
Performance Comparisons
Yield and Total Return. From time to time, performance information for
the Funds showing their average annual total return and/or yield may be included
in advertisements or in information furnished to present or prospective
shareholders and the ranking of those performance figures relative to such
figures for groups of mutual funds categorized by Lipper Analytical Services as
having the same investment objectives may from time to time be included in
advertisements.
B-50
<PAGE> 54
From time to time, the Group may include the following types of
information in advertisements, supplemental sales literature and reports to
Shareholders: (1) discussions of general economic or financial principals (such
as the effects of inflation, the power of compounding and the benefits of
dollar-cost averaging); (2) discussions of general economic trends; (3)
presentations of statistical data to supplement such discussions; (4)
descriptions of past or anticipated portfolio holdings for one or more of the
Funds within the Group, (5) descriptions of investment strategies for one or
more of such Funds; (6) descriptions or comparisons of various savings and
investment products (including, but not limited to, insured bank products,
annuities, qualified retirement plans and individual stocks and bonds), which
may or may not include the Funds; (7) comparisons of investment products
(including the Funds) with relevant market or industry indices or other
appropriate benchmarks; (8) discussions of fund rankings or ratings by
recognized rating organizations; and (9) testimonials describing the experience
of persons that have invested in one or more of the Funds. The Funds may also
include in these communications calculations, such as hypothetical compounding
examples, that describe hypothetical investment results, such performance
examples will be based on an express set of assumptions and are not indicative
of performance of any of the Funds.
Total return and/or yield may also be used to compare the performance
of the Funds against certain widely acknowledged standards or indices for stock
and bond market performance. The Standard & Poor's Composite Index of 500 stocks
(the "S&P 500") is a market value-weighted and unmanaged index showing the
changes in the aggregate market value of 500 Stocks relative to the base period
1941-43. The S&P 500 is composed almost entirely of common stocks of companies
listed on the New York Stock Exchange, although the common stocks of a few
companies listed on the American Stock Exchange or traded over-the-counter are
included. The 500 companies represented include 400 industrial, 60
transportation and 40 financial services concerns. The S&P 500 represents about
80% of the market value of all issues traded on the New York Stock Exchange.
The NASDAQ-OTC Price Index (the "NASDAQ Index") is a market
value-weighted and unmanaged index showing the changes in the aggregate market
value of approximately 3,500 stocks relative to the base measure of 100.00 on
February 5, 1971. The NASDAQ Index is composed entirely of common stocks of
companies traded over-the-counter and often through the National Association of
Securities Dealers Automated Quotations ("NASDAQ") system. Only those
over-the-counter stocks having only one market maker or traded on exchanges are
excluded.
The Morgan Stanley Capital International Europe, Australia and the Far
East Index ("EAFE") is an index composed of a sample of companies representative
of the market structure of twenty European and Pacific Basin countries. The
Index represents the evolution of an unmanaged portfolio consisting of all
domestically listed stocks.
B-51
<PAGE> 55
The Shearson Lehman Government Bond Index (the "SL Government Index")
is a measure of the market value of all public obligations of the U.S. Treasury;
all publicly issued debt of all agencies of the U.S. Government and all
quasi-federal corporations; and all corporate debt guaranteed by the U.S.
Government. Mortgage backed securities, flower bonds and foreign targeted issues
are not included in the SL Government Index.
The Lehman Brothers Government/Corporate Bond Index (the "SL
Government/Corporate Index") is a measure of the market value of approximately
5,300 bonds with a face value currently in excess of $1.3 trillion. To be
included in the SL Government/Corporate Index, an issue must have amounts
outstanding in excess of $1 million, have at least one year to maturity and be
rated "Baa" or higher ("investment grade") by a nationally recognized
statistical rating organization ("NRSRO").
Current yields or performance will fluctuate from time to time and are
not necessarily representative of future results. Accordingly, a Fund's yield or
performance may not provide for comparison with bank deposits or other
investments that pay a fixed return for a stated period of time. Yield and
performance are functions of quality, composition, and maturity, as well as
expenses allocated to the Fund. Fees imposed upon customer accounts by BB&T or
its affiliated or correspondent banks for cash management services will reduce a
Fund's effective yield to Customers.
In addition, with respect to the North Carolina Fund, the benefits of
tax-free investments may be communicated in advertisements or communications to
shareholders. For example, the table below presents the approximate yield that a
taxable investment must earn at various income brackets to produce after-tax
yields equivalent to those of tax-exempt investments yielding from 3.00% to
5.50%. The yields below are for illustration purposes only and are not intended
to represent current or future yields for the North Carolina Fund, which may be
higher or lower than those shown. The rates shown in the table below are subject
to adjustment for the Internal Revenue Service inflation indexation. Investors
should consult their tax advisers with specific reference to their own tax
situation.
B-52
<PAGE> 56
<TABLE>
<CAPTION>
APPROXIMATE YIELD TABLE: NORTH CAROLINA FUND
- -------------------------------------------------------------------------------------------------------------------------------
SINGLE RETURN COMBINED
SAMPLE NORTH FEDERAL AND
TAXABLE FEDERAL CAROLINA N.C. .......... TAX-EXEMPT YIELDS ..........
INCOME MARGINAL MARGINAL MARGINAL
(1997) TAX RATE TAX RATE TAX RATE 3.00 3.50% 4.00% 4.50% 5.00% 5.50% 6.00% 6.50% 7.00%
- -------------------------------------------------------------------------------------------------------------------------------
FROM
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
$0 TO
$12,750 15.00% 6.00% 20.10% 3.75% 4.38% 5.01% 5.63% 6.26% 6.88% 7.51% 8.14% 8.76%
FROM
$12,751 TO
$24,650 15.00% 7.00% 20.95% 3.80% 4.43% 5.06% 5.69% 6.33% 6.96% 7.59% 8.22% 8.86%
FROM
$24,651 TO
$59,750 28.00% 7.00% 33.04% 4.48% 5.23% 5.97% 6.72% 7.47% 8.21% 8.96% 9.71% 10.45%
FROM
$59,751 TO
$60,000 31.00% 7.00% 35.83% 4.68% 5.45% 6.23% 7.01% 7.79% 8.57% 9.35% 10.13% 10.91%
FROM
$60,001 TO
$124,650 31.00% 7.75% 36.35% 4.71% 5.50% 6.28% 7.07% 7.86% 8.64% 9.43% 10.21% 11.00%
FROM
$124,651 TO
$271,050 36.00% 7.75% 40.96% 5.08% 5.93% 6.78% 7.62% 8.47% 9.32% 10.16% 11.01% 11.86%
OVER
$271,050 39.60% 7.75% 44.28% 5.38% 6.28% 7.18% 8.08% 8.97% 9.87% 10.77% 11.67% 12.56%
</TABLE>
B-53
<PAGE> 57
APPROXIMATE YIELD TABLE: NORTH CAROLINA FUND
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
MARRIED
FILING JOINTLY COMBINED
SAMPLE NORTH FEDERAL AND
TAXABLE FEDERAL CAROLINA N.C. ...... TAX-EXEMPT YIELDS ......
INCOME MARGINAL MARGINAL MARGINAL
(1997) TAX RATE TAX RATE TAX RATE 3.00 3.50% 4.00% 4.50% 5.00% 5.50% 6.00% 6.50% 7.00%
- -----------------------------------------------------------------------------------------------------------------------------------
FROM
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
$0 TO
$21,250 15.00% 6.00% 20.10% 3.75% 4.38% 5.01% 5.63% 6.26% 6.88% 7.51% 8.14% 8.76%
FROM
$21,251 TO
$41,200 15.00% 7.00% 20.95% 3.80% 4.43% 5.06% 5.69% 6.33% 6.96% 7.59% 8.22% 8.86%
FROM
$41,201 TO
$99,600 28.00% 7.00% 33.04% 4.48% 5.23% 5.97% 6.72% 7.47% 8.21% 8.96% 9.71% 10.45%
FROM
$99,601 TO
$100,000 31.00% 7.00% 35.83% 4.68% 5.45% 6.23% 7.01% 7.79% 8.57% 9.35% 10.13% 10.91%
FROM
$100,001 TO
$151,750 31.00% 7.75% 36.35% 4.71% 5.50% 6.28% 7.07% 7.86% 8.64% 9.43% 10.21% 11.00%
FROM
$151,751 TO
$271,050 36.00% 7.75% 40.96% 5.08% 5.93% 6.78% 7.62% 8.47% 9.32% 10.16% 11.01% 11.86%
OVER
$271,050 39.60% 7.75% 44.28% 5.38% 6.28% 7.18% 8.08% 8.97% 9.87% 10.77% 11.67% 12.56%
</TABLE>
B-54
<PAGE> 58
The "combined Federal and N.C. Marginal Tax Rate" represents the
combined federal and North Carolina tax rates available to taxpayers who itemize
deductions adjusted to account for the federal deduction of state taxes paid.
Such data are for illustrative purposes only and are not intended to
indicate past or future performance results of the North Carolina Fund. Actual
performance of the Fund may be more or less than that noted in the hypothetical
illustrations.
ADDITIONAL INFORMATION
Organization and Description of Shares
The Group was organized as a Massachusetts business trust by the
Agreement and Declaration of Trust, dated October 1, 1987, under the name "Shelf
Registration Trust IV." The Group's Agreement and Declaration of Trust has been
amended two times: (1) on June 25, 1992 to change the Group's name, and (2) on
August 18, 1992, to provide for the issuance of multiple classes of shares. A
copy of the Group's Amended and Restated Agreement and Declaration of Trust,
(the "Declaration of Trust") is on file with the Secretary of State of The
Commonwealth of Massachusetts. The Declaration of Trust authorizes the Board of
Trustees to issue an unlimited number of Shares, which are units of beneficial
interest. The Group presently has eight series of Shares offered to the public
which represent interests in the U.S. Treasury Fund, Growth and Income Fund,
North Carolina Fund, Short- Intermediate Fund, Intermediate Bond Fund, Balanced
Fund, Small Company Growth Fund, and International Equity Fund, respectively.
The Group also offers three additional series of Shares which represent
interests in the BB&T Capital Manager Conservative Growth Fund, the BB&T Capital
Manager Moderate Growth Fund, and the BB&T Capital Manager Growth Funds (the
"Funds of Funds"). These Funds of Funds offer Trust Shares only. The Group's
Declaration of Trust authorizes the Board of Trustees to divide or redivide any
unissued Shares of the Group into one or more additional series.
Shares have no subscription or preemptive rights and only such
conversion or exchange rights as the Board of Trustees may grant in its
discretion. When issued for payment as described in the Prospectuses and this
Statement of Additional Information, the Group's Shares will be fully paid and
non-assessable. In the event of a liquidation or dissolution of the Group,
Shareholders of a Fund are entitled to receive the assets available for
distribution belonging to that Fund, and a proportionate distribution, based
upon the relative asset values of the respective Funds, of any general assets
not belonging to any particular Fund which are available for distribution.
As described in the text of the Prospectuses following the caption
"GENERAL INFORMATION -- Description of the Group and its Shares," shares of the
Group are entitled to one vote per share (with proportional voting for
fractional shares) on such matters as shareholders are entitled to vote.
Shareholders vote in the aggregate and not by series or class
B-55
<PAGE> 59
on all matters except (i) when required by the 1940 Act, shares shall be voted
by individual series, (ii) when the Trustees have determined that the matter
affects only the interests of a particular series or class, then only
Shareholders of such series or class shall be entitled to vote thereon, and
(iii) only the holders of Class A and Class B Shares will be entitled to vote on
matters submitted to Shareholder vote with regard to the Distribution Plan
applicable to such class. There will normally be no meetings of Shareholders for
the purposes of electing Trustees unless and until such time as less than a
majority of the Trustees have been elected by the Shareholders, at which time
the Trustees then in office will call a Shareholders' meeting for the election
of Trustees. In addition, Trustees may be removed from office by a written
consent signed by the holders of two-thirds of the outstanding shares of the
Group and filed with the Group's custodian or by vote of the holders of
two-thirds of the outstanding shares of the Group at a meeting duly called for
the purpose, which meeting shall be held upon the written request of the holders
of not less than 10% of the outstanding shares of any Fund. Except as set forth
above, the Trustees shall continue to hold office and may appoint their
successors.
Shareholder and Trustee Liability
Under Massachusetts law, Shareholders could, under certain
circumstances, be held personally liable for the obligations of the Group.
However, the Group's Declaration of Trust disclaims Shareholder liability for
acts or obligations of the Group and requires that notice of such disclaimer be
given in every agreement, obligation or instrument entered into or executed by
the Group or the Trustees. The Declaration of Trust provides for indemnification
out of a Fund's property for all loss and expense of any Shareholder of such
Fund held liable on account of being or having been a Shareholder. Thus, the
risk of a Shareholder incurring financial loss on account of Shareholder
liability is limited to circumstances in which a Fund would be unable to meet
its obligations.
The Agreement and Declaration of Trust states further that no Trustee,
officer or agent of the Group shall be personally liable in connection with the
administration or preservation of the assets of the Group or the conduct of the
Group's business; nor shall any Trustee, officer, or agent be personally liable
to any person for any action or failure to act expect for his own bad faith,
willful misfeasance, gross negligence, or reckless disregard of his duties. The
Agreement and Declaration of Trust also provides that all persons having any
claim against the Trustees or the Group shall look solely to the assets of the
Group for payment.
Miscellaneous
The Group may include information in its Annual Reports and Semi-Annual
Reports to Shareholders that (1) describes general economic trends, (2)
describes general trends within the financial services industry or the mutual
fund industry, (3) describes past or anticipated portfolio holdings for one or
more of the Funds within the Group, or (4) describes investment management
strategies for such Funds. Such information is provided to inform Shareholders
of the activities of the Group for the most recent fiscal year or half-year and
to provide the
B-56
<PAGE> 60
views of the Investment Adviser and/or Group officers regarding expected trends
and strategies.
The organizational expenses of the Group have been allocated to each
Fund and are being amortized over a period of two years from the commencement of
the public offering of Shares of the Group. In the event any of the initial
Shares of the Group are redeemed during the amortization period by any holder
thereof, the redemption proceeds will be reduced by a pro rata portion of any
unamortized organization expenses in the same proportion as the number of
initial Shares being redeemed bears to the total number of initial Shares
outstanding at the time of redemption. Investors purchasing Shares of the Group
subsequent to the date of the Prospectus and this Statement of Additional
Information bear such expenses only as they are amortized against a Fund's
investment income.
The Group is registered with the Securities and Exchange Commission as
a management investment company. Such registration does not involve supervision
by the Securities and Exchange Commission of the management or policies of the
Group.
As of December 9, 1996, the following persons owned of record or
beneficially 5% or more of the Class A, Class B, or Trust Shares of the listed
Funds:
U.S. Treasury Money Market Fund - Class A Shares
<TABLE>
<CAPTION>
Percent Owned
-------------
Name and Address Total Shares Record Only Beneficially
- ---------------- ------------ ----------- ------------
<S> <C> <C>
Stephens, Inc. 18,927,743.580 63.61%
For the Exclusive Benefit
of Our Customers
111 Center Street
Little Rock, AR 72201
Joseph Riddle III and 1,962,593.150 6.60%
George Armstrong
Trust Joseph P. Riddle III
and Carolyn R. Armstrong
and Sharlene R. Williams
Revocable Insurance Trust
P.O. Box 53646
Fayetteville, N.C. 28305
</TABLE>
B-57
<PAGE> 61
U.S. Treasury Money Market Fund - Trust Shares
<TABLE>
<CAPTION>
Percent Owned
-------------
Name and Address Total Shares Record Only Beneficially
- ---------------- ------------ ----------- ------------
<S> <C> <C>
Branch Banking & Trust Co. 11,444,894.540 5.61%
FBO Daily Recordkeeping Plans
Attn: Corp Employee Benefit
Serv/Ops Mgr
434 Fayetteville St., 4th Floor
Raleigh, N.C. 27601-1767
Wilbranch 176,279,114.700 86.44%
Cash
Attn: J. Michael Pollock
P.O. Box 2887
Wilson, NC 27894- 1847
Benefit Service Corporation 11,539,811.230 5.66%
Agnt BB&T Savings and
Thrift Plan
1375 Peachtree St., Suite 300
Atlanta, GA 30309
</TABLE>
U.S. Treasury Money Market Fund - Class B Shares
<TABLE>
<CAPTION>
Percent Owned
-------------
Name and Address Total Shares Record Only Beneficially
- ---------------- ------------ ----------- ------------
<S> <C> <C>
Robert A. Robertson 91,423.700 5.72%
Rollover IRA
1001 Areheart St.
West Columbia, SC 29169
</TABLE>
Short Intermediate U.S. Government Fund - Class A Shares
<TABLE>
<CAPTION>
Percent Owned
-------------
Name and Address Total Shares Record Only Beneficially
- ---------------- ------------ ----------- ------------
<S> <C> <C>
Henry Fibers, Inc. 72,577.124 11.17%
Attn: George F. Henry, Jr.
President
P.O. Box 1675
Gastonia, NC 28053
</TABLE>
B-58
<PAGE> 62
<TABLE>
<CAPTION>
Percent Owned
-------------
Name and Address Total Shares Record Only Beneficially
- ---------------- ------------ ----------- ------------
<S> <C> <C>
Stephens, Inc. 101,427.739 15.61%
For the Exclusive Benefit
of Our Customers
111 Center Street
Little Rock, AR 72201
</TABLE>
Short Intermediate U.S. Government Fund - Trust Shares
<TABLE>
<CAPTION>
Percent Owned
-------------
Name and Address Total Shares Record Only Beneficially
- ---------------- ------------ ----------- ------------
<S> <C> <C>
CAP CO. 586,906.700 8.75%
P.O. Box 2887
Wilson, NC 27894-2887
Wilbranch Co. 2,088,402.331 31.14%
P.O. Box 2887
Wilson, NC 27894-2887
Wilbranch Co. 3,249,193.218 48.45%
P.O. Box 2887
Wilson, NC 27894- 2887
</TABLE>
Intermediate U.S. Government Bond Fund - Class A Shares
<TABLE>
<CAPTION>
Percent Owned
-------------
Name and Address Total Shares Record Only Beneficially
- ---------------- ------------ ----------- ------------
<S> <C> <C>
Stephens, Inc. 76,069.638 17.04%
For the Exclusive Benefit of
Our Customers
111 Center Street
Little Rock, AR 72201
Federated Bank Trust Agent 55,278.566 12.39%
Agnt For BB&T Trustee
FBO World Acceptance Corp.
Attn: Trust OPS
P.O. Box 418
Pittsburgh, PA 15230-0418
</TABLE>
B-59
<PAGE> 63
Intermediate U.S. Government Bond Fund - Trust Shares
<TABLE>
<CAPTION>
Percent Owned
-------------
Name and Address Total Shares Record Only Beneficially
- ---------------- ------------ ----------- ------------
<S> <C> <C>
CAP Co. 737,366.838 5.83%
P.O. Box 2887
Wilson, NC 27894-2887
Wilbranch Co. 2,752,228.562 21.75%
P.O. Box 2887
Wilson, NC 27894-2887
Wilbranch Co. 7,486,237.088 59.16%
P.O. Box 2887
Wilson, NC 27894-2887
CAP Co. 661,224.682 5.23%
P.O. Box 2887
Wilson, NC 27894-2887
</TABLE>
Intermediate U.S. Government Bond Fund - Class B Shares
<TABLE>
<CAPTION>
Percent Owned
-------------
Name and Address Total Shares Record Only Beneficially
- ---------------- ------------ ----------- ------------
<S> <C> <C>
NC Foundation Seed Producers 2,913.780 7.08%
8220 Riley Hill Rd.
Zebulon, NC 27597
Eleanor G. Major 3,904.866 9.49%
IRA Rollover
P.O. Box 125, 105 S Academy
Varnville, SC 29944
L.J. Inc. 5,391.295 13.10%
Attn: Keith Coffer
220 Stoneridge Dr., Suite 405
Columbia, SC 29210
William Ted Camp 2,606.999 6.34%
2105 W. Nash. St.
Wilson, NC 27893
</TABLE>
B-60
<PAGE> 64
<TABLE>
<CAPTION>
Percent Owned
-------------
Name and Address Total Shares Record Only Beneficially
- ---------------- ------------ ----------- ------------
<S> <C> <C>
Indiraben D. Patel 5,209.784 12.66%
P.O. Box 95
Siler City, NC 27344
Nancy K. Harmon 2,120.725 5.15%
Trst Gilbert Community Club
Scholarship Trust
P.O. Box 62
Gilbert, SC 29054-0062
</TABLE>
Growth and Income Stock Fund - Class A Shares
<TABLE>
<CAPTION>
Percent Owned
-------------
Name and Address Total Shares Record Only Beneficially
- ---------------- ------------ ----------- ------------
<S> <C> <C>
Stephens, Inc. 232,299.734 15.88%
For the Exclusive Benefit
of Our Customers
111 Center Street
Little Rock, AR 72201
Federated Bank Trust Agent 94,091.088 6.43%
Agnt For BB&T Trustee
FBO World Acceptance Corp
Attn: Trust Ops.
P.O. Box 418
Pittsburgh, PA 15230-0418
</TABLE>
B-61
<PAGE> 65
Growth and Income Stock Fund - Trust Shares
<TABLE>
<CAPTION>
Percent Owned
-------------
Name and Address Total Shares Record Only Beneficially
- ---------------- ------------ ----------- ------------
<S> <C> <C>
Wilbranch Co. 6,997,380.576 50.06%
P.O. Box 2887
Wilson, NC 27894-2887
CAP Co. 750,049.688 5.37%
P.O. Box 2887
Wilson, NC 27894-2887
Benefit Service Corporation 950,672.511 6.80%
Agnt BB&T Savings and
Thrift Plan
1375 Peachtree St., Suite 300
Atlanta, GA 30309
Wilbranch Co. 3,987,802.566 28.53%
P.O. Box 2887
Wilson, NC 27894-2887
</TABLE>
North Carolina Intermediate Tax-Free Fund - Class A Shares
<TABLE>
<CAPTION>
Percent Owned
-------------
Name and Address Total Shares Record Only Beneficially
- ---------------- ------------ ----------- ------------
<S> <C> <C>
Stephens, Inc. 200,694.445 22.44%
For the Exclusive Benefit
of Our Customers
111 Center Street
Little Rock, AR 72201
Helen H. Hendricks 55,769.562 6.23%
277 Beechwood Dr.
Mocksville, NC 27028
</TABLE>
B-62
<PAGE> 66
North Carolina Intermediate Tax-Free Fund - Trust Shares
<TABLE>
<CAPTION>
Percent Owned
-------------
Name and Address Total Shares Record Only Beneficially
- ---------------- ------------ ----------- ------------
<S> <C> <C>
Wilbranch 2,833,802.010 100%
P.O. Box 2887
Wilson, NC 27894-2887
</TABLE>
Balanced Fund - Class A Shares
<TABLE>
<CAPTION>
Percent Owned
-------------
Name and Address Total Shares Record Only Beneficially
- ---------------- ------------ ----------- ------------
<S> <C> <C>
Stephens, Inc. 382,476.269 34.34%
For the Exclusive Benefit
of Our Customers
111 Center Street
Little Rock, AR 72201
</TABLE>
Balanced Fund - Trust Shares
<TABLE>
<CAPTION>
Percent Owned
-------------
Name and Address Total Shares Record Only Beneficially
- ---------------- ------------ ----------- ------------
<S> <C> <C>
Wilbranch Co. 733,015.111 11.87%
P.O. Box 2887
Wilson, NC 27894-2887
Branch Banking & Trust Co. 635,904.626 10.31%
FBO Daily Recordkeeping Plans
Attn: Corp Employee Benefit Serv/
Ops Manager
434 Fayetteville St., 4th Floor
Raleigh, NC 27601-1767
Wilbranch Co. 3,657,265.849 59.30%
P.O. Box 2887
Wilson, NC 27894-2887
</TABLE>
B-63
<PAGE> 67
Small Company Growth Fund - Class A Shares
<TABLE>
<CAPTION>
Percent Owned
-------------
Name and Address Total Shares Record Only Beneficially
- ---------------- ------------ ----------- ------------
<S> <C> <C>
Stephens Inc. 53,008.306 12.53%
For The Exclusive Benefit
Of Our Customers
111 Center St.
Little Rock, AR 72201
</TABLE>
Small Company Growth Fund - Trust Shares
<TABLE>
<CAPTION>
Percent Owned
-------------
Name and Address Total Shares Record Only Beneficially
- ---------------- ------------ ----------- ------------
<S> <C> <C>
Wilbranch Co. 794,828.777 40.98%
P.O. Box 2887
Wilson, NC 27894-2887
CAP Co. 215,796.111 11.13%
P.O. Box 2887
Wilson, NC 27894-2887
Wilbranch Co. 412,011.748 21.24%
P.O. Box 2887
Wilson, NC 27894-2887
Benefit Service Corporation 196,707.372 10.14%
Agnt BB & T Savings &
Thrift Plan
1375 Peachtree St., Suite 300
Atlanta, GA 30309-0000
Branch Banking & Trust Co. 127,343.092 6.57%
FBO Daily Recordkeeping Plans
Attn: Corp Employee Benefit
Serv/Ops Mgr
434 Fayetteville St., 4th Floor
Raleigh, N.C. 27601-1767
</TABLE>
As of December 9 , 1996, BB&T owned of record substantially all of the
outstanding Trust Shares of each of the Funds, and held voting or investment
power with respect to
B-64
<PAGE> 68
98.5%, 99.6%, 99.8%, 99.2%, 98.8%, 99.4%, and 99.3% of the Trust Shares of
the U.S. Treasury , Short-Intermediate , North Carolina , Growth and Income ,
Intermediate Bond, Balanced, and Small Company Growth Funds, respectively. As a
result, BB&T may be deemed to be a "controlling person" of the Trust Shares of
each of the Funds under the 1940 Act.
As of December 9, 1996, Stephens Inc., For the Exclusive Benefit of Our
Customers, 111 Center Street, Little Rock, AR 72201: record owner with respect
to 63.61% and 34.34% of the Class A Shares of the U.S. Treasury Money Market and
Balanced Funds, respectively. Accordingly, Stephens, Inc. may be deemed to be a
"controlling person" of the Class A Shares of the Funds of which it is a
shareholder.
The Prospectuses of the Funds and this Statement of Additional
Information omit certain of the information contained in the Registration
Statement filed with the Securities and Exchange Commission. Copies of such
information may be obtained from the Securities and Exchange Commission upon
payment of the prescribed fee.
The Prospectuses of the Funds and this Statement of Additional
Information are not an offering of the securities herein described in any state
in which such offering may not lawfully be made. No salesman, dealer, or other
person is authorized to give any information or make any representation other
than those contained in the Prospectuses of the Funds and this Statement of
Additional Information.
B-65
<PAGE> 69
FINANCIAL STATEMENTS
Independent Auditors Report
Audited Financial Statements as of September 30, 1996
B-66
<PAGE> 70
APPENDIX
The nationally recognized statistical rating organizations (individually, an
"NRSRO") that may be utilized by BB&T with regard to portfolio investments for
the Funds include Moody's Investors Service, Inc. ("Moody's"), Standard & Poor's
Corporation ("S&P"), Duff & Phelps, Inc. ("Duff"), Fitch Investors Service, Inc.
("Fitch"), IBCA Limited and its affiliate, IBCA Inc. (collectively, "IBCA"), and
Thomson BankWatch, Inc. ("Thomson"). Set forth below is a description of the
relevant ratings of each such NRSRO. The NRSROs that may be utilized by BB&T and
the description of each NRSRO's ratings is as of the date of this Statement of
Additional Information, and may subsequently change.
Long-Term Debt Ratings (may be assigned, for example, to corporate and municipal
bonds)
Description of the four highest long-term debt ratings by Moody's (Moody's
applies numerical modifiers (1, 2, and 3) in each rating category to indicate
the security's ranking within the category):
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 edged." Interest payments
are protected by a large or by an exceptionally stable margin
and principal is secure. While the various protective elements
are likely to change, such changes as can be visualized are
most unlikely to impair the fundamentally strong position of
such issues.
Aa Bonds which are rated Aa are judged to be of high quality by
all standards. Together with the Aaa group they comprise what
are generally known as high grade bonds. They are rated lower
than the best bonds because margins of protection may not be
as large as in Aaa securities or fluctuation of protective
elements may be of greater amplitude or there may be other
elements present which make the long-term risk 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 some time 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.
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<PAGE> 71
Ba Bonds which are rated Ba are judged to have speculative
elements; their future cannot be considered as well-assured.
Often the protection of interest and principal payments may be
very moderate and thereby not well safeguarded during both
good and bad times in the future. Uncertainty of position
characterizes bonds in this class.
Description of the five highest long-term debt ratings by S&P (S&P may apply a
plus (+) or minus (-) to a particular rating classification to show relative
standing within that classification):
AAA Debt rated AAA has the highest rating assigned by S&P.
Capacity to pay interest and repay principal is extremely
strong.
AA Debt rated AA has a very strong capacity to pay interest and
repay principal and differs from the higher rated issues only
in small degree.
A Debt rated A has a strong capacity to pay interest and repay
principal, although it is somewhat more susceptible to the
adverse effects of changes in circumstances and economic
conditions than debt in higher-rated categories.
BBB Debt rated BBB is regarded as having an adequate capacity to
pay interest and repay principal. Whereas it normally exhibits
adequate protection parameters, adverse economic conditions or
changing circumstances are more likely to lead to a weakened
capacity to pay interest and repay principal for debt in this
category than in higher-rated categories.
BB Debt rated BB is regarded, on balance, as predominantly
speculative with respect to capacity to pay interest and repay
principal in accordance with the terms of the obligation.
While such debt will likely have some quality and protective
characteristics, these are outweighed by large uncertainties
or major risk exposure to adverse conditions.
Description of the three highest long-term debt ratings by Duff:
AAA Highest credit quality. The risk factors are negligible, being
only slightly more than for risk-free U.S. Treasury debt.
AA+ High credit quality. Protection factors are strong.
AA Risk is modest but may vary slightly from time to time
AA- because of economic conditions.
A+ Protection factors are average but adequate. However,
A risk factors are more variable and greater in periods
A- of economic stress.
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<PAGE> 72
Description of the three highest long-term debt ratings by Fitch (plus or minus
signs are used with a rating symbol to indicate the relative position of the
credit within the rating category):
AAA Bonds 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 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
issues is generally rated "F-1+."
A Bonds 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.
IBCA's description of its three highest long-term debt ratings:
AAA Obligations for which there is the lowest expectation of
investment risk. Capacity for timely repayment of principal
and interest is substantial, such that adverse changes in
business, economic or financial conditions are unlikely to
increase investment risk significantly.
AA Obligations for which there is a very low expectation of
investment risk. Capacity for timely repayment of principal
and interest is substantial. Adverse changes in business,
economic, or financial conditions may increase investment
risk, albeit not very significantly.
A Obligations for which there is a low expectation of investment
risk. Capacity for timely repayment of principal and interest
is strong, although adverse changes in business, economic or
financial conditions may lead to increased investment risk.
Short-Term Debt Ratings (may be assigned, for example, to commercial paper,
master demand notes, bank instruments, and letters of credit)
Moody's description of its three highest short-term debt ratings:
Prime-1 Issuers rated Prime-1 (or supporting institutions) have a
superior capacity for repayment of senior short-term debt
obligations. Prime-1
B-69
<PAGE> 73
repayment capacity will often be evidenced by many of the
following characteristics:
-Leading market positions in well-established
industries.
-High rates of return on funds employed.
-Conservative capitalization structure with moderate
reliance on debt and ample asset protection.
-Broad margins in earnings coverage of fixed
financial charges and high internal cash generation.
-Well-established access to a range of financial
markets and assured sources of alternate liquidity.
Prime-2 Issuers rated Prime-2 (or supporting institutions) have a
strong ability for repayment of senior short-term debt
obligations. This will normally be evidenced by many of the
characteristics cited above but to a lesser degree. Earnings
trends and coverage ratios, while sound, may be more subject
to variation. Capitalization characteristics, while still
appropriate, may be more affected by external conditions.
Ample alternate liquidity is maintained.
Prime-3 Issuers rated Prime-3 (or supporting institutions) have an
acceptable ability for repayment of senior short-term
obligations. The effect of industry characteristics and market
compositions may be more pronounced. Variability in earnings
and profitability may result in changes in the level of debt
protection measurements and may require relatively high
financial leverage. Adequate alternate liquidity is
maintained.
S&P's description of its three highest short-term debt ratings:
A-1 This designation indicates that the degree of safety regarding
timely payment is strong. Those issues determined to possess
extremely strong safety characteristics are denoted with a
plus sign (+).
A-2 Capacity for timely payment on issues with this designation is
satisfactory. However, the relative degree of safety is not as
high as for issues designated "A-1."
B-70
<PAGE> 74
A-3 Issues carrying this designation have adequate capacity for
timely payment. They are, however, more vulnerable to the
adverse effects of changes in circumstances than obligations
carrying the higher designations.
Duff's description of its five highest short-term debt ratings (Duff
incorporates gradations of "1+" (one plus) and "1-" (one minus) to assist
investors in recognizing quality differences within the highest rating
category):
Duff 1+ Highest certainty of timely payment. Short-term liquidity,
including internal operating factors and/or access to
alternative sources of funds, is outstanding, and safety is
just below risk-free U.S. Treasury short-term obligations.
Duff 1 Very high certainty of timely payment. Liquidity factors are
excellent and supported by good fundamental protection
factors. Risk factors are minor.
Duff 1- High certainty of timely payment. Liquidity factors are
strong and supported by good fundamental protection factors.
Risk factors are very small.
Duff 2 Good certainty of timely payment. Liquidity factors and
company fundamentals are sound. Although ongoing funding needs
may enlarge total financing requirements, access to capital
markets is good. Risk factors are small.
Duff 3 Satisfactory liquidity and other protection factors qualify
issues as to investment grade. Risk factors are larger
and subject to more variation. Nevertheless, timely payment is
expected.
Fitch's description of its four highest short-term debt ratings:
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 assigned this rating have a
satisfactory degree of assurance for timely payment, but the
margin of safety is not as great as for issues assigned F-1+
or F-1 ratings.
F-3 Fair Credit Quality. Issues assigned this rating have
characteristics suggesting that the degree of assurance for
timely payment is adequate; however, near-
B-71
<PAGE> 75
term adverse changes could cause these securities to be rated
below investment grade.
IBCA's description of its three highest short-term debt ratings:
A1 Obligations supported by the highest capacity for timely
repayment. Where issues possess a particularly strong credit
feature, a rating of A1+ is assigned.
A2 Obligations supported by a good capacity for timely repayment.
Short-Term Loan/Municipal Note Ratings
Moody's description of its two highest short-term loan/municipal note ratings:
MIG-1/VMIG-1 This designation denotes best quality. There is present
strong protection by established cash flows, superior
liquidity support or demonstrated broad-based access to
the market for refinancing.
MIG-2/VMIG-2 This designation denotes high quality. Margins of
protection are ample although not so large as in the
preceding group.
S&P's description of its two highest municipal note ratings:
SP-1 Strong capacity to pay principal and interest. Issues
determined to possess very strong characteristics are
given a plus (+) designation.
SP-2 Satisfactory capacity to pay principal and interest, with
some vulnerability to adverse financial and economic
changes over the term of the notes.
Short-Term Debt Ratings
Thomson BankWatch, Inc. ("TBW") ratings are based upon a qualitative and
quantitative analysis of all segments of the organization including, where
applicable, holding company and operating subsidiaries.
BankWatch(TM) Ratings do not constitute a recommendation to buy or sell
securities of any of these companies. Further, BankWatch does not suggest
specific investment criteria for individual clients.
The TBW Short-Term Ratings apply to commercial paper, other senior short-term
obligations and deposit obligations of the entities to which the rating has been
assigned.
B-72
<PAGE> 76
The TBW Short-Term Ratings apply only to unsecured instruments that have a
maturity of one year or less.
The TBW Short-Term Ratings specifically assess the likelihood of an untimely
payment of principal or interest.
TBW-1 The highest category; indicates a very high likelihood
that principal and interest will be paid on a timely
basis.
TBW-2 The second highest category; while the degree of safety
regarding timely repayment of principal and interest is
strong, the relative degree of safety is not as high as
for issues rated "TBW-1."
TBW-3 The lowest investment grade category; indicates that while
more susceptible to adverse developments (both internal
and external) than obligations with higher ratings,
capacity to service principal and interest in a timely
fashion is considered adequate.
TBW-4 The lowest rating category; this rating is regarded as
non-investment grade and therefore speculative.
Definitions of Certain Money Market Instruments
Commercial Paper
Commercial paper consists of unsecured promissory notes issued by
corporations. Issues of commercial paper normally have maturities of less than
nine months and fixed rates of return.
Certificates of Deposit
Certificates of Deposit are negotiable certificates issued against
funds deposited in a commercial bank or a savings and loan association for a
definite period of time and earning a specified return.
Bankers' Acceptances
Bankers' acceptances are negotiable drafts or bills of exchange,
normally drawn by an importer or exporter to pay for specific merchandise, which
are "accepted" by a bank, meaning, in effect, that the bank unconditionally
agrees to pay the face value of the instrument on maturity.
U.S. Treasury Obligations
B-73
<PAGE> 77
U.S. Treasury Obligations are obligations issued or guaranteed as to
payment of principal and interest by the full faith and credit of the U.S.
Government. These obligations may include Treasury bills, notes and bonds, and
issues of agencies and instrumentalities of the U.S. Government, provided such
obligations are guaranteed as to payment of principal and interest by the full
faith and credit of the U.S. Government.
U.S. Government Agency and Instrumentality Obligations
Obligations issued by agencies and instrumentalities of the U.S.
Government include such agencies and instrumentalities as the Government
National Mortgage Association, the Export-Import Bank of the United States, the
Tennessee Valley Authority, the Farmers Home Administration, the Federal Home
Loan Banks, the Federal Intermediate Credit Banks, the Federal Farm Credit
Banks, the Federal Land Banks, the Federal Housing Administration, the Federal
National Mortgage Association, the Federal Home Loan Mortgage Corporation, and
the Student Loan Marketing Association. Some of these obligations, such as those
of the Government National Mortgage Association are supported by the full faith
and credit of the U.S. Treasury; others, such as those of the Export-Import Bank
of the United States, are supported by the right of the issuer to borrow from
the Treasury; others, such as those of the Federal National Mortgage
Association, are supported by the discretionary authority of the U.S. Government
to purchase the agency's obligations; still others, such as those of the Student
Loan Marketing Association, are supported only by the credit of the
instrumentality. No assurance can be given that the U.S. Government would
provide financial support to U.S. Government-sponsored instrumentalities if it
is not obligated to do so by law. A Fund will invest in the obligations of such
instrumentalities only when the investment adviser believes that the credit risk
with respect to the instrumentality is minimal.
B-74
<PAGE> 78
INDEPENDENT AUDITORS' REPORT
The Shareholders and Board of Trustees of
BB&T Mutual Funds Group:
We have audited the accompanying statements of assets and liabilities of the
BB&T Mutual Funds Group-U.S. Treasury Money Market Fund, Short-Intermediate
U.S. Government Income Fund, Intermediate U.S. Government Bond Fund, North
Carolina Intermediate Tax-Free Fund, Growth and Income Stock Fund, Balanced
Fund and Small Company Growth Fund, including the schedules of portfolio
investments, as of September 30, 1996, and the related statements of
operations, statements of changes in net assets and the financial highlights
for each of the periods indicated herein. These financial statements and the
financial highlights are the responsibility of the BB&T Mutual Funds Group's
management. Our responsibility is to express an opinion on these financial
statements and financial highlights based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to
obtain reasonable assurance about whether the financial statements and
financial highlights are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. Our procedures included verification of securities
owned as of September 30, 1996, by confirmation with the custodian and other
appropriate audit procedures. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of each
of the aforementioned funds comprising the BB&T Mutual Funds Group at September
30, 1996, the results of their operations, the changes in their nets assets and
the financial highlights for each of the periods indicated herein, in
conformity with generally accepted accounting principles.
KPMG Peat Marwick LLP
Columbus, Ohio
November 8, 1996
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<PAGE> 79
STATEMENTS OF ASSETS AND LIABILITIES
SEPTEMBER 30, 1996
<TABLE>
<CAPTION>
U.S. Treasury Short-Intermediate Intermediate
Money Market U.S. Government U.S. Government
Fund Income Fund Bond Fund
-------------- ------------------ -----------------
ASSETS:
<S> <C> <C> <C>
Investments, at value (Amortized cost $118,757,258;
cost $68,917,857; and $124,082,549, respectively)...... $ 118,757,258 $ 68,372,719 $ 122,548,269
Repurchase agreements, at cost......................... 117,372,191 -- --
------------- ----------- -------------
Total Investments...................................... 236,129,449 68,372,719 122,548,269
Interest receivable.................................... 111,458 999,247 1,819,677
Prepaid expenses and other............................. 6,811 2,354 3,455
------------- ----------- ------------
Total Assets................................. 236,247,718 69,374,320 124,371,401
------------- ----------- ------------
LIABILITIES:
Dividends payable...................................... 865,628 331,984 615,773
Accrued expenses and other payables:
Investment advisory fees........................... 76,392 28,174 50,912
Administration fees................................ 38,196 11,270 20,365
Distribution fees.................................. 5,361 1,298 1,016
Accounting and transfer agent fees................. 20,150 12,198 16,970
Other.............................................. 31,396 11,910 21,254
------------- ----------- ------------
Total Liabilities............................ 1,037,123 396,834 726,290
------------- ----------- ------------
NET ASSETS:
Capital................................................ 235,210,595 71,003,107 127,115,765
Undistributed net investment income.................... -- -- 5,718
Net unrealized depreciation on investments............. -- (545,138) (1,534,280)
Accumulated undistributed net realized losses on
investment transactions................................ -- (1,480,483) (1,942,092)
------------- ----------- ------------
Net Assets $ 235,210,595 $ 68,977,486 $ 123,645,111
============= =========== ============
</TABLE>
Continued
-19-
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<PAGE> 80
STATEMENTS OF ASSETS AND LIABILITIES, CONTINUED
SEPTEMBER 30, 1996
<TABLE>
<CAPTION>
U.S. Treasury Short-Intermediate Intermediate
Money Market U.S. Government U.S. Government
Fund Income Fund Bond Fund
-------------- ------------------ -----------------
<S> <C> <C> <C>
Net Assets
Class A....................................... $ 27,931,354 $ 6,356,000 $ 3,659,147
Class B....................................... 1,304,785 -- 353,334
Trust Class................................... 205,974,456 62,621,486 119,632,630
------------- ------------ -------------
Total..................................... $ 235,210,595 $ 68,977,486 $ 123,645,111
============= ============ =============
Outstanding units of beneficial interest (shares)
Class A....................................... 27,931,354 653,039 380,071
Class B....................................... 1,304,785 -- 36,791
Trust Class................................... 205,974,456 6,430,579 12,411,224
------------ ----------- ------------
Total..................................... 235,210,595 7,083,618 12,828,086
============ =========== ============
Net asset value
Class A--redemption price per share........... $ 1.00 $ 9.73 $ 9.63
Class B--offering price per share*............ 1.00 -- 9.60
Trust Class--offering and redemption price per
share............................. 1.00 9.74 9.64
============ =========== ============
Maximum Sales Charge (Class A)......................... 2.00% 4.50%
=========== ============
Maximum Offering Price (100%/ (100%-Maximum Sales
Charge) of net asset value adjusted to nearest cent)
per share--Class A..................................... $ 1.00(a) $ 9.93 $ 10.08
============ =========== ============
</TABLE>
- ----------
* Redemption price per share (Class B) varies by length of time shares are
held.
(a) Offering price and redemption price are the same for the U.S. Treasury Money
Market Fund.
See notes to financial statements
-20-
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<PAGE> 81
STATEMENT OF ASSETS AND LIABILITIES
SEPTEMBER 30, 1996
<TABLE>
<CAPTION>
North Carolina Growth and Small Company
Intermediate Stock Income Balanced Growth
Tax-Free Fund Fund Fund Fund
-------------- ------------ ----------- --------------
<S> <C> <C> <C> <C>
ASSETS:
Investments, at value (Cost $38,239,071;
$182,180,043; $75,172,426; and $31,600,228,
respectively)..................................... $ 38,344,894 $ 229,746,482 $ 83,721,546 $ 47,530,175
Cash.............................................. -- -- -- 603
Interest and dividends receivable................. 505,044 480,905 802,367 1,346
Receivable for capital shares issued.............. -- 11,672 -- 8,172
Receivable from brokers for investments sold...... -- -- -- 155,737
Unamortized organization costs.................... -- -- -- 2,099
Prepaid expense and other......................... 3,840 6,854 2,255 21,262
----------- ------------ ----------- ----------
Total Assets............................. 38,853,778 230,245,913 84,526,168 47,719,394
----------- ------------ ----------- ----------
LIABILITIES:
Dividends payable................................. 113,896 254,872 270,535 --
Payable for capital shares redeemed............... -- -- 665 --
Payable to brokers for investments purchased...... 994,750 301,705 -- 655,782
Accrued expenses and other payables:
Investment advisory fees................. 15,331 93,590 34,068 36,192
Administration fees...................... 4,599 37,436 13,627 7,238
Distribution fees........................ 1,139 6,721 4,349 3,744
Accounting and transfer agent fees....... 10,604 27,468 20,882 20,517
Other.................................... 9,205 36,132 13,447 10,521
----------- ------------ ----------- ----------
Total Liabilities........................ 1,149,524 757,924 357,573 733,994
----------- ------------ ----------- ----------
NET ASSETS:
Capital........................................... 37,723,453 172,703,921 73,805,105 31,650,081
Undistributed net investment loss................. -- -- -- (421,082)
Net unrealized appreciation on investments........ 105,823 47,566,439 8,549,120 15,929,947
Accumulated undistributed net realized gains
(losses) on investment transactions............... (125,022) 9,217,629 1,814,370 (173,546)
----------- ------------ ----------- ----------
Net Assets............................... $37,704,254 $229,487,989 $84,168,595 $46,985,400
=========== ============ =========== ==========
</TABLE>
Continued
-21-
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<PAGE> 82
STATEMENTS OF ASSETS AND LIABILITIES, CONTINUED
SEPTEMBER 30, 1996
<TABLE>
<CAPTION>
North Carolina Growth and Small Company
Intermediate Income Stock Balanced Growth
Tax-Free Fund Fund Fund Fund
------------- ------------- ------------ --------------
<S> <C> <C> <C> <C>
Net Assets
Class A .............................................. $ 9,261,340 $ 18,948,734 $12,455,697 $ 7,412,707
Class B .............................................. -- 3,879,945 2,338,795 3,199,557
Trust Class .......................................... 28,442,914 206,659,310 69,374,103 36,373,136
----------- ------------ ----------- -----------
Total ............................................ $37,704,254 $229,487,989 $84,168,595 $46,985,400
=========== ============ =========== ===========
Outstanding units of beneficial interest (shares)
Class A .............................................. 921,898 1,237,278 1,041,648 351,971
Class B .............................................. -- 253,687 196,298 152,963
Trust Class .......................................... 2,830,793 13,468,959 5,812,814 1,717,398
----------- ------------ ----------- -----------
Total ............................................ 3,752,691 14,959,924 7,050,760 2,222,332
=========== ============ =========== ===========
Net asset value
Class A--redemption price per share .................. $ 10.05 $ 15.31 $ 11.96 $ 21.06
Class B--offering price per share* ................... -- 15.29 11.91 20.92
Trust Class--offering and redemption price per share.. 10.05 15.34 11.93 21.18
=========== ============ =========== ===========
Maximum Sales Charge (Class A) ................................ 2.00% 4.50% 4.50% 4.50%
=========== ============ =========== ===========
Maximum Offering Price (100%/(100%-Maximum Sales
Charge) of net asset value adjusted to nearest cent) per
share--Class A $ 10.26 $ 16.03 $ 12.52 $ 22.05
=========== ============ =========== ===========
</TABLE>
- ----------
* Redemption price per share (Class B) varies by length of time shares are
held.
See notes to financial statements
-22-
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<PAGE> 83
STATEMENTS OF OPERATIONS
FOR THE YEAR ENDED SEPTEMBER 30, 1996
<TABLE>
<CAPTION>
U.S. Treasury Short-Intermediate Intermediate
Money Market U.S. Government U.S. Government
Fund Income Fund Bond Fund
------------- ------------------ ---------------
<S> <C> <C> <C>
INVESTMENT INCOME:
Interest income................................................. $ 9,828,598 $ 3,889,555 $ 7,251,688
----------- ----------- -----------
Total Income.................................. 9,828,598 3,889,555 7,251,688
----------- ----------- -----------
EXPENSES:
Investment advisory fees........................................ 731,113 346,207 638,632
Administration fees............................................. 365,557 115,305 212,620
Distribution fees--Class A...................................... 108,449 33,463 21,772
Distribution fees--Class B...................................... 5,530 -- 1,386
Custodian and accounting fees................................... 89,880 50,611 62,412
Legal and audit fees............................................ 55,738 19,458 33,048
Organization costs.............................................. 9 216 90
Trustees' fees and expenses..................................... 8,220 2,706 5,262
Transfer agent fees............................................. 66,210 46,788 59,736
Registration and filing fees.................................... 16,331 4,554 3,744
Printing costs.................................................. 39,552 7,447 13,566
Other........................................................... 4,218 2,208 3,349
----------- ----------- -----------
Gross Expenses................................ 1,490,807 628,963 1,055,617
Expenses voluntarily reduced.................................... (56,370) (74,671) (117,853)
----------- ----------- -----------
Total Expenses................................ 1,434,437 554,292 937,764
----------- ----------- -----------
Net Investment Income........................................... 8,394,161 3,335,263 6,313,924
----------- ----------- -----------
REALIZED/UNREALIZED GAINS (LOSSES) ON INVESTMENTS:
Net realized losses on investment transactions.................. -- (162,759) (725,469)
Change in unrealized depreciation on investments................ -- (686,269) (2,757,133)
----------- ----------- -----------
Net realized/unrealized losses on investments................... -- (849,028) (3,482,602)
----------- ----------- -----------
Change in net assets resulting from operations.................. $ 8,394,161 $ 2,486,235 $ 2,831,322
=========== =========== ===========
</TABLE>
See notes to financial statements
-23-
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<PAGE> 84
STATEMENTS OF OPERATIONS
FOR THE YEAR ENDED SEPTEMBER 30, 1996
<TABLE>
<CAPTION>
North
Carolina Growth and Small Company
Intermediate Income Stock Balanced Growth
Tax-Free Fund Fund Fund Fund
------------- ------------ ----------- -------------
<S> <C> <C> <C> <C>
INVESTMENT INCOME:
Interest income.................................................. $ 1,681,672 $ 451,511 $ 2,702,304 $ 233,058
Dividend income.................................................. -- 5,439,921 996,840 9,282
----------- ------------ ----------- ------------
Total Income............................................ 1,681,672 5,891,432 3,699,144 242,340
----------- ------------ ----------- ------------
EXPENSES:
Investment advisory fees......................................... 215,256 1,490,003 549,962 308,711
Administration fees.............................................. 71,752 402,293 148,506 61,583
Distribution fees--Class A....................................... 45,087 73,234 56,073 18,773
Distribution fees--Class B....................................... -- 14,031 11,185 10,500
Custodian and accounting fees.................................... 36,073 95,174 62,173 76,747
Legal and audit fees............................................. 19,806 63,054 24,576 8,040
Organization costs............................................... 37 73 -- 11,130
Trustees' fees and expenses...................................... 1,974 9,552 3,450 1,170
Transfer agent fees.............................................. 43,518 98,334 74,592 75,282
Registration and filing fees..................................... 3,936 20,754 8,166 5,832
Printing costs................................................... 5,549 22,290 8,310 3,095
Other............................................................ 1,524 5,436 2,136 522
----------- ------------ ----------- ------------
Gross expenses.......................................... 444,512 2,294,228 949,129 581,385
Expenses voluntarily reduced..................................... (85,394) (520,946) (206,753) (10,226)
----------- ------------ ----------- ------------
Total expenses.......................................... 359,118 1,773,282 742,376 571,159
----------- ------------ ----------- ------------
Net Investment Income (Loss)..................................... 1,322,554 4,118,150 2,956,768 (328,819)
----------- ------------ ----------- ------------
REALIZED/UNREALIZED GAINS (LOSSES) ON INVESTMENTS:
Net realized gains (losses) on investment transactions........... (47,072) 9,428,482 2,206,261 90,971
Change in unrealized appreciation (depreciation) on investments.. (302,527) 24,542,390 3,503,931 12,148,737
---------- ------------ ----------- -----------
Net realized/unrealized gains (losses) on investments............ (349,599) 33,970,872 5,710,192 12,239,708
---------- ------------ ----------- -----------
Change in net assets resulting from operations................... $ 972,955 $ 38,089,022 $ 8,666,960 $11,910,889
========== ============ =========== ===========
</TABLE>
See notes to financial statements
-24-
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<PAGE> 85
STATEMENTS OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
U.S. Treasury Short-Intermediate
Money Market U.S. Government
Fund Income Fund
---------------------------- ---------------------------
For the For the For the For the
year year year year
ended ended ended ended
September 30, September 30, September 30, September 30,
1996 1995 1996 1995
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
FROM INVESTMENT ACTIVITIES:
OPERATIONS:
Net investment income................................... $ 8,394,161 $ 5,085,963 $ 3,335,263 $ 2,904,229
Net realized losses on investment transactions.......... -- -- (162,759) (1,125,416)
Net change in unrealized appreciation...................
(depreciation) on investments.......................... -- -- (686,269) 2,643,412
------------- ------------- ------------ ------------
Change in net assets resulting from operations............ 8,394,161 5,085,963 2,486,235 4,422,225
------------- ------------- ------------ ------------
DISTRIBUTIONS TO CLASS A SHAREHOLDERS:
From net investment income.............................. (948,869) (285,363) (371,250) (421,136
DISTRIBUTIONS TO CLASS B SHAREHOLDERS(a):
From net investment income.............................. (19,543) -- -- --
DISTRIBUTIONS TO TRUST CLASS SHAREHOLDERS:
From net investment income.............................. (7,425,749) (4,800,600) (2,964,013) (2,483,093)
------------- ------------- ------------ ------------
Change in net assets from shareholder distributions....... (8,394,161) (5,085,963) (3,335,263) (2,904,229)
------------- ------------- ------------ ------------
CAPITAL TRANSACTIONS:
Proceeds from shares issued............................. 449,946,776 413,983,846 32,001,311 16,642,791
Dividends reinvested.................................... 1,721,604 507,038 1,448,084 778,260
Cost of shares redeemed................................. (350,488,723) (359,409,516) (15,729,346) (15,385,757)
------------- ------------- ------------ ------------
Change in net assets from share transactions.............. 101,179,657 55,081,368 17,720,049 2,035,294
------------- ------------- ------------ ------------
Change in net assets...................................... 101,179,657 55,081,368 16,871,021 3,553,290
NET ASSETS:
Beginning of period..................................... 134,030,938 78,949,570 52,106,465 48,553,175
------------- ------------- ------------ ------------
End of period........................................... $ 235,210,595 $ 134,030,938 $ 68,977,486 $ 52,106,465
============= ============= ============ ============
SHARE TRANSACTIONS:
Issued.................................................. 449,946,776 413,983,846 3,264,121 1,718,480
Reinvested.............................................. 1,721,604 507,038 146,965 80,130
Redeemed................................................ (350,488,723) (359,409,516) (1,597,468) (1,581,451)
------------- ------------- ------------ ------------
Change in shares.......................................... 101,179,657 55,081,368 1,813,618 217,159
============= ============= ============ ============
</TABLE>
- ----------
(a) From January 1, 1996 (commencement of operations) through September 30,
1996.
See notes to financial statements
-25-
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<PAGE> 86
STATEMENTS OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
Intermediate U.S. North Carolina
Government Bond Intermediate Tax-Free
Fund Fund
------------------------------- ------------------------------
For the For the For the For the
year year year year
ended ended ended ended
September 30, September 30, September 30, September 30,
1996 1995 1996 1995
-------------- --------------- --------------- --------------
FROM INVESTMENT ACTIVITIES:
OPERATIONS:
<S> <C> <C> <C> <C>
Net investment income................................ $ 6,313,924 $ 5,024,624 $ 1,322,554 $ 1,416,162
Net realized losses on investment transactions....... (725,469) (1,194,343) (47,072) (77,950)
Net change in unrealized appreciation (depreciation)
on investments...................................... (2,757,133) 5,832,579 (302,527) 1,483,907
------------ ------------ ------------ ------------
Change in net assets resulting from operations......... 2,831,322 9,662,860 972,955 2,822,119
------------ ------------ ------------ ------------
DISTRIBUTIONS TO CLASS A SHAREHOLDERS:
From net investment income........................... (247,352) (377,937) (322,468) (330,842)
DISTRIBUTIONS TO CLASS B SHAREHOLDERS(a):
From net investment income........................... (6,966) -- -- --
DISTRIBUTIONS TO TRUST CLASS SHAREHOLDERS:
From net investment income........................... (6,059,606) (4,646,687) (1,000,086) (1,085,320)
------------ ------------ ------------ ------------
Change in net assets from shareholder distributions.... (6,313,924) (5,024,624) (1,322,554) (1,416,162)
------------ ------------ ------------ ------------
CAPITAL TRANSACTIONS:
Proceeds from shares issued.......................... 66,845,451 23,171,044 11,820,669 10,916,979
Dividends reinvested................................. 4,689,472 3,929,840 268,478 278,161
Cost of shares redeemed.............................. (28,159,031) (23,210,413) (10,843,225) (14,646,808)
------------ ------------ ------------ ------------
Change in net assets from share transactions........... 43,375,892 3,890,471 1,245,922 (3,451,668)
------------ ------------ ------------ ------------
Change in net assets................................... 39,893,290 8,528,707 896,323 (2,045,711)
NET ASSETS:
Beginning of period.................................. 83,751,821 75,223,114 36,807,931 38,853,642
------------ ------------ ------------ ------------
End of period........................................ $123,645,111 $ 83,751,821 $ 37,704,254 $ 36,807,931
============ ============ ============ ============
SHARE TRANSACTIONS:
Issued............................................... 6,757,431 2,419,901 1,171,335 1,107,634
Reinvested........................................... 478,491 414,007 26,506 28,266
Redeemed............................................. (2,876,321) (2,420,431) (1,071,579) (1,480,683)
------------ ------------ ------------ ------------
Change in shares....................................... 4,359,601 413,477 126,262 (344,783)
============ ============ ============ ============
</TABLE>
______________
(a) From January 1, 1996 (commencement of operations) through September 30,
1996.
See notes to financial statements
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<PAGE> 87
STATEMENTS OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
Growth and Income Stock Balanced
Fund Fund
-------------------------------- ---------------------------------
For the For the For the For the
year year year year
ended ended ended ended
September 30, September 30, September 30, September 30,
1996 1995 1996 1995
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
FROM INVESTMENT ACTIVITIES:
OPERATIONS:
Net investment income................................... $ 4,118,150 $ 2,757,443 $ 2,956,768 $ 2,228,732
Net realized gains (losses) on investment transactions.. 9,428,482 1,084,821 2,206,261 (361,045)
Net change in unrealized appreciation on investments.... 24,542,390 18,939,826 3,503,931 6,451,498
------------ ------------ ------------ ------------
Change in net assets resulting from operations........... 38,089,022 22,782,090 8,666,960 8,319,185
------------ ------------ ------------ ------------
DISTRIBUTIONS TO CLASS A SHAREHOLDERS:
From net investment income.............................. (270,458) (187,792) (421,901) (355,479)
From net realized gains from investment transactions.... (76,748) (83,203) -- --
In excess of net realized gains from investment
transactions........................................... -- (108,268) -- --
DISTRIBUTIONS TO CLASS B SHAREHOLDERS (a):
From net investment income.............................. (19,098) -- (39,026) --
DISTRIBUTIONS TO TRUST CLASS SHAREHOLDERS:
From net investment income.............................. (3,828,594) (2,569,651) (2,495,841) (1,873,253)
From net realized gains from investment transactions.... (1,044,981) (1,001,618) -- --
In excess of net realized gains from investment
transactions........................................... -- (1,152,654) -- --
------------ ------------ ------------ ------------
Change in net assets from shareholder distributions...... (5,239,879) (5,103,186) (2,956,768) (2,228,732)
------------ ------------ ------------ ------------
CAPITAL TRANSACTIONS:
Proceeds from shares issued............................. 78,886,812 57,688,354 30,350,061 18,039,983
Dividends reinvested.................................... 3,546,244 3,097,037 2,471,085 1,590,880
Cost of shares redeemed................................. (42,239,195) (19,347,795) (13,413,504) (14,945,721)
------------ ------------ ------------ ------------
Change in net assets from share transactions............. 40,193,861 41,437,596 19,407,642 4,685,142
------------ ------------ ------------ ------------
Change in net assets..................................... 73,043,004 59,116,500 25,117,834 10,775,595
NET ASSETS:
Beginning of period..................................... 156,444,985 97,328,485 59,050,761 48,275,166
------------ ------------ ------------ ------------
End of period........................................... $229,487,989 $156,444,985 $ 84,168,595 $ 59,050,761
============ ============ ============ ============
SHARE TRANSACTIONS:
Issued.................................................. 5,587,933 4,774,121 2,636,434 1,719,005
Reinvested.............................................. 252,319 275,871 214,800 156,859
Redeemed................................................ (2,926,808) (1,633,604) (1,159,914) (1,469,697)
------------ ------------ ------------ ------------
Change in shares......................................... 2,913,444 3,416,388 1,691,320 406,167
============ ============ ============ ============
</TABLE>
- ----------
(a) From January 1, 1996 (commencement of operations) through September 30,
1996.
See notes to financial statements
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<PAGE> 88
STATEMENTS OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
Small Company
Growth Fund
------------------------------
For the For the period
year December 7, 1994
ended to
September 30, September 30,
1996 (a)5
------------- ----------------
<S> <C> <C>
FROM INVESTMENT ACTIVITIES:
OPERATIONS:
Net investment loss........................................................... $ (328,819) $ (92,263)
Net realized gains (losses) on investment transactions........................ 90,971 (264,517)
Net change in unrealized appreciation on investments.......................... 12,148,737 3,781,210
----------- -----------
Change in net assets resulting from operations.................................. 11,910,889 3,424,430
----------- -----------
CAPITAL TRANSACTIONS:
Proceeds from shares issued................................................... 22,938,972 15,189,335
Cost of shares redeemed....................................................... (5,922,093) (556,133)
----------- -----------
Change in net assets from share transactions.................................... 17,016,879 14,633,202
----------- -----------
Change in net assets............................................................ 28,927,768 18,057,632
NET ASSETS:
Beginning of period........................................................... 18,057,632 -
----------- -----------
End of period................................................................. $46,985,400 $ 18,057,632
=========== ===========
SHARE TRANSACTIONS:
Issued........................................................................ 1,298,090 1,280,823
Redeemed...................................................................... (315,568) (41,013)
----------- -----------
Change in shares................................................................ 982,522 1,239,810
=========== ===========
</TABLE>
- -------------
(a) Period from commencement of operations.
See notes to financial statements
-28-
[LOGO OF BB&T MUTUAL FUNDS APPEARS HERE]
<PAGE> 89
U.S. TREASURY MONEY MARKET FUND
SCHEDULE OF PORTFOLIO INVESTMENTS
SEPTEMBER 30, 1996
<TABLE>
<CAPTION>
Principal Security Amortized
Amount Description Cost
- ----------- ---------------------------- ------------
<S> <C> <C>
U.S. TREASURY BILLS (47.9%):
$12,000,000 10/17/96 ................. $11,972,922
6,000,000 11/7/96 .................. 5,968,581
12,000,000 11/14/96 ................. 11,925,200
6,000,000 11/21/96 ................. 5,956,055
12,000,000 12/5/96 .................. 11,887,550
8,000,000 12/12/96 ................. 7,916,780
6,000,000 12/19/96 ................. 5,930,941
6,000,000 12/26/96 ................. 5,925,897
6,000,000 1/2/97 ................... 5,918,315
8,000,000 1/9/97 ................... 7,883,472
8,000,000 1/16/97 .................. 7,878,971
8,000,000 1/23/97 .................. 7,871,053
8,000,000 1/30/97 .................. 7,860,850
8,000,000 2/6/97 ................... 7,852,231
------------
Total U.S. Treasury Bills 112,748,818
------------
U.S. TREASURY NOTES (2.6%):
6,000,000 6.13%, 12/31/96......... 6,008,440
------------
Total U.S. Treasury Notes 6,008,440
------------
Total Investments 118,757,258
------------
</TABLE>
<TABLE>
<CAPTION>
Principal Security Amortized
Amount Description Cost
----------- ---------------------------- ------------
<S> <C> <C>
REPURCHASE AGREEMENTS (49.9%):
$40,000,000 H.S.B.C. Securities,5.70%,
10/1/96 (Collateralized by
41,250,000 U.S. Treasury
Notes, 6.13%, 9/30/00, market
value-$40,831,550)...................... $ 40,000,000
25,000,000 Lehman Brothers, 5.70%, 10/1/96
(Collateralized by 19,055,000
U.S. Treasury Notes, 11.86%,
11/15/03, market value--
$25,501,143)............................ 25,000,000
52,372,191 NationsBank, 5.70%, 10/1/96
(Collateralized by 53,600,000
U.S.Treasury Notes, 6.38%,
9/30/01, market value--
$53,408,387)............................ 52,372,191
------------
Total Repurchase Agreements 117,372,191
------------
Total (Amortized Cost--$236,129,449)(a) $ 236,129,449
============
</TABLE>
- ----------
Percentages indicated are based on net assets of $235,210,595.
(a) Cost for federal income tax and financial reporting purposes are the same.
See notes to financial statements
-29-
[LOGO OF BB&T MUTUAL FUNDS APPEARS HERE]
<PAGE> 90
SHORT-INTERMEDIATE U.S. GOVERNMENT INCOME FUND
SCHEDULE OF PORTFOLIO INVESTMENTS
SEPTEMBER 30, 1996
<TABLE>
<CAPTION>
Shares
or
Principal Security Market
Amount Description Value
- ---------- ------------------------------ -----------
<S> <C> <C>
CORPORATE BONDS (2.8%):
Automotive (2.8%):
$2,000,000 Ford Motor Credit, 6.38%, 10/6/00.. $ 1,962,500
-----------
Total Corporate Bonds 1,962,500
-----------
PASS-THROUGH MORTGAGE SECURITIES (3.1%):
Federal National Mortgage Assoc.:
2,172,875 7.00%, 6/1/08, Pool # 50751........ 2,155,883
-----------
Total Pass-through Mortgage Securities 2,155,883
-----------
U.S. GOVERNMENT AGENCIES (5.8%):
Federal Home Loan Bank:
3,000,000 6.17%, 3/8/01....................... 2,948,280
1,000,000 7.28%, 7/25/01...................... 1,025,410
-----------
Total U.S. Government Agencies 3,973,690
-----------
U.S. TREASURY NOTES (85.2%):
4,250,000 6.88%, 3/31/97...................... 4,280,473
4,250,000 8.88%, 11/15/97..................... 4,385,277
</TABLE>
<TABLE>
<CAPTION>
Shares
or
Principal Security Market
Amount Description Value
- ---------- ----------------------------- -----------
<S> <C> <C>
U.S. TREASURY NOTES , CONTINUED:
$4,500,000 5.63%, 1/31/98 ...............$ 4,480,515
6,500,000 7.25%, 2/15/98 ............... 6,603,935
7,000,000 8.25%, 7/15/98 ............... 7,251,510
4,500,000 5.88%, 3/31/99 ............... 4,466,520
6,500,000 6.50%, 4/30/99 ............... 6,542,315
6,000,000 8.00%, 8/15/99 ............... 6,263,400
8,000,000 6.75%, 4/30/00 ............... 8,090,160
6,000,000 6.38%, 8/15/02 ............... 5,956,680
500,000 5.88%, 11/15/05 .............. 472,140
-----------
Total U.S. Treasury Notes 58,792,925
-----------
INVESTMENT COMPANIES (2.2%):
1,487,721 Federated Cash Reserves U.S.
Treasury Fund............. 1,487,721
-----------
Total Investment Companies 1,487,721
-----------
Total (Cost-$68,917,857)(a) $68,372,719
===========
</TABLE>
- ----------
Percentages indicated are based on net assets of $68,977,486.
(a) Represents cost for federal income tax purposes and differs from value by
net unrealized depreciation of securities as follows:
<TABLE>
<S> <C>
Unrealized appreciation........... $ 297,466
Unrealized depreciation........... (842,604)
----------
Net unrealized depreciation....... $(545,138)
==========
</TABLE>
See notes to financial statements
-30-
[LOGO OF BB&T MUTUAL FUNDS APPEARS HERE]
<PAGE> 91
INTERMEDIATE U.S. GOVERNMENT BOND FUND
SCHEDULE OF PORTFOLIO INVESTMENTS
SEPTEMBER 30, 1996
<TABLE>
<CAPTION>
Shares
or
Principal Security Market
Amount Description Value
- ----------- ---------------------------- ------------
<S> <C> <C>
CORPORATE BONDS (3.2%):
Automotive (3.2%):
$4,000,000 Ford Motor Credit, 6.38%,
10/6/00............................ $ 3,925,000
------------
Total Corporate Bonds 3,925,000
------------
PASS-THROUGH MORTGAGE SECURITIES (15.9%):
Federal Home Loan Mortgage Corp.:
2,722,664 7.50%, 7/1/07, Pool #E00108.......... 2,749,890
Federal National Mortgage Assoc.:
5,295,084 6.00%, 6/1/08, Pool #124885.......... 5,078,303
4,035,340 7.00%, 6/1/08, Pool # 50751.......... 4,003,784
Government National Mortgage Assoc.:
3,701,128 7.50%, 3/15/23, Pool # 342553........ 3,676,811
4,286,375 7.00%, 8/15/23, Pool # 354627........ 4,151,054
------------
Total Pass-through Mortgage Securities 19,659,842
------------
U.S. GOVERNMENT AGENCIES (4.2%):
Federal Home Loan Bank:
2,000,000 8.38%, 10/25/99...................... 2,108,080
3,000,000 7.36%, 7/1/04........................ 3,086,520
------------
Total U.S. Government Agencies 5,194,600
------------
<CAPTION>
Shares
or
Principal Security Market
Amount Description Value
- ----------- ---------------------------- ------------
<S> <C> <C>
U.S. TREASURY BONDS (14.2%):
$ 3,000,000 12.00%, 5/15/05...................... $ 4,026,270
6,000,000 9.38%, 2/15/06...................... 7,108,440
1,500,000 9.13%, 5/15/09...................... 1,705,530
4,500,000 7.50%, 11/15/16..................... 4,712,535
------------
Total U.S. Treasury Bonds 17,552,775
------------
U.S. TREASURY NOTES (60.6%):
5,000,000 6.13%, 3/31/98...................... 5,008,750
11,500,000 7.00%, 4/15/99...................... 11,707,230
8,000,000 6.88%, 7/31/99...................... 8,116,640
10,500,000 7.88%, 8/15/01...................... 11,104,905
11,000,000 6.38%, 8/15/02...................... 10,920,580
8,000,000 6.25%, 2/15/03...................... 7,866,720
9,500,000 7.25%, 8/15/04...................... 9,838,010
11,000,000 5.88%, 11/15/05..................... 10,387,080
------------
Total U.S. Treasury Notes 74,949,915
------------
INVESTMENT COMPANIES (1.0%):
1,266,137 Federated Cash Reserves
U.S. Treasury Fund................ 1,266,137
------------
Total Investment Companies 1,266,137
------------
Total (Cost-$124,082,549)(a) $ 122,548,269
============
</TABLE>
- ----------
Percentages indicated are based on net assets of $123,645,111.
(a) Represents cost for financial reporting purposes and differs from cost basis
for federal income tax purposes by the amount of losses recognized for
financial reporting in excess of federal income tax reporting of $35,586.
Cost for federal income tax purposes differs from value by net unrealized
depreciation of securities as follows:
<TABLE>
<S> <C>
Unrealized appreciation $ 726,410
Unrealized depreciation (2,296,276)
-----------
Net unrealized depreciation $(1,569,866)
===========
</TABLE>
See notes to financial statements
-31-
[LOGO OF BB&T MUTUAL FUNDS APPEARS HERE]
<PAGE> 92
NORTH CAROLINA INTERMEDIATE TAX-FREE FUND
SCHEDULE OF PORTFOLIO INVESTMENTS, CONTINUED
SEPTEMBER 30, 1996
<TABLE>
<CAPTION>
Shares
or
Principal Security Market
Amount Description Value
- ---------- ------------------------------------------------------------------------------------------ -----------
<S> <C> <C>
MUNICIPAL BONDS (95.2%):
General Obligation Bonds (87.0%):
$ 500,000 Asheville, 4.80%, 6/1/06 ...................................................... $ 481,875
470,000 Buncombe County, 5.00%, 3/1/00 ................................................ 478,225
500,000 Buncombe County, 5.00%, 3/1/03 ................................................ 506,250
1,000,000 Buncombe County, 5.10%, 3/1/07 ................................................ 991,250
1,000,000 Cary, 5.50%, 2/1/01 ........................................................... 1,033,750
545,000 Charlotte, 6.80%, 10/1/97 ..................................................... 561,072
395,000 Charlotte, 5.20%, 7/1/01 ...................................................... 406,850
1,000,000 Charlotte, 5.30%, 4/1/10, Callable 4/1/05 @ 102 ............................... 986,250
500,000 Chatham County, 5.40%, 4/1/11, Callable 4/1/06 @ 102*, (b) .................... 490,625
1,000,000 City of Durham, 4.90%, 2/1/04 ................................................. 997,500
500,000 City of Durham, 5.00%, 2/1/05 ................................................. 498,750
275,000 Cleveland County, 7.10%, 6/1/99 ............................................... 293,906
600,000 Cleveland County, 5.10%, 6/1/03 ............................................... 604,500
500,000 Craven County, 5.50%, 6/1/09, Callable 6/1/06 @ 102* .......................... 503,750
500,000 Durham & Wake Counties, 5.75%, 4/1/02 ......................................... 528,125
400,000 Durham County, 5.20%, 3/1/01 .................................................. 409,500
340,000 Durham County, 5.20%, 3/1/05, Callable 3/1/02 @ 101.50 ........................ 346,800
1,000,000 Fayetteville, 4.80%, 5/1/05, Callable 5/1/03 @ 101* ........................... 975,000
265,000 Forsyth County, 5.40%, 6/1/04, Callable 6/1/02 @ 101 .......................... 273,613
500,000 Gaston County, 5.00%, 3/1/08, Callable 3/1/06 @ 101* .......................... 481,250
450,000 Goldsboro, 4.90%, 6/1/99 ...................................................... 454,500
550,000 Greensboro, 6.00%, 3/1/98 ..................................................... 564,438
1,000,000 Guilford County, 4.80%, 4/1/99 ................................................ 1,013,750
300,000 Hickory, 6.50%, 5/1/99 ........................................................ 314,625
680,000 High Point, 4.40%, 4/1/02 ..................................................... 662,150
500,000 Lee County, 5.50%, 2/1/00 ..................................................... 514,375
1,000,000 Lincoln County, 4.70%, 6/1/01 ................................................. 1,005,000
1,000,000 Lincoln County, 4.80%, 6/1/04 ................................................. 992,500
700,000 Mecklenburg County, 5.75%, 3/1/03, Callable 3/1/02 @ 100.50.................... 735,875
1,000,000 Mecklenburg County, 5.00%, 4/1/08 ............................................. 982,500
500,000 Moore County, 4.75%, 6/1/03 ................................................... 495,000
500,000 New Hanover County, 4.30%, 1/1/02 ............................................. 489,375
1,000,000 New Hanover County, 4.50%, 9/1/03 ............................................. 975,000
1,500,000 North Carolina State, 5.75%, 3/1/98 ........................................... 1,533,750
500,000 North Carolina State, 4.70%, 2/1/01 ........................................... 501,875
1,000,000 North Carolina State, 4.70%, 2/1/06, Callable 2/1/04 @ 101..................... 970,000
670,000 Orange County, 5.10%, 6/1/00 .................................................. 684,238
500,000 Orange County, 5.10%, 6/1/06, Callable 6/1/03 @ 101.5 ......................... 498,125
500,000 Orange County, 5.10%, 6/1/07, Callable 6/1/03 @ 102 ........................... 496,250
1,000,000 Pitt County, 4.80%, 2/1/00 .................................................... 1,007,500
500,000 Raleigh, 5.00%, 2/1/08, Callable 2/1/00 @ 102 ................................. 490,625
400,000 Rocky Mount, 5.50%, 5/1/97 .................................................... 403,980
700,000 Rowan County, 5.50%, 4/1/05 ................................................... 727,125
</TABLE>
Continued
-32-
[LOGO OF BB&T MUTUAL FUNDS APPEARS HERE]
<PAGE> 93
NORTH CAROLINA INTERMEDIATE TAX-FREE FUND
SCHEDULE OF PORTFOLIO INVESTMENTS CONTINUED
SEPTEMBER 30, 1996
<TABLE>
<CAPTION>
Shares
or
Principal Security Market
Amount Description Value
- ---------- ------------------------------------------------------------------------------------------ -----------
MUNICIPAL BONDS, CONTINUED:
General Obligation Bonds, continued:
<S> <C> <C>
$ 225,000 Rowan County, 5.50%, 2/1/07, Callable 2/1/06 @ 100.5 ................................ $ 231,188
200,000 Union County, 5.80%, 3/1/05, Callable 3/1/02 @ 101.5 ................................ 208,250
1,000,000 Wake County, 4.50%, 4/1/03 .......................................................... 985,000
1,000,000 Wayne County, 4.80%, 4/1/03 ......................................................... 992,500
500,000 Wilkes County, 5.00%, 6/1/01 ........................................................ 502,500
1,000,000 Wilmington, 4.60%, 3/1/02 ........................................................... 990,000
505,000 Winston Salem, 6.50%, 6/1/99 ........................................................ 532,775
-----------
32,803,610
-----------
Health Care Bonds (5.9%):
650,000 Charlotte Mecklenburg Hospital Revenue, 5.70%, 1/1/01.................................. 678,437
500,000 Charlotte Mecklenburg Hospital Revenue, 5.90%, 1/1/02.................................. 526,250
400,000 Medical Care Commission, Presbyterian Hospital Services, 5.70%, 10/1/04, Callable
10/01/02 @ 102......................................................................... 416,000
600,000 Medical Care Commission, Rex Hospital, 4.70%, 6/1/98................................... 603,000
-----------
2,223,687
-----------
Housing Bonds (1.0%):
365,000 Housing Finance Authority Revenue, 3.85%**, 9/1/16..................................... 365,000
-----------
Utility Bonds (1.3%):
500,000 Asheville Revenue, 5.30%, 8/1/09, Callable 8/1/06 @ 102*,(b)........................... 495,000
-----------
Total Municipal Bonds 35,887,297
-----------
INVESTMENT COMPANIES (6.5%):
1,408,264 Compass Capital Funds North Carolina Municipal Money Market Portfolio(c)............... 1,408,264
1,049,333 North Carolina Municipal Cash Trust(c)................................................. 1,049,333
-----------
Total Investment Companies 2,457,597
-----------
Total (Cost-$38,239,071)(a) $38,344,894
===========
</TABLE>
- ----------
Percentages indicated are based on net assets of $37,704,254.
(a) Represents cost for federal income tax purposes and differs from value by
net unrealized appreciation of securities as follows:
<TABLE>
<S> <C>
Unrealized appreciation............ $ 332,873
Unrealized depreciation............ (227,050)
---------
Net unrealized appreciation........ $ 105,823
=========
</TABLE>
(b) When-Issued security
(c) 499,900 Shares of the Compass Capital Funds North Carolina Municipal Money
Market and 497,069 shares of the North Carolina Municipal Cash Trust were
segregated due to the "When-Issued" securities purchased.
* Additional put and demand features exist allowing the Fund to require the
purchase of the instrument within variable time periods including daily,
weekly, monthly, or semiannually.
** Variable rate investments. The rate reflected on the Schedule of Investments
is the rate in effect at September 30, 1996.
See notes to financial statements
-33-
[LOGO OF BB&T MUTUAL FUNDS APPEARS HERE]
<PAGE> 94
GROWTH AND INCOME STOCK FUND
SCHEDULE OF PORTFOLIO INVESTMENTS
SEPTEMBER 30, 1996
<TABLE>
<CAPTION>
Security Market
Shares Description Value
- ---------- ---------------------------- ------------
<S> <C> <C>
COMMON STOCKS (96.6%):
Apparel (1.0%):
38,500 V.F. Corp............................. $ 2,314,812
------------
Banks (6.0%):
83,800 Barnett Banks, Inc.................... 2,828,250
58,400 Boatmens Bancshares, Inc.............. 3,263,100
39,500 J. P. Morgan & Co..................... 3,510,562
82,400 Wachovia Corp......................... 4,078,800
------------
13,680,712
------------
Beverages (2.4%):
145,200 Anheuser-Busch Co..................... 5,463,150
------------
Business Equipment & Services (3.8%):
95,400 John H. Harland Co.................... 2,862,000
113,100 Pitney Bowes,Inc...................... 5,951,887
------------
8,813,887
------------
Chemicals (3.7%):
79,300 Air Products & Chemicals, Inc......... 4,619,225
18,500 Monsanto Corp......................... 675,250
53,800 Vulcan Materials Co................... 3,228,000
------------
8,522,475
------------
Communications Equipment (2.4%):
85,600 Harris Corp........................... 5,574,700
------------
Computers (4.7%):
40,900 Apple Computer, Inc................... 907,469
79,600 Hewlett Packard Co.................... 3,880,500
77,000 Honeywell, Inc........................ 4,860,625
9,600 IBM Corp.............................. 1,195,200
------------
10,843,794
------------
Construction Materials (0.9%):
34,400 PPG Industries........................ 1,870,500
------------
Containers (1.6%):
120,100 Ball Corp............................. 2,942,450
30,000 Sonoco Products Co.................... 825,000
------------
3,767,450
------------
Defense (2.2%):
56,600 Lockheed Martin Corp.................. 5,101,075
------------
Electrical Equipment (1.8%):
45,200 Emerson Electric...................... 4,073,650
------------
Electronic Components (1.4%):
64,400 Avnet, Inc............................ 3,123,400
------------
Electronic Instruments (0.2%):
10,500 Tektronix, Inc........................ 429,187
------------
Food & Related (3.4%):
121,400 Dean Foods Co......................... $ 3,429,550
161,400 SUPERVALU, Inc........................ 4,438,500
------------
7,868,050
------------
Forest & Paper Products (1.9%):
95,900 Weyerhaeuser Co....................... 4,423,388
------------
Health Care (3.7%):
60,000 Abbott Laboratories................... 2,955,000
50,100 Glaxo Holdings ADR.................... 1,559,363
79,000 Johnson & Johnson..................... 4,048,750
------------
8,563,113
------------
Household--Major Appliances (1.0%):
43,700 Whirlpool Corp........................ 2,212,313
------------
Household Products (1.6%):
22,650 Unilever NV, New York Shares.......... 3,570,206
------------
Insurance (6.4%):
93,000 Aon Corp.............................. 5,045,250
83,300 Lincoln National Corp................. 3,654,788
170,400 SAFECO Corp........................... 5,963,999
------------
14,664,037
------------
Leisure Time Industry (1.2%):
75,400 Hasbro, Inc........................... 2,799,225
------------
Manufacturing (0.5%):
25,000 Parker Hannifin Corp.................. 1,050,000
------------
Metal Fabrication (1.4%):
98,200 Trinity Industries.................... 3,277,425
------------
Metals (0.8%):
28,600 Phelps Dodge Corp..................... 1,833,975
------------
Motor Vehicles (1.2%):
91,200 Ford Motor Co......................... 2,850,000
------------
Multiple Industry (1.4%):
81,900 Corning Glass......................... 3,194,100
------------
Petroleum (8.8%):
62,000 Ashland, Inc.......................... 2,464,500
68,200 Chevron Corp.,Inc..................... 4,271,025
27,600 Mobil Corp............................ 3,194,700
124,200 Phillips Petroleum Co................. 5,309,549
31,600 Royal Dutch Petroleum Co.............. 4,933,550
------------
20,173,324
------------
Pharmaceuticals (6.6%):
54,300 Bristol Myers Squibb Co............... 5,233,163
67,700 Rhone-Poulenc Rorer................... 4,984,413
</TABLE>
Continued
-34-
[LOGO OF BB&T MUTUAL FUNDS APPEARS HERE]
<PAGE> 95
GROWTH AND INCOME STOCK FUND
SCHEDULE OF PORTFOLIO INVESTMENTS, CONTINUED
SEPTEMBER 30, 1996
<TABLE>
<CAPTION>
Security Market
Shares Description Value
- ----------- ---------------------------- ------------
<S> <C> <C>
COMMON STOCKS, CONTINUED:
Pharmaceuticals, continued:
78,100 Schering Plough Corp............... $ 4,803,150
-------------
15,020,726
-------------
Photographic Equipment (0.6%):
16,900 Eastman Kodak Co................... 1,326,650
-------------
Publishing (2.8%):
38,000 American Greetings................. 1,087,750
48,800 Houghton Mifflin Co................ 2,299,700
103,400 Lee Enterprises.................... 2,365,275
17,400 Media General, Inc................. 548,100
-------------
6,300,825
-------------
Railroad (0.6%):
26,000 CSX Corp........................... 1,313,000
-------------
Restaurants (0.6%):
110,000 Bob Evans Farms.................... 1,471,250
-------------
Retail (4.5%):
111,100 American Stores Co................. 4,444,000
91,569 Limited, Inc....................... 1,751,257
85,500 May Department Stores Co........... 4,157,438
-------------
10,352,695
-------------
Securities Brokers & Dealers (1.5%):
120,925 AG Edwards......................... 3,521,941
-------------
Tobacco (0.8%):
20,700 Philip Morris Cos., Inc............ 1,857,825
-------------
Trucking & Shipping (0.8%):
75,000 Alexander & Baldwin................ $ 1,837,500
-------------
Utilities--Electric (4.3%):
65,900 FPL Group, Inc..................... 2,850,175
68,000 Public Service Co. Of Colorado..... 2,414,000
160,200 Western Resources, Inc............. 4,665,825
-------------
9,930,000
-------------
Utilities--Gas (3.5%):
61,400 Consolidated Natural Gas Co........ 3,292,575
141,000 NICOR, Inc......................... 4,758,750
-------------
8,051,325
-------------
Utilities--Telephone (4.6%):
25,400 AT&T Corp.......................... 1,327,150
92,200 SBC Communications Inc............. 4,437,125
123,000 Sprint Corp........................ 4,781,625
-------------
10,545,900
-------------
Total Common Stocks............................ 221,587,585
-------------
INVESTMENT COMPANIES (3.6%):
8,158,897 Federated Cash Reserves U.S.
Treasury Fund...................... 8,158,897
-------------
Total Investment Companies 8,158,897
-------------
Total (Cost--$182,180,043)(a) $ 229,746,482
=============
</TABLE>
- ----------
Percentages indicated are based on net assets of $229,487,989.
(a) Represents cost for federal income tax purposes and differs from value by
net unrealized appreciation of securities as follows:
Unrealized appreciation $ 50,699,151
Unrealized depreciation (3,132,712)
----------
Net unrealized appreciation $ 47,566,439
==========
ADR - American Depository Receipt
See notes to financial statements
-35-
[LOGO OF BB&T MUTUAL FUNDS APPEARS HERE]
<PAGE> 96
BALANCED FUND
SCHEDULE OF PORTFOLIO INVESTMENTS
SEPTEMBER 30, 1996
<TABLE>
<CAPTION>
Shares
or
Principal Security Market
Amount Description Value
- ---------- ------------------------------ -----------
<S> <C> <C>
COMMON STOCKS (43.5%):
Apparel (0.7%):
10,000 V.F. Corp..................... $ 601,250
-----------
Banks (2.5%):
11,000 Banc One Corp................. 451,000
10,000 Boatmens Bancshares, Inc...... 558,750
5,000 J. P. Morgan & Co............. 444,375
14,000 Wachovia Corp................. 693,000
-----------
2,147,125
-----------
Beverages (0.9%):
20,000 Anheuser-Busch Co............. 752,500
-----------
Business Equipment & Services (1.2%):
10,000 John H. Harland Co............ 300,000
13,000 Pitney Bowes, Inc............. 684,125
-----------
984,125
-----------
Chemicals (2.3%):
8,000 Air Products & Chemicals, Inc. 466,000
7,500 E. I. Dupont de Nemours Co.... 661,875
23,000 Monsanto Corp................. 839,500
-----------
1,967,375
-----------
Communications Equipment (0.7%):
9,000 Harris Corp................... 586,125
-----------
Computers (2.4%):
15,000 Hewlett Packard Co............ 731,250
11,500 Honeywell, Inc................ 725,938
10,500 Xerox Corp.................... 563,063
-----------
2,020,251
-----------
Construction-Engineering (0.6%):
10,000 Ingersol-Rand Co.............. 475,000
-----------
Construction Materials (0.8%):
12,000 PPG Industries................ 652,500
-----------
Containers (0.5%):
12,300 Ball Corp..................... 301,350
3,000 Sonoco Products Co............ 82,500
-----------
383,850
-----------
Defense (0.8%):
4,000 Lockheed Martin Corp.......... 360,500
6,000 Raytheon Co................... 333,750
-----------
694,250
-----------
Electrical Equipment (0.5%):
4,500 Emerson Electric.............. 405,563
-----------
Electronic Components (0.8%):
14,200 Avnet, Inc.................... 688,700
-----------
Food & Related (2.6%):
20,000 Dean Foods Co................. 565,000
14,500 H. J. Heinz Co................ 489,375
22,500 Sara Lee Corp................. 804,375
13,000 SUPERVALU, Inc................ 357,500
-----------
2,216,250
-----------
Forest & Paper Products (0.7%):
13,000 Weyerhaeuser Co............... 599,625
-----------
Health Care (2.1%):
17,500 Abbott Laboratories........... 861,875
7,400 Glaxo Holdings ADR............ 230,325
13,000 Johnson & Johnson............. 666,250
-----------
1,758,450
-----------
Household-Major Appliances (0.5%):
9,000 Whirlpool Corp................ 455,625
-----------
Household Products (0.5%):
2,500 Unilever New York Shares...... 394,062
-----------
Insurance (3.0%):
14,000 American General Corp......... 528,500
18,500 Lincoln National Corp......... 811,687
28,000 SAFECO Corp................... 980,000
7,500 USLIFE Corp................... 225,000
-----------
2,545,187
-----------
Leisure Time Industry (0.3%):
7,500 Hasbro, Inc................... 278,437
-----------
Metal Fabrication (0.6%):
15,000 Trinity Industries............ 500,625
-----------
Motor Vehicles (0.4%):
11,000 Ford Motor Co................. 343,750
-----------
Multiple Industry (0.7%):
12,500 Corning Glass................. 487,500
7,000 Hanson Trust ADR.............. 86,625
-----------
574,125
-----------
Petroleum (4.2%):
6,000 Ashland, Inc.................. 238,500
4,400 Atlantic Richfield Co......... 561,000
8,000 Chevron Corp.................. 501,000
5,500 Mobil Corp.................... 636,625
28,000 Phillips Petroleum Co......... 1,197,000
2,500 Royal Dutch Petroleum Co...... 390,313
-----------
3,524,438
-----------
Pharmaceuticals (2.5%):
12,000 Bristol Myers Squibb Co....... 1,156,500
15,000 Schering Plough Corp.......... 922,500
-----------
2,079,000
-----------
Publishing (1.1%):
4,000 Gannett Co., Inc.............. 281,500
</TABLE>
Continued
-36-
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<PAGE> 97
BALANCED FUND
SCHEDULE OF PORTFOLIO INVESTMENTS, CONTINUED
SEPTEMBER 30, 1996
<TABLE>
<CAPTION>
Shares
or
Principal Security Market
Amount Description Value
- ---------- ----------------------------------- -----------
<S> <C> <C>
COMMON STOCKS, CONTINUED:
Publishing, continued:
8,000 Tribune Co......................... $ 624,000
-----------
905,500
-----------
Railroad (0.6%):
5,500 Norfolk Southern Corp.............. 502,563
-----------
Retail (2.5%):
15,000 Dayton Hudson Corp................. 495,000
7,500 J.C. Penney, Inc................... 405,937
7,000 May Department Stores Co........... 340,375
11,000 Melville Corp...................... 485,375
11,300 Rite-Aid........................... 409,625
-----------
2,136,312
-----------
Securities Brokers & Dealers (0.4%):
11,000 AG Edwards......................... 320,375
-----------
Tobacco (0.7%):
7,000 Philip Morris Cos., Inc............ 628,250
-----------
Trucking & Shipping (0.2%):
5,500 Alexander & Baldwin................ 134,750
-----------
Utilities-Electric (1.5%):
6,000 American Electric Power, Inc....... 243,750
2,500 Duke Power Co...................... 116,562
11,000 FPL Group, Inc..................... 475,750
16,000 Scana Corp......................... 420,000
-----------
1,256,062
-----------
Utilities-Gas (2.0%):
25,000 NICOR, Inc......................... 843,750
16,000 Williams Cos., Inc................. 816,000
-----------
1,659,750
-----------
Utilities-Telephone (1.7%):
6,600 Ameritech Corp..................... 347,325
4,000 AT&T Corp.......................... 209,000
22,000 Sprint Corp........................ 855,250
-----------
1,411,575
-----------
Total Common Stocks 36,583,325
-----------
PASS-THROUGH MORTGAGE SECURITIES (4.6%):
Federal Home Loan Mortgage Corp.:
$ 960,527 7.50%, 7/1/07, Pool # E00108.... $ 970,133
Federal National Mortgage Assoc.:
1,423,123 6.50%, 1/1/09, Pool # 50974..... 1,386,648
1,510,469 7.00%, 5/1/09, Pool # 250055.... 1,498,657
-----------
Total Pass-through Mortgage Securities..... 3,855,438
-----------
U.S. TREASURY BONDS (6.4%):
1,500,000 11.13%, 8/15/03.................. 1,868,040
3,000,000 9.38%, 2/15/06.................. 3,554,220
-----------
Total U.S. Treasury Bonds 5,422,260
-----------
U.S. TREASURY NOTES (39.5%)
2,000,000 7.13%, 10/15/98.................. 2,039,040
4,000,000 8.00%, 8/15/99.................. 4,175,600
4,000,000 8.50%, 11/15/00.................. 4,295,600
3,500,000 7.75%, 2/15/01.................. 3,671,080
2,500,000 7.50%, 11/15/01.................. 2,607,825
2,500,000 7.50%, 5/15/02.................. 2,616,675
2,500,000 6.38%, 8/15/02.................. 2,481,950
2,500,000 6.25%, 2/15/03.................. 2,458,350
2,500,000 7.25%, 5/15/04.................. 2,588,250
3,000,000 7.88%, 11/15/04.................. 3,223,560
2,000,000 7.50%, 2/15/05.................. 2,103,660
1,000,000 6.50%, 8/15/05.................. 986,690
-----------
Total U.S. Treasury Notes 33,248,280
-----------
INVESTMENT COMPANIES (5.5%):
2,171,201 Federated Cash Reserves U.S.
Treasury Fund................... 2,171,201
2,441,042 Federated Short-Term U.S.
Government Trust................ 2,441,042
-----------
Total Investment Companies................ 4,612,243
-----------
Total (Cost-$75,172,426)(a)............... $ 83,721,546
===========
</TABLE>
- -----------
Percentages indicated are based on net assets of $84,168,595.
(a) Represents cost for federal income tax purposes and differs from value by
net unrealized appreciation of securities as follows:
<TABLE>
<S> <C>
Unrealized appreciation.......... $ 9,450,507
Unrealized depreciation.......... (901,387)
----------
Net unrealized appreciation...... $ 8,549,120
==========
</TABLE>
ADR - American Depository Receipt
See notes to financial statements
-37-
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<PAGE> 98
SMALL COMPANY GROWTH FUND
SCHEDULE OF PORTFOLIO INVESTMENTS
SEPTEMBER 30, 1996
<TABLE>
<CAPTION>
Shares
or
Principal Security Market
Amount Description Value
- ---------- ------------------------------ -----------
<S> <C> <C>
COMMON STOCKS (93.4%):
Advertising (0.2%):
7,400 Leap Group Inc.(b)..................... $ 75,850
-----------
Beverages (0.8%):
20,000 Boston Beer Co., Inc.(b)............... 387,500
-----------
Business Services (9.3%):
36,000 Accustaff, Inc.(b)..................... 931,500
14,000 Acxiom Corp.(b)........................ 575,750
19,400 APAC Teleservices, Inc.(b)............. 994,250
16,600 Norrell Corp........................... 522,900
13,000 Robert Half International, Inc. (b).... 479,375
19,600 Sitel Corp.(b)......................... 872,200
-----------
4,375,975
-----------
Commercial Goods & Services (3.9%):
9,000 Access Health, Inc.(b)................. 506,250
11,450 Apollo Group, Inc.(b).................. 306,287
23,100 Cambridge Technology Partners,
Inc.(b)............................... 698,775
13,800 Wackenhut Corrections Corp.(b)......... 307,050
-----------
1,818,362
-----------
Commercial Services (2.2%):
2,000 Abacus Direct Corp.(b)................. 39,000
14,800 May & Speh, Inc.(b).................... 296,000
17,600 Precision Response Corp.(b)............ 677,600
400 Vincam Group, Inc.(b).................. 15,300
-----------
1,027,900
-----------
Computer Hardware (0.6%):
10,100 Network Appliance, Inc.(b)............. 303,000
-----------
Computer Software (17.5%):
13,400 Aspen Technologies, Inc.(b)............ 907,850
3,000 Baan Co. NV(b)......................... 100,125
10,200 Bisys Group, Inc.(b)................... 418,200
17,900 CBT Group PLC ADR(b)................... 841,300
3,500 Citrix Systems, Inc.(b)................ 174,563
6,000 Electronics for Imaging, Inc.(b)....... 430,500
3,700 HCIA, Inc.(b).......................... 222,000
17,600 Legato Systems, Inc.(b)................ 836,000
13,900 Manugistics Group, Inc.(b)............. 559,475
12,500 National Techteam Inc.(b).............. 339,063
12,400 Pegasystems Inc.(b).................... 322,400
16,600 Rational Software Corp.(b)............. 566,475
20,000 Saville Systems ADR(b)................. 705,000
12,700 Transaction Systems Architects,
Inc.(b)............................... 536,575
5,400 Vantive Corp.(b)....................... 349,650
12,000 Veritas Software Corp.(b).............. 849,000
4,200 Xionics Document Technologies,
Inc.(b)............................... 59,850
-----------
8,218,026
-----------
Computers (2.9%):
17,900 Converse Technology, Inc.(b)........... 695,862
18,500 Technology Solutions Co.(b)............ 645,188
-----------
1,341,050
-----------
Construction Materials (1.7%):
23,700 Systemsoft Corp.(b).................... 811,725
-----------
Consumer Goods & Services (1.0%):
5,600 Gemstar International Group
Limited(b)............................ 165,200
7,500 USA Detergents, Inc.(b)................ 298,125
-----------
463,325
-----------
Distribution Services (0.5%):
20,000 Keystone Automotive Industries,
Inc.(b)............................... 245,000
-----------
Electronics (3.2%):
9,300 Dynatech Corp.(b)...................... 425,475
8,300 Sawtek, Inc.(b)........................ 215,800
10,400 Ultrak, Inc.(b)........................ 286,000
14,600 Vitesse Semiconductor Corp.(b)......... 563,925
-----------
1,491,200
-----------
Entertainment (1.2%):
16,725 Regal Cinemas, Inc.(b)................. 418,125
6,000 Speedway Motorsports, Inc.(b).......... 157,500
-----------
575,625
-----------
Environmental Services (2.9%):
16,666 Continental Waste Industries,
Inc.(b).............................. 372,902
16,800 United Waste Systems, Inc.(b).......... 583,800
13,090 USA Waste Services, Inc.(b)............ 412,335
-----------
1,369,037
-----------
Financial Services (5.4%):
15,000 Aames Financial Corp................... 755,625
</TABLE>
Continued
-38-
[LOGO OF BB&T MUTUAL FUNDS APPEARS HERE]
<PAGE> 99
SMALL COMPANY GROWTH FUND
SCHEDULE OF PORTFOLIO INVESTMENTS, CONTINUED
SEPTEMBER 30, 1996
<TABLE>
<CAPTION>
Shares
or
Principal Security Market
Amount Description Value
- --------- --------------------------- ----------
<S> <C> <C>
COMMON STOCKS, CONTINUED:
Financial Services, continued:
18,500 Amresco, Inc.................. $ 423,188
10,300 Cityscape Financial Corp.(b).. 272,950
7,000 Envoy Corp.(b)................ 271,250
10,500 IMC Mortgage Co.(b)........... 336,000
9,250 The Money Store, Inc.......... 245,125
11,000 Oxford Resources Corp.,
Class A(b).................. 235,125
----------
2,539,263
----------
Health Care--General (0.2%):
2,000 CRA Managed Care, Inc.(b)..... 108,000
----------
Homebuilders--Mobile Homes (1.6%):
14,000 Oakwood Homes................. 385,000
22,500 Southern Energy Homes, Inc.(b) 360,000
----------
745,000
----------
Hospital Supply & Management (0.2%):
3,500 FPA Medical Management, Inc.(b) 92,313
----------
Hotel Management & Related Services (0.3%):
7,350 Studio Plus Hotels, Inc.(b)... 121,275
----------
Hotels & Gaming (0.8%):
10,000 Doubletre Corp.(b)............ 398,750
----------
Insurance (1.5%):
15,000 HCC Insurance Holdings, Inc... 433,125
7,600 United Dental Care, Inc.(b)... 274,550
----------
707,675
----------
Leisure Time Industry (0.8%):
14,200 The North Face, Inc.(b)....... 401,150
----------
Manufactured Housing (0.9%):
18,000 Champion Enterprises, Inc.(b). 407,250
----------
Medical (2.7%):
10,800 Clintrial Research(b)......... 440,100
6,400 Quintiles Transnational Corp.(b) 468,800
10,000 Serologicals Corp.(b)......... 347,500
----------
1,256,400
----------
Medical--Hospital Management & Services (5.5%):
16,000 NCS Healthcare, Inc., Class A(b) 502,000
11,300 Occusystems, Inc.(b).......... 339,000
5,200 Omnicare, Inc................. 158,600
14,000 Orthodontic Centers of
America, Inc.(b)............ 285,250
12,700 Pediatrix Medical Group, Inc.(b) 630,237
8,025 Phycor, Inc................... 305,452
11,600 Renal Treatment Centers, Inc.(b) 385,700
----------
2,606,239
----------
Medical Equipment & Supplies (0.6%):
6,600 MiniMed Inc.(b)............... 165,825
6,000 Techne Corp.(b)............... 140,250
----------
306,075
----------
Oil & Gas (1.1%):
7,200 Marine Drilling Co., Inc.(b).. 69,300
5,000 Reading & Bates Corp.(b)...... 135,625
6,000 Seacor Holdings(b)............ 304,500
----------
509,425
----------
Pharmaceuticals (6.6%):
26,000 Dura Pharmaceuticals, Inc.(b). 958,750
23,250 Jones Medical Industries, Inc. 1,127,625
9,250 Medicis Pharmaceutical Corp.(b) 446,312
3,000 Noven Pharmaceuticals(b)...... 37,875
8,300 Parexel International Corp.(b) 522,900
----------
3,093,462
----------
Publishing (0.5%):
7,000 Gartner Group, Inc.(b)........ 238,000
----------
Restaurants (4.7%):
5,400 CKE Restaurants, Inc.......... 166,050
14,000 Einstein/Noah Bagel Corp.(b).. 430,500
17,000 Landry's Seafood Restaurants(b) 425,000
16,050 Logan Roadhouse, Inc.(b)...... 323,006
9,150 Papa John's International,Inc.(b) 480,375
13,000 Quality Dining, Inc.(b)....... 370,500
----------
2,195,431
----------
Retail (5.9%):
600 Cost Plus, Inc.(b)............ 13,875
5,400 Gadzooks, Inc.(b)............. 187,650
4,400 Gargoyles, Inc.(b)............ 90,475
3,000 Global Directmail Corp.(b).... 143,250
7,400 Inacom Corp.(b)............... 253,450
5,100 Just For Feet, Inc.(b)........ 255,638
2,000 Oakley, Inc.(b)............... 85,000
7,000 Pacific Sunwear of California. 230,125
9,000 Petco Animal Supplies, Inc.(b) 245,250
16,400 Rexall Sundown, Inc.(b)....... 598,600
6,000 The Finish Line, Inc.(b)...... 285,000
</TABLE>
Continued
-39-
[LOGO OF BB&T MUTUAL FUNDS APPEARS HERE]
<PAGE> 100
SMALL COMPANY GROWTH FUND
SCHEDULE OF PORTFOLIO INVESTMENTS, CONTINUED
SEPTEMBER 30, 1996
<TABLE>
<CAPTION>
Shares
or
Principal Security Market
Amount Description Value
- ---------- ----------------------------------------- -----------
<S> <C> <C>
COMMON STOCKS, CONTINUED:
Retail, continued:
11,000 West Marie Inc.(b).................. $ 363,000
-----------
2,751,313
-----------
Telecommunications (3.3%):
3,300 Boston Communications Group(b)...... 53,625
8,400 DSP Communications, Inc.(b)......... 469,350
9,000 Natural Microsystems Corp.(b)....... 433,125
8,500 P-COM, Inc.(b)...................... 210,375
13,700 Tel-Save Holdings, Inc.(b).......... 393,875
-----------
1,560,350
-----------
Textile (1.6%):
3,400 Donna Karan Intl, Inc.(b)........... 77,775
9,000 Nautica Enterprises, Inc.(b)........ 290,250
7,600 St. John Knits, Inc................. 380,950
-----------
748,975
-----------
Transportation (1.3%):
4,800 American Medical Response, Inc.(b).. 172,800
12,000 Rural/Metro Corp.(b)................ 438,000
-----------
610,800
-----------
Total Common Stocks 43,900,721
-----------
U.S. GOVERNMENT AGENCIES (7.7%):
Federal Home Loan Mortgage Corp.:
$3,630,000 10/1/96................................... $ 3,629,454
-----------
Total U.S. Government Agencies 3,629,454
-----------
Total (Cost-$31,600,228)(a) $47,530,175
===========
</TABLE>
- ----------
Percentages indicated are based on net assets of $46,985,400.
(a) Represents cost for federal income tax purposes and differs from value by
net unrealized appreciation of securities as follows:
Unrealized appreciation $16,418,979
Unrealized depreciation (489,032)
-----------
Net unrealized appreciation $15,929,947
===========
(b)Represents non-income producing securities.
See notes to financial statements
-40-
[LOGO OF BB&T MUTUAL FUNDS APPEARS HERE]
<PAGE> 101
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 1996
1. ORGANIZATION:
The BB&T Mutual Funds Group ("The Group") was organized on October 1, 1987
and is registered under the Investment Company Act of 1940, as amended ("the
1940 Act"), as a diversified, open-end investment company established as a
Massachusetts business trust.
The Group is authorized to issue an unlimited number of shares without par
value. The Group offers shares of the U.S. Treasury Money Market Fund, the
Short-Intermediate U.S. Government Income Fund, the Intermediate U.S.
Government Bond Fund, the North Carolina Intermediate Tax-Free Fund, the
Growth and Income Stock Fund, the Balanced Fund and the Small Company Growth
Fund (referred to individually as a "Fund" and collectively as the "Funds").
The Group offers three classes of shares: Class A Shares, Class B Shares,
and Trust Shares. Class A Shares are offered with a front-end sales charge
on the Short-Intermediate U.S. Government Income Fund, the Intermediate U.S.
Government Bond Fund, the North Carolina Intermediate Tax-Free Fund, the
Growth and Income Stock Fund, the Balanced Fund and the Small Company Growth
Fund (collectively, "the variable net asset funds"). Class B Shares are
offered subject to a contingent deferred sales charge which varies based on
the length of time Class B Shares are held in accordance with the Prospec-
tus Prospectus. Each class of shares has identical rights and privileges
except with respect to the distribution fees borne by the Class A Shares and
Class B Shares, expenses allocable exclusively to each class of shares,
voting rights on matters affecting a single class of shares and the exchange
privilege of each class of shares. Sales of shares of the Group may be made
to customers of Branch Banking & Trust Company (BB&T) and its affiliates, to
all accounts of correspondent banks of BB&T and to the general public. BB&T
serves as investment adviser to the Group.
The U.S. Treasury Money Market Fund (the "money market fund") seeks current
income with liquidity and stability of principle. The Short-Intermediate
U.S. Government Income Fund and the Intermediate U.S. Government Bond Fund
seek current income consistent with preservation of capital. The North
Carolina Intermediate Tax-Free Fund seeks to produce a high level of current
interest income that is exempt from both federal income tax and North
Carolina personal income tax. The Growth and Income Stock Fund seeks capital
growth, current income or both. The Balanced Fund seeks long-term capital
growth and current income. The Small Company Growth Fund seeks long-term
capital appreciation.
2. SIGNIFICANT ACCOUNTING POLICIES:
The following is a summary of significant accounting policies followed by
the Group in the preparation of its financial statements. The policies are
in conformity with generally accepted accounting principles. The preparation
of financial statements requires management to make estimates and assump-
tions that affect the reported amounts of assets and liabilities at the
date of the financial statements and the reported amounts of income and
expenses for the period. Actual results could differ from those estimates.
SECURITIES VALUATION:
Investments of the money market fund are valued at either amortized cost,
which approximates market value, or at original cost which, combined with
accrued interest, approximates market value. Under the amortized cost
method, discount or premium is amortized on a constant basis to the maturity
of the security. In addition the
Continued
-41-
[LOGO OF BB&T MUTUAL FUNDS APPEARS HERE]
<PAGE> 102
NOTES TO FINANCIAL STATEMENTS, CONTINUED
SEPTEMBER 30, 1996
U.S. Treasury Money Market Fund may not (a) purchase any instrument with a
remaining maturity greater than 397 days unless such instrument is subject
to a demand feature, or (b) maintain a dollar-weighted-average portfolio
maturity which exceeds 90 days.
Investments in common stocks, commercial paper, corporate bonds, municipal
securities, U.S. Government securities, and U.S. Government agency securi-
ties of the variable net asset funds are valued at their market values
determined on the latest available bid prices in the principal market
(closing sales prices if the principal market is an exchange) in which such
securities are normally traded. Investments in investment companies are
valued at their respective net asset values as reported by such companies.
The differences between cost and market values of investments are reflected
as unrealized appreciation or depreciation.
SECURITIES TRANSACTIONS AND RELATED INCOME:
Securities transactions are accounted for on the date the security is
purchased or sold (trade date). Interest income is recognized on the accrual
basis and includes, where applicable, the pro rata amortization of premium
or discount. Dividend income is recorded on the ex-dividend date. Gains or
losses realized from sales of securities are determined by comparing the
identified cost of the security lot sold with the net sales proceeds.
WHEN-ISSUED AND FORWARD COMMITMENTS:
The Funds may purchase securities on a "when-issued" basis and may also
purchase or sell securities on a forward commitment. The Funds record
when-issued securities on the trade date and maintain security positions
such that sufficient liquid assets will be available to make payment for the
securities purchased. The value of the securities underlying when-issued or
forward commitments to purchase securities, and any subsequent fluctuation
in their value, is taken into account when determining the net asset value
of the Funds commencing with the date the funds agree to purchase the
securities. The Funds do not accrue interest or dividends on when-issued
securities until the underlying securities are received.
REPURCHASE AGREEMENTS:
Each Fund may enter into repurchase agreements with member banks of the
Federal Deposit Insurance Corporation and with registered broker/dealers
that BB&T deems creditworthy under guidelines approved by the Board of
Trustees, subject to the seller's agreement to repurchase such securities at
a mutually agreed-upon date and price. The repurchase price generally equals
the price paid by the Fund plus interest negotiated on the basis of current
short-term rates, which may be more or less than the rate on the underlying
portfolio securities. The seller, under a repurchase agreement, is required
to maintain the value of collateral held pursuant to the agreement at not
less than the repurchase price (including accrued interest). Securities
subject to repurchase agreements are held by the Fund's custodian or another
qualified custodian or in the Federal Reserve/Treasury book-entry system.
DIVIDENDS TO SHAREHOLDERS:
Dividends from net investment income are declared daily and paid monthly for
the U.S. Treasury Money Market Fund, the Short-Intermediate U.S. Government
Income Fund, the Intermediate U.S. Government Bond Fund and the North
Carolina Intermediate Tax-Free Fund. Dividends from net investment income
are declared and paid
Continued
-42-
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<PAGE> 103
NOTES TO FINANCIAL STATEMENTS, CONTINUED
SEPTEMBER 30, 1996
monthly for the Growth and Income Stock Fund and the Balanced Fund.
Dividends from net investment income are declared and paid quarterly for the
Small Company Growth Fund. Distributable net realized capital gains, if any,
are declared and distributed at least annually.
Dividends from net investment income and from net realized capital gains are
determined in accordance with income tax regulations which may differ from
generally accepted accounting principles. These differences are primarily
due to differing treatments for mortgage-backed securities and deferrals of
certain losses. Permanent book and tax basis differences have been
reclassified among the components of net assets.
FEDERAL INCOME TAXES:
It is the policy of each Fund of the Group to continue to qualify as a
regulated investment company by complying with the provisions available to
certain investment companies, as defined in applicable sections of the
Internal Revenue Code, and to make distributions of net investment income
and net realized capital gains sufficient to relieve it from all, or
substantially all, federal income taxes.
OTHER:
Expenses that are directly related to one of the Funds are charged directly
to that Fund. Other operating expenses for the Group are prorated to the
Funds on the basis of relative net assets. All expenses in connection with
the Small Company Growth Fund's organization and registration under the 1940
Act and the Securities Act of 1933 were paid by the Fund. Such expenses are
being amortized over a period of two years commencing with the initial
public offering.
3. PURCHASES AND SALES OF SECURITIES:
Purchases and sales of securities (excluding short-term securities) for the
year ended September 30, 1996 are as follows:
<TABLE>
<CAPTION>
Purchases Sales
--------- -----
<S> <C> <C>
Short-Intermediate U.S. Government Income Fund................ $ 47,303,841 $30,588,880
Intermediate U.S. Government Bond Fund........................ $122,080,365 $79,358,988
North Carolina Intermediate Tax-Free Fund..................... $ 8,627,355 $ 7,219,005
Growth and Income Stock Fund.................................. $ 76,878,732 $38,074,744
Balanced Fund................................................. $ 31,689,074 $13,676,157
Small Company Growth Fund..................................... $ 35,554,010 $19,820,616
</TABLE>
4. RELATED PARTY TRANSACTIONS:
Investment advisory services are provided to the Group by BB&T. Under the
terms of the investment advisory agreement, BB&T is entitled to receive fees
based on a percentage of the average net assets of each of the Funds.
Pursuant to a Sub-Advisory Agreement with BB&T, PNC Bank manages the Small
Company Growth Fund subject to the general supervision of the Group's Board
of Trustees and BB&T. For its services, PNC Bank is entitled to a fee,
payable by BB&T, at the following annual rates as a percentage of the
average daily net
Continued
-43-
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<PAGE> 104
NOTES TO FINANCIAL STATEMENTS, CONTINUED
SEPTEMBER 30, 1996
assets: (1) 0.50% of net assets up to $50 million, (2) 0.45% of net assets
in excess of $50 million and less than or equal to $100 million, and (3)
0.40% of net assets in excess of $100 million.
BISYS Fund Services Limited Partnership d/b/a BISYS Fund Services ("BISYS"),
an Ohio Limited Partnership, and BISYS Fund Services Ohio, Inc. ("BISYS
Ohio") are subsidiaries of the BISYS Group, Inc. BISYS, whom certain
officers of the Funds are affiliated, serves the Funds as administrator.
Such officers and trustees are paid no fees directly by the Funds for
serving as officers of the Funds. Fees payable to BISYS for administration
services are established under terms of the administration contract at the
annual rate of 0.20% as a percentage of the average daily net assets of each
Fund. BISYS Ohio, serves the Funds as transfer agent and mutual fund
accountant.
The Funds have adopted a Distribution and Shareholder Services Plan in
accordance with Rule 12b-1 under the 1940 Act, pursuant to which the Funds
are authorized to pay or reimburse BISYS, as distributor, a periodic amount,
calculated at an annual rate not to exceed 0.50% and 1.00% of the average
daily net assets of the Class A Shares and Class B Shares, respectively. The
fees may be used by BISYS to pay banks, including the adviser, broker
dealers and other institutions. As distributor, BISYS is entitled to receive
commissions on sales of shares of the variable net asset funds. For the year
ended September 30, 1996, BISYS received $730,054 from commissions earned on
sales of shares of the Funds' variable net asset value funds, of which
$693,683 was allowed to affiliated broker/dealers of the Funds.
BB&T and BISYS may voluntarily reduce or reimburse fees to assist the Funds
in maintaining competitive expense ratios.
Information regarding these transactions is as follows for the year ended
September 30, 1996.
<TABLE>
<CAPTION>
Administration Distribution
Investment Advisory Fees Fees Fees
------------------------------- --------------- -------------
(As a Transfer Agent
Percentage Voluntary Voluntary Voluntary and
of Average Fee Fee Fee Mutual Fund
Net Assets) Reductions Reductions Reductions Accounting Fees
-------------- --------------- --------------- ------------- ----------------
<S> <C> <C> <C> <C> <C>
U.S. Treasury Money Market Fund 0.40% $56,370 $138,570
Short-Intermediate U.S. Government
Income Fund 0.60% $ 57,944 $16,727 $ 88,537
Intermediate U.S. Government
Bond Fund 0.60% $106,977 $10,876 $112,686
North Carolina Intermediate Tax-
Free Fund 0.60% $ 35,889 $17,942 $31,563 $ 71,503
Growth and Income Stock Fund 0.74% $484,272 $36,674 $178,406
Balanced Fund 0.74% $178,695 $28,058 $126,691
Small Company Growth
Fund..................................... 1.00% $ 796 $ 9,430 $126,517
</TABLE>
Continued
-44-
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<PAGE> 105
NOTES TO FINANCIAL STATEMENTS, CONTINUED
SEPTEMBER 30, 1996
5. CAPITAL SHARE TRANSACTIONS:
Transactions in capital shares for the Group were as follows:
<TABLE>
<CAPTION>
U.S. Treasury Short Intermediate U.S.
Money Market Fund Government Income Fund
------------------------------- ---------------------------------
For the For the For the For the
year year year year
ended ended ended ended
September 30, September 30, September 30, September 30,
1996 1995 1996 1995
--------------- -------------- --------------- ---------------
<S> <C> <C> <C> <C>
CAPITAL TRANSACTIONS:
CLASS A SHARES:
Proceeds from shares issued........................... $ 61,519,685 $ 39,015,125 $ 780,331 $ 238,092
Dividends reinvested.................................. 893,083 235,433 292,456 335,908
Cost of shares redeemed............................... (48,429,306) (26,788,169) (1,717,615) (4,008,351)
--------------- -------------- --------------- ---------------
Change in net assets from Class A share transactions.. $ 13,983,462 $ 12,462,389 $ (644,828) $ (3,434,35)
=============== ============== =============== ===============
CLASS B SHARES (a):
Proceeds from shares issued........................... $ 1,957,034 --
Dividends reinvested.................................. 16,070 --
Cost of shares redeemed............................... (668,319) --
--------------- --------------
Change in net assets from Class B share transactions.. $ 1,304,785 --
=============== ==============
TRUST SHARES:
Proceeds from shares issued........................... $ 386,470,057 $ 374,968,721 $ 31,220,980 $ 16,404,699
Dividends reinvested.................................. 812,451 271,605 1,155,628 442,352
Cost of shares redeemed............................... (301,391,098) (332,621,347) (14,011,731) (11,377,406)
--------------- -------------- --------------- ---------------
Change in net assets from Trust share transactions.... $ 85,891,410 $ 42,618,979 $ 18,364,877 $ 5,469,645
=============== ============== =============== ===============
SHARE TRANSACTIONS:
CLASS A SHARES:
Issued................................................ 61,519,685 39,015,125 79,521 24,465
Reinvested............................................ 893,083 235,433 29,675 34,730
Redeemed.............................................. (48,429,306) (26,788,169) (174,736) (417,677)
--------------- -------------- --------------- ---------------
Change in Class A Shares.............................. 13,983,462 12,462,389 (65,540) (358,482)
=============== ============== =============== ===============
CLASS B SHARES (a):
Issued................................................ 1,957,034 --
Reinvested............................................ 16,070 --
Redeemed.............................................. (668,319) --
--------------- --------------
Change in Class B Shares.............................. 1,304,785 --
=============== ==============
TRUST SHARES:
Issued................................................ 386,470,057 374,968,721 3,184,600 1,694,015
Reinvested............................................ 812,451 271,605 117,290 45,400
Redeemed.............................................. (301,391,098) (332,621,347) (1,422,732) (1,163,774)
--------------- -------------- --------------- ---------------
Change in Trust Shares................................ 85,891,410 42,618,979 1,879,158 575,641
=============== ============== =============== ===============
</TABLE>
(a) The Fund commenced offering Class B Shares January 1, 1996.
Continued
-45-
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<PAGE> 106
NOTES TO FINANCIAL STATEMENTS, CONTINUED
SEPTEMBER 30, 1996
<TABLE>
<CAPTION>
Intermediate U.S. North Carolina
Government Bond Fund Intermediate Tax-Free Fund
--------------------------- ---------------------------
For the For the For the For the
year year year year
ended ended ended ended
September 30, September 30, September 30, September 30,
1996 1995 1996 1995
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
CAPITAL TRANSACTIONS:
CLASS A SHARES:
Proceeds from shares issued.......................................... $ 923,832 $ 322,927 $ 1,510,448 $ 560,783
Dividends reinvested................................................. 207,800 320,094 268,478 278,140
Cost of shares redeemed.............................................. (2,521,905) (2,597,921) (1,143,115) (3,505,541)
------------ ------------ ----------- ------------
Change in net assets from Class A share transactions................. $ (1,390,273) $ (1,954,900) $ 635,811 $ (2,666,618)
============ ============ =========== ============
CLASS B SHARES(a):
Proceeds from shares issued.......................................... $ 359,519 --
Dividends reinvested................................................. 5,665 --
Cost of shares redeemed.............................................. (8,010) --
------------ ------------
Change in net assets from Class B share transactions................. $ 357,174 --
============ ============
TRUST SHARES:
Proceeds from shares issued.......................................... $ 65,562,100 $ 22,848,117 $10,310,221 $ 10,356,196
Dividends reinvested................................................. 4,476,007 3,609,746 -- 21
Cost of shares redeemed.............................................. (25,629,116) (20,612,492) (9,700,110) (11,141,267)
------------ ------------ ----------- ------------
Change in net assets from Trust share transactions................... $ 44,408,991 $ 5,845,371 $ 610,111 $ (785,050)
============ ============ =========== ============
SHARE TRANSACTIONS:
CLASS A SHARES:
Issued............................................................... 93,847 34,521 149,219 56,493
Reinvested........................................................... 21,069 33,838 26,506 28,264
Redeemed............................................................. (258,458) (270,549) (112,758) (358,791)
------------ ------------ ----------- ------------
Change in Class A Shares............................................. (143,542) (202,190) 62,967 (274,034)
============ ============ =========== ============
CLASS B SHARES(a):
Issued............................................................... 37,041 --
Reinvested........................................................... 591 --
Redeemed............................................................. (841) --
------------ ------------
Change in Class B Shares............................................. 36,791 --
============ ============
TRUST SHARES:
Issued............................................................... 6,626,544 2,385,380 1,022,116 1,051,141
Reinvested........................................................... 456,830 380,169 -- 2
Redeemed............................................................. (2,617,022) (2,149,882) (958,821) (1,121,892)
------------ ------------ ----------- ------------
Change in Trust Shares............................................... 4,466,352 615,667 63,295 (70,749)
============ ============ =========== ============
</TABLE>
(a) The Fund commenced offering Class B Shares January 1, 1996.
Continued
-46-
[LOGO OF BB&T MUTUAL FUNDS APPEARS HERE]
<PAGE> 107
NOTES TO FINANCIAL STATEMENTS, CONTINUED
SEPTEMBER 30, 1996
<TABLE>
<CAPTION>
Growth and Income
Stock Fund Balanced Fund
-------------------------------- ----------------------------
For the For the For the For the
year year year year
ended ended ended ended
September 30, September 30, September 30, September 30,
1996 1995 1996 1995
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
CAPITAL TRANSACTIONS:
CLASS A SHARES:
Proceeds from shares issued............................ $ 6,811,567 $ 2,464,804 $ 3,871,025 $ 1,398,339
Dividends reinvested................................... 338,523 378,623 402,738 350,315
Cost of shares redeemed................................ (1,427,065) (1,270,600) (1,928,670) (2,079,598)
------------ ------------ ------------- ------------
Change in net assets from Class A share transactions... $ 5,723,025 $ 1,572,827 $ 2,345,093 $ (330,944)
============ ============ ============= ============
CLASS B SHARES(a):
Proceeds from shares issued............................ $ 3,738,136 -- $ 2,332,596 --
Dividends reinvested................................... 17,476 -- 33,079 --
Cost of shares redeemed................................ (82,260) -- (77,715) --
------------ ------------ ------------- ------------
Change in net assets from Class B share transactions... $ 3,673,352 -- $ 2,287,960 --
============ ============ ============= ============
TRUST SHARES:
Proceeds from shares issued............................ $ 68,337,109 $ 55,223,550 $ 24,146,440 $ 16,641,644
Dividends reinvested................................... 3,190,245 2,718,414 2,035,268 1,240,565
Cost of shares redeemed................................ (40,729,870) (18,077,195) (11,407,119) (12,868,123)
------------ ------------ ------------- -------------
Change in net assets from Trust share transactions..... $ 30,797,484 $ 39,864,769 $ 14,774,589 $ 5,014,086
============ =========== ============= =============
SHARE TRANSACTIONS:
CLASS A SHARES:
Issued................................................. 477,889 205,305 334,248 133,311
Reinvested............................................. 24,085 33,975 34,933 34,562
Redeemed............................................... (100,847) (111,033) (166,329) (206,078)
------------ ------------ ------------- -------------
Change in Class A Shares............................... 401,127 128,247 202,852 (38,205)
============ ============ ============= =============
CLASS B SHARES(a):
Issued................................................. 258,055 -- 200,160 --
Reinvested............................................. 1,200 -- 2,850 --
Redeemed............................................... (5,567) -- (6,712) --
------------ ------------ ------------- -------------
Change in Class B Shares............................... 253,688 -- 196,298 --
============ ============ ============= =============
TRUST SHARES:
Issued................................................. 4,851,989 4,568,816 2,102,026 1,585,694
Reinvested............................................. 227,034 241,896 177,017 122,297
Redeemed............................................... (2,820,394) (1,522,571) (986,873) (1,263,619)
------------ ------------ ------------- -------------
Change in Trust Shares................................. 2,258,629 3,288,141 1,292,170 444,372
============ ============ ============= =============
</TABLE>
(a) The Fund commenced offering Class B Shares January 1, 1996.
Continued
-47-
[LOGO OF BB&T MUTUAL FUNDS APPEARS HERE]
<PAGE> 108
NOTES TO FINANCIAL STATEMENTS, CONTINUED
SEPTEMBER 30, 1996
<TABLE>
<CAPTION>
Small Company Growth Fund
------------------------------
For the For the period
year December 7,1994
ended to
September 30, September 30,
1996 1995(a)
------------- ----------------
<S> <C> <C>
CAPITAL TRANSACTIONS:
CLASS A SHARES:
Proceeds from shares issued................................................... $ 5,198,893 $ 938,909
Dividends reinvested.......................................................... - -
Cost of shares redeemed....................................................... (321,183) (30,211)
----------- ----------
Change in net assets from Class A share transactions.......................... $ 4,877,710 $ 908,698
=========== ===========
CLASS B SHARES(b):
Proceeds from shares issued................................................... $ 2,870,037 -
Dividends reinvested.......................................................... - -
Cost of shares redeemed....................................................... (41,375) -
----------- -----------
Change in net assets from Class B share transactions.......................... $ 2,828,662 -
=========== ===========
TRUST SHARES:
Proceeds from shares issued................................................... $14,870,042 $14,250,426
Dividends reinvested.......................................................... - -
Cost of shares redeemed....................................................... (5,559,535) (525,922)
----------- -----------
Change in net assets from Trust share transactions............................$ 9,310,507 $ 13,724,504
=========== ===========
SHARE TRANSACTIONS:
CLASS A SHARES:
Issued........................................................................ 294,124 77,577
Reinvested.................................................................... - -
Redeemed...................................................................... (17,579) (2,151)
---------- -----------
Change in Class A Shares...................................................... 276,545 75,426
=========== ===========
CLASS B SHARES(b):
Issued........................................................................ 155,105 -
Reinvested.................................................................... - -
Redeemed...................................................................... (2,142) -
---------- -----------
Change in Class B Shares...................................................... 152,963 -
=========== ===========
TRUST SHARES:
Issued........................................................................ 848,861 1,203,246
Reinvested.................................................................... - -
Redeemed...................................................................... (295,847) (38,862)
---------- -----------
Change in Trust Shares........................................................ 553,014 1,164,384
=========== ===========
</TABLE>
(a) Period from commencement of operations.
(b) The Fund commenced offering Class B Shares January 1, 1996.
Continued
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<PAGE> 109
NOTES TO FINANCIAL STATEMENTS, CONTINUED
SEPTEMBER 30, 1996
6. FEDERAL INCOME TAXES:
The Growth & Income Stock Fund declared $1,121,729 in capital gain dividend
distributions from long-term capital gains for the year ended September 30,
1996.
At September 30, 1996, the following Funds have capital loss carryforwards
which are available to offset future capital gains, if any:
<TABLE>
<CAPTION>
SHORT INTERMEDIATE NORTH CAROLINA SMALL INTERMEDIATE
U.S. GOVERNMENT INTERMEDIATE COMPANY U.S. GOVERNMENT
INCOME FUND TAX-FREE FUND GROWTH FUND BOND FUND
----------------- ----------------- --------------- ------------------
<S> <C> <C> <C> <C>
Expires in 2004.............. $ 77,950 $172,143 $1,274,796
Expires in 2003.............. $312,074 $ 16,562
Expires in 2002.............. $990,728
</TABLE>
Under current tax law, capital losses realized after October 31 may be
deferred and treated as occurring on the first day of the fiscal year ended
September 30, 1997. The following Funds had such losses:
<TABLE>
<CAPTION>
SHORT INTERMEDIATE NORTH CAROLINA INTERMEDIATE
U.S. GOVERNMENT INTERMEDIATE U.S. GOVERNMENT
INCOME FUND TAX-FREE FUND BOND FUND
------------------- ----------------- -------------------
<S> <C> <C> <C>
Post October Loss Deferred... $156,556 $47,072 $631,270
</TABLE>
7. ELIGIBLE DISTRIBUTIONS (UNAUDITED):
For the taxable year ended September 30, 1996, 100.00% and 33.71% of the
income dividends paid by the Growth and Income Stock Fund and the Balanced
Fund, respectively, qualify for the dividends received deduction available
to corporations.
8. EXEMPT-INTEREST INCOME DESIGNATIONS (UNAUDITED):
The BB&T Mutual Funds Group designates the following exempt-interest
dividends for the North Carolina Intermediate Tax-Free Fund's taxable year
ended September 30, 1996:
<TABLE>
<S> <C>
Exempt-Interest Dividends........................... $1,681,672
Exempt-Interest Dividends Per Share - Class A....... $ 0.362
Exempt-Interest Dividends Per Share - Trust......... $ 0.377
</TABLE>
100% of the exempt interest income for the North Carolina Intermediate Tax-
Free Fund's taxable year ended September 30, 1996 was from North Carolina
securities.
Continued
-49-
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<PAGE> 110
U.S. TREASURY MONEY MARKET FUND
Class A Shares
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
FOR THE YEAR ENDED SEPTEMBER 30,
-------------------------------------------------- OCTOBER 5, 1992 TO
1996 1995 1994 SEPTEMBER 30, 1993 (a)
---------------- -------------- ------------- ----------------------
<S> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD........ $ 1.00 $ 1.00 $ 1.00 $ 1.00
------- ------- -------- -------
INVESTMENT ACTIVITIES
Net investment income..................... 0.044 0.047 0.027 0.026
------- ------- -------- -------
Total from Investment Activities........ 0.044 0.047 0.027 0.026
------- ------- -------- -------
DISTRIBUTIONS
Net investment income..................... (0.044) (0.047) (0.027) (0.026)
------- ------- -------- -------
Total Distributions..................... (0.044) (0.047) (0.027) (0.026)
------- ------- -------- -------
NET ASSET VALUE, END OF PERIOD.............. $ 1.00 $ 1.00 $ 1.00 $ 1.00
======= ======= ======== =======
Total Return................................ 4.49% 4.81% 2.76% 2.60%(b)
RATIOS/SUPPLEMENTARY DATA:
Net Assets, End of Period (000)........... $27,931 $13,948 $ 1,486 $ 279
Ratio of expenses to average net assets... 0.99% 0.98% 0.94% 0.51%(c)
Ratio of net investment income to
average net assets....................... 4.37% 4.81% 2.89% 2.58%(c)
Ratio of expenses to average net assets*.. 1.25% 1.24% 1.32% 1.32%(c)
Ratio of net investment income to
average net asset*....................... 4.11% 4.55% 2.51% 1.77%(c)
</TABLE>
- ----------
* During the period, certain fees were voluntarily reduced. If such voluntary
fee reductions had not occurred, the ratios would have been as indicated.
(a) Period from commencement of operations.
(b) Not annualized.
(c) Annualized.
See notes to financial statements
-50-
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<PAGE> 111
U.S. TREASURY MONEY MARKET FUND
Class B Shares
<TABLE>
<CAPTION>
FINANCIAL HIGHLIGHTS
JANUARY 1, 1996 to
SEPTEMBER 30, 1996 (a)
----------------------
<S> <C>
NET ASSET VALUE, BEGINNING OF PERIOD ........................................................ $ 1.00
----------
INVESTMENT ACTIVITIES
Net investment income ..................................................................... 0.025
----------
Total from Investment Activities ...................................................... 0.025
----------
DISTRIBUTIONS
Net investment income ..................................................................... (0.025)
----------
Total Distributions ................................................................... (0.025)
----------
NET ASSET VALUE, END OF PERIOD .............................................................. $ 1.00
==========
Total Return (excludes redemption charge) ................................................... 2.53%(b)
RATIOS/SUPPLEMENTARY DATA:
Net Assets, End of Period (000) ........................................................... $ 1,305
Ratio of expenses to average net assets ................................................... 1.75%(c)
Ratio of net investment income to average net assets ...................................... 3.55%(c)
</TABLE>
- ----------
(a) Period from commencement of operations.
(b) Not annualized.
(c) Annualized.
See notes to financial statements
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<PAGE> 112
U.S. TREASURY MONEY MARKET FUND
Trust Shares
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
FOR THE YEAR ENDED SEPTEMBER 30,
------------------------------------------------- OCTOBER 5, 1992 TO
1996 1995 1994 SEPTEMBER 30, 1993 (a)
------------- ------------- ------------- ---------------------
<S> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD ................ $ 1.00 $ 1.00 $ 1.00 $ 1.00
-------- -------- -------- --------
INVESTMENT ACTIVITIES
Net investment income ............................. 0.046 0.050 0.030 0.027
-------- -------- -------- --------
Total from Investment Activities .............. 0.046 0.050 0.030 0.027
-------- -------- -------- --------
DISTRIBUTIONS
Net investment income ............................. (0.046) (0.050) (0.030) (0.027)
-------- -------- -------- --------
Total Distributions ........................... (0.046) (0.050) (0.030) (0.027)
-------- -------- -------- --------
NET ASSET VALUE, END OF PERIOD ...................... $ 1.00 $ 1.00 $ 1.00 $ 1.00
======== ======== ======== ========
Total Return ........................................ 4.74% 5.07% 3.01% 2.70%(b)
RATIOS/SUPPLEMENTARY DATA:
Net Assets, End of Period (000) ................... $205,974 $120,083 $77,464 $74,962
Ratio of expenses to average net assets ........... 0.75% 0.72% 0.67% 0.38%(c)
Ratio of net investment income to average
net assets ....................................... 4.63% 4.97% 2.97% 2.71%(c)
Ratio of expenses to average net assets* .......... 0.75% 0.75% 0.83% 0.81%(c)
Ratio of net investment income to average
net assets* ...................................... 4.63% 4.95% 2.82% 2.27%(c)
</TABLE>
- ----------
* During the period, certain fees were voluntarily reduced. If such voluntary
fee reductions had not occurred, the ratios would have been as indicated.
(a) Period from commencement of operations.
(b) Not annualized.
(c) Annualized.
See notes to financial statements
-52-
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<PAGE> 113
SHORT-INTERMEDIATE U.S. GOVERNMENT INCOME FUND
Class A Shares
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
FOR THE YEAR ENDED SEPTEMBER 30,
--------------------------------------------- NOVEMBER 30, 1992 TO
1996 1995 1994 SEPTEMBER 30, 1993 (a)
----------- ----------- ------------ ----------------------
<S> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD............ $ 9.88 $ 9.60 $ 10.29 $ 10.00
------ ------- ------- -------
INVESTMENT ACTIVITIES
Net investment income......................... 0.55 0.53 0.50 0.47
Net realized and unrealized losses on
investments.................................. (0.15) 0.29 (0.68) 0.30
------ ------- ------- -------
Total from Investment Activities........... 0.40 0.82 (0.18) 0.77
------ ------- ------- -------
DISTRIBUTIONS
Net investment income......................... (0.55) (0.54) (0.50) (0.48)
Net realized gains............................ - - (0.01) -
------ ------- ------- -------
Total Distributions........................ (0.55) (0.54) (0.51) (0.48)
------ ------- ------- -------
NET ASSET VALUE, END OF PERIOD.................. $ 9.73 $ 9.88 $ 9.60 $ 10.29
====== ======= ======= =======
Total Return (excludes sales charge)............ 4.09% 8.74% (1.86)% 7.80%(b)
RATIOS/SUPPLEMENTARY DATA:
Net Assets, End of Period (000).............. $6,356 $ 7,102 $10,345 $14,915
Ratio of expenses to average net
assets..................................... 1.19% 1.17% 0.89% 0.56%(c)
Ratio of net investment income to
average net assets......................... 5.55% 5.50% 5.01% 5.43%(c)
Ratio of expenses to average net assets*..... 1.54% 1.58% 1.58% 1.56%(c)
Ratio of net investment income to
average net assets*........................ 5.20% 5.09% 4.32% 4.42%(c)
Portfolio turnover(d)........................ 54.82% 106.81% 7.06% 14.06%
- ----------
</TABLE>
* During the period, certain fees were voluntarily reduced. If such voluntary
fee reductions had not occurred, the ratios would have been as indicated.
(a) Period from commencement of operations.
(b) Not annualized.
(c) Annualized.
(d) Portfolio turnover is calculated on the basis of the Fund as a whole without
distinguishing between the classes of shares issued.
See notes to financial statements
-53-
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<PAGE> 114
SHORT-INTERMEDIATE U.S. GOVERNMENT INCOME FUND
Trust Shares
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
FOR THE YEAR ENDED SEPTEMBER 30,
-------------------------------------------------- NOVEMBER 30, 1992 TO
1996 1995 1994 SEPTEMBER 30, 1993 (a)
---------------- -------------- ------------- -----------------------
<S> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD............ $ 9.89 $ 9.61 $ 10.30 $ 10.00
------- -------- ------- -------
INVESTMENT ACTIVITIES
Net Investment Income......................... 0.57 0.56 0.52 0.49
Net realized and unrealized losses on
investments................................. (0.15) 0.28 (0.68) 0.30
------- -------- ------- -------
Total from Investment Activities.......... 0.42 0.84 (0.16) 0.79
------- -------- ------- -------
DISTRIBUTIONS
Net investment income......................... (0.57) (0.56) (0.52) (0.49)
Net realized gains............................ - - (0.01) -
------- -------- ------- -------
Total Distributions....................... (0.57) (0.56) (0.53) (0.49)
------- -------- ------- -------
NET ASSET VALUE, END OF PERIOD.................. $ 9.74 $ 9.89 $ 9.61 $ 10.30
======= ======== ======= =======
Total Return.................................... 4.36% 9.01% (1.66)% 8.01%(b)
RATIOS/SUPPLEMENTARY DATA:
Net Assets, End of Period (000)............... $62,621 $ 45,005 $38,208 $34,646
Ratio of expenses to average net assets....... 0.93% 0.93% 0.71% 0.39%(c)
Ratio of net investment income to average
net assets.................................. 5.81% 5.78% 5.20% 5.60%(c)
Ratio of expenses to average net assets*...... 1.03% 1.08% 1.08% 1.05%(c)
Ratio of net investment income to average
net assets*................................. 5.71% 5.64% 4.83% 4.94%(c)
Portfolio turnover(d)......................... 54.82% 106.81% 7.06% 14.06%
</TABLE>
- ----------
* During the period, certain fees were voluntarily reduced. If such voluntary
fee reductions had not occurred, the ratios would have been as indicated.
(a) Period from commencement of operations.
(b) Not annualized.
(c) Annualized.
(d) Portfolio turnover is calculated on the basis of the Fund as a whole without
distinguishing between the classes of shares issued.
See notes to financial statements
-54-
[LOGO OF BB&T MUTUAL FUNDS APPEARS HERE]
<PAGE> 115
INTERMEDIATE U.S. GOVERNMENT BOND FUND
Class A Shares
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
FOR THE YEAR ENDED SEPTEMBER 30,
----------------------------------------------- OCTOBER 9, 1992 TO
1996 1995 1994 SEPTEMBER 30, 1993 (a)
-------------- --------------- -------------- ----------------------
<S> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD......... $ 9.88 $ 9.33 $ 10.39 $ 10.00
------- ------- -------- --------
INVESTMENT ACTIVITIES
Net investment income...................... 0.56 0.59 0.59 0.63
Net realized and unrealized gains
(losses) on investments.................. (0.25) 0.55 (1.04) 0.39
------- ------- -------- --------
Total from Investment Activities......... 0.31 1.14 (0.45) 1.02
------- ------- -------- --------
DISTRIBUTIONS
Net investment income...................... (0.56) (0.59) (0.59) (0.63)
Net realized gains......................... -- -- (0.02) --
------- ------- -------- --------
Total Distributions...................... (0.56) (0.59) (0.61) (0.63)
------- ------- -------- --------
NET ASSET VALUE, END OF PERIOD............... $ 9.63 $ 9.88 $ 9.33 $ 10.39
======= ======= ======== ========
Total Return (excludes sales charge)......... 3.17% 12.63% (4.48)% 10.53%(b)
RATIOS/SUPPLEMENTARY DATA:
Net Assets, End of Period (000)............ $ 3,659 $ 5,173 $ 6,772 $ 5,238
Ratio of expenses to
average net assets....................... 1.13% 1.09% 0.96% 0.59%(c)
Ratio of net investment income
to average net assets.................... 5.68% 6.22% 6.03% 6.26%(c)
Ratio of expenses to
average net assets*...................... 1.48% 1.50% 1.56% 1.55%(c)
Ratio of net investment income
to average net assets*................... 5.33% 5.81% 5.43% 5.30%(c)
Portfolio turnover(d)...................... 76.29% 68.91% 0.38% 15.27%
</TABLE>
- ----------------
* During the period, certain fees were voluntarily reduced. If such voluntary
fee reductions had not occurred, the ratios would have been as indicated.
(a) Period from commencement of operations.
(b) Not annualized.
(c) Annualized.
(d) Portfolio turnover is calculated on the basis of the Fund as a whole
without distinguishing between the classes of shares issued.
See notes to financial statements
-55-
[LOGO OF BB&T MUTUAL FUNDS APPEARS HERE]
<PAGE> 116
INTERMEDIATE U.S. GOVERNMENT BOND FUND
Class B Shares
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
January 1, 1996 to
September 30, 1996 (a)
----------------------
<S> <C>
NET ASSET VALUE, BEGINNING OF PERIOD.................. $10.17
------
INVESTMENT ACTIVITIES
Net investment income.............................. 0.31
Net realized and unrealized losses on investments.. (0.57)
------
Total from Investment Activities................. (0.26)
------
DISTRIBUTIONS
Net investment income.............................. (0.31)
------
Total Distributions.............................. (0.31)
------
NET ASSET VALUE, END OF PERIOD........................ $ 9.60
======
Total Return (excludes redemption charge)............. (2.48)%(b)
RATIOS/SUPPLEMENTARY DATA:
Net Assets, End of Period (000)....................... $ 353
Ratio of expenses to average net assets............... 1.85%(c)
Ratio of net investment income to average net assets.. 5.01%(c)
Ratio of expenses to average net assets*.............. 1.95%(c)
Ratio of net investment income to average net assets*. 4.91%(c)
Portfolio turnover(d)................................. 76.29%
</TABLE>
- -------
* During the period, certain fees were voluntarily reduced. If such voluntary
fee reductions had not occurred, the ratios would have been as indicated.
(a) Period from commencement of operations.
(b) Not annualized.
(c) Annualized.
(d) Portfolio turnover is calculated on the basis of the Fund as a whole
without distinguishing between the classes of shares issued.
See notes to financial statements
-56-
[LOGO OF BB&T MUTUAL FUNDS APPEARS HERE]
<PAGE> 117
INTERMEDIATE U.S. GOVERNMENT BOND FUND
Trust Shares
<TABLE>
<CAPTION>
FINANCIAL HIGHLIGHTS
FOR THE YEAR ENDED SEPTEMBER 30,
---------------------------------------- OCTOBER 9, 1992 TO
1996 1995 1994 SEPTEMBER 30, 1993 (a)
------------- ------------ ------------ -----------------------
<S> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD....................... $ 9.89 $ 9.34 $ 10.40 $ 10.00
------- ------- ------- --------
INVESTMENT ACTIVITIES
Net investment income................................... 0.58 0.61 0.62 0.64
Net realized and unrealized gains (losses)
on investments........................................ (0.25) 0.55 (1.04) 0.40
------- ------- ------- --------
Total from Investment Activities.................... 0.33 1.16 (0.42) 1.04
------- ------- ------- --------
DISTRIBUTIONS
Net investment income................................... (0.58) (0.61) (0.62) (0.64)
Net realized gains...................................... -- -- (0.02) --
------- ------- ------- --------
Total Distributions................................. (0.58) (0.61) (0.64) (0.64)
------- ------- ------- --------
NET ASSET VALUE, END OF PERIOD............................. $ 9.64 $ 9.89 $ 9.34 $ 10.40
======= ======= ======= ========
Total Return............................................... 3.43% 12.91% (4.23)% 10.76%(b)
RATIOS/SUPPLEMENTARY DATA:
Net Assets, End of Period (000)......................... $119,633 $78,578 $68,451 $ 59,816
Ratio of expenses to average net assets................. 0.87% 0.85% 0.70% 0.39%(c)
Ratio of net investment income to average net assets.... 5.94% 6.43% 6.27% 6.45%(c)
Ratio of expenses to average net assets*................ 0.97% 1.00% 1.06% 1.03%(c)
Ratio of net investment income to average net assets*... 5.84% 6.28% 5.91% 5.82%(c)
Portfolio turnover(d)................................... 76.29% 68.91% 0.38% 15.27%
</TABLE>
- -------------
* During the period, certain fees were voluntarily reduced. If such voluntary
fee reductions had not occurred, the ratios would have been as indicated.
(a) Period from commencement of operations.
(b) Not annualized.
(c) Annualized.
(d) Portfolio turnover is calculated on the basis of the Fund as a whole
without distinguishing between the classes of shares issued.
See notes to financial statements
-57-
[LOGO OF BB&T MUTUAL FUNDS APPEARS HERE]
<PAGE> 118
NORTH CAROLINA INTERMEDIATE TAX-FREE FUND
Class A Shares
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
FOR THE YEAR ENDED SEPTEMBER 30,
--------------------------------------- OCTOBER 16, 1992 TO
1996 1995 1994 SEPTEMBER 30, 1993 (a)
--------------------------------------- ----------------------
<S> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD..................... $10.15 $ 9.78 $ 10.29 $ 10.00
------ ------ ------- -------
INVESTMENT ACTIVITIES
Net investment income.................................. 0.36 0.36 0.36 0.36
Net realized and unrealized losses on investments...... (0.10) 0.37 (0.50) 0.29
------ ------ ------- -------
Total from Investment Activities..................... 0.26 0.73 (0.14) 0.65
------ ------ ------- -------
DISTRIBUTIONS
Net investment income.................................. (0.36) (0.36) (0.36) (0.36)
Net realized gains..................................... -- -- (0.01) --
------ ------ ------- -------
Total Distributions.................................. (0.36) (0.36) (0.37) (0.36)
------ ------ ------- -------
NET ASSET VALUE, END OF PERIOD........................... $10.05 $10.15 $ 9.78 $ 10.29
====== ====== ======= =======
Total Return (excludes sales charge)..................... 2.61% 7.61% (1.33)% 6.60%(b)
RATIOS/SUPPLEMENTARY DATA:
Net Assets, End of Period (000)........................ $9,261 $8,717 $11,083 $13,695
Ratio of expenses to average net assets................ 1.11% 1.05% 0.75% 0.43%(c)
Ratio of net investment income to average net assets... 3.58% 3.63% 3.63% 3.80%(c)
Ratio of expenses to average net assets*............... 1.61% 1.63% 1.66% 1.77%(c)
Ratio of net investment income to average net assets... 3.08% 3.05% 2.72% 2.45%(c)
Portfolio turnover(d).................................. 20.90% 9.38% 0.56% 5.92%
</TABLE>
- ------------
* During the period, certain fees were voluntarily reduced. If such voluntary
fee reductions had not occurred, the ratios would have been as indicated.
(a) Period from commencement of operations.
(b) Not annualized.
(c) Annualized.
(d) Portfolio turnover is calculated on the basis of the Fund as a whole
without distinguishing between the classes of shares issued.
See notes to financial statements
-58-
[LOGO OF BB&T MUTUAL FUNDS APPEARS HERE]
<PAGE> 119
NORTH CAROLINA INTERMEDIATE TAX-FREE FUND
Trust Shares
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
FOR THE YEAR ENDED SEPTEMBER 30,
------------------------------------------ OCTOBER 16, 1992 TO
1996 1995 1994 SEPTEMBER 30, 1993 (a)
------------ ------------ ------------ ----------------------
<S> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD........... $ 10.15 $ 9.78 $ 10.29 $ 10.00
------- ------- ------- -------
INVESTMENT ACTIVITIES
Net investment income........................ 0.38 0.37 0.38 0.36
Net realized and unrealized losses on
investments................................ (0.10) 0.37 (0.50) 0.29
------- ------- ------- -------
Total from Investment Activities......... 0.28 0.74 (0.12) 0.65
------- ------- ------- -------
DISTRIBUTIONS
Net investment income........................ (0.38) (0.37) (0.38) (0.36)
Net realized gains........................... -- -- (0.01) --
------- ------- ------- -------
Total Distributions...................... (0.38) (0.37) (0.39) (0.36)
------- ------- ------- -------
NET ASSET VALUE, END OF PERIOD................. $ 10.05 $ 10.15 $ 9.78 $ 10.29
======= ======= ======= =======
Total Return................................... 2.77% 7.77% (1.18)% 6.62%(b)
RATIOS/SUPPLEMENTARY DATA:
Net Assets, End of Period (000).............. $28,443 $28,091 $27,770 $20,128
Ratio of expenses to average net assets...... 0.96% 0.91% 0.63% 0.42%(c)
Ratio of net investment income to average
net assets................................. 3.72% 3.78% 3.77% 3.80%(c)
Ratio of expenses to average net assets*..... 1.11% 1.13% 1.17% 1.30%(c)
Ratio of net investment income to average
net assets*................................ 3.57% 3.55% 3.24% 2.92%(c)
Portfolio turnover(d)........................ 20.90% 9.38% 0.56% 5.92%
</TABLE>
- -----------
* During the period, certain fees were voluntarily reduced. If such voluntary
fee reductions had not occurred, the ratios would have been as indicated.
(a) Period from commencement of operations.
(b) Not annualized.
(c) Annualized.
(d) Portfolio turnover is calculated on the basis of the Fund as a whole without
distinguishing between the classes of shares issued.
See notes to financial statements
-59-
[LOGO OF BB&T MUTUAL FUNDS APPEARS HERE]
<PAGE> 120
GROWTH AND INCOME STOCK FUND
Class A Shares
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
FOR THE YEAR ENDED SEPTEMBER 30,
-------------------------------------------------------- OCTOBER 9, 1992 TO
1996 1995 1994 SEPTEMBER 30, 1993 (a)
--------------- --------------- --------------- ----------------------
<S> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD .... $ 12.97 $ 11.26 $11.26 $10.00
INVESTMENT ACTIVITIES ------- ------- ------ ------
Net investment income ................. 0.26 0.25 0.25 0.28
Net realized and unrealized gains on
investments .......................... 2.43 1.98 0.12 1.27
------- ------- ------ ------
Total from Investment Activities ... 2.69 2.23 0.37 1.55
------- ------- ------ -----
DISTRIBUTIONS
Net investment income ................ (0.26) (0.25) (0.26) (0.29)
Net realized gains .................... (0.09) (0.12) (0.11) --
In excess of net realized gains ....... -- (0.15) -- --
------- ------- -------
Total Distributions................. (0.35) (0.52) (0.37) (0.29)
------- ------- ------- -------
NET ASSET VALUE, END OF PERIOD........... $ 15.31 $ 12.97 $11.26 $11.26
======= ======= ======= =======
Total Return (excludes sales charge)..... 20.97% 20.62% 3.33% 15.72%(b)
RATIOS/SUPPLEMENTARY DATA:
Net Assets, End of Period (000)........ $ 18,949 $10,842 $7,973 $6,009
Ratio of expenses to average
net assets............................ 1.11% 1.07% 0.92% 0.63%(c)
Ratio of net investment income to
average net assets.................... 1.82% 2.15% 2.26% 2.85%(c)
Ratio of expenses to average
net assets* .......................... 1.60% 1.60% 1.65% 1.68%(c)
Ratio of net investment income to
average net assets*................... 1.33% 1.62% 1.52% 1.81%(c)
Portfolio turnover(d).................... 19.82% 8.73% 21.30% 27.17%
Average commission rate(e)............... $0.0721
</TABLE>
- ---------------
* During the period, certain fees were voluntarily reduced. If such
voluntary fee reductions had not occurred, the ratios would have been as
indicated.
(a) Period from commencement of operations.
(b) Not annualized.
(c) Annualized.
(d) Portfolio turnover is calculated on the basis of the Fund as a whole
without distinguishing between the classes of shares issued.
(e) Represents the total dollar amount of commissions paid on security
transactions divided by total number of shares purchased and sold by the
Fund for which commissions were charged.
See notes to financial statements
-60-
[LOGO OF BB&T MUTUAL FUNDS APPEARS HERE]
<PAGE> 121
GROWTH AND INCOME STOCK FUND
Class B Shares
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
JANUARY 1, 1996 TO
SEPTEMBER 30, 1996 (a)
------------------------
<S> <C>
NET ASSET VALUE, BEGINNING OF PERIOD.................... $ 13.78
-------
INVESTMENT ACTIVITIES
Net investment income................................ 0.13
Net realized and unrealized gains on investments..... 1.52
-------
Total from Investment Activities................... 1.65
-------
DISTRIBUTIONS
Net investment income................................ (0.14)
-------
Total Distributions................................ (0.14)
-------
NET ASSET VALUE, END OF PERIOD.......................... $ 15.29
=======
Total Return (excludes redemption charge)............... 12.01%(b)
RATIOS/SUPPLEMENTARY DATA:
Net Assets, End of Period (000)...................... $ 3,880
Ratio of expenses to average net assets.............. 1.85%(c)
Ratio of net investment income to average
net assets......................................... 1.13%(c)
Ratio of expenses to average net assets*............. 2.09%(c)
Ratio of net investment income to average
net assets*........................................ 0.89%(c)
Portfolio turnover(d)................................ 19.82%
Average commission rate(e)........................... $0.0721
</TABLE>
_____________
* During the period, certain fees were voluntarily reduced. If such voluntary
fee reductions had not occurred, the ratios would have been as indicated.
(a) Period from commencement of operations.
(b) Not annualized.
(c) Annualized.
(d) Portfolio turnover is calculated on the basis of the Fund as a whole
without distinguishing between the classes of shares issued.
(e) Represents the total dollar amount of commissions paid on security
transactions divided by total number of shares purchased and sold by the
Fund for which commissions were charged.
See notes to financial statements
-61-
[LOGO OF BB&T MUTUAL FUNDS APPEARS HERE]
<PAGE> 122
GROWTH AND INCOME STOCK FUND
Trust Shares
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
For the year ended September 30,
----------------------------------- October 9, 1992 to
1996 1995 1994 September 30, 1993 (a)
----------- --------- ------------ ------------------------
<S> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD.................. $ 12.99 $ 11.28 $ 11.28 $ 10.00
-------- -------- ------- -------
INVESTMENT ACTIVITIES
Net investment income............................... 0.29 0.28 0.28 0.30
Net realized and unrealized gains on investments.... 2.44 1.98 0.11 1.28
-------- -------- ------- -------
Total from Investment Activities................. 2.73 2.26 0.39 1.58
-------- -------- ------- -------
DISTRIBUTIONS
Net investment income............................... (0.29) (0.28) (0.28) (0.30)
Net realized gains.................................. (0.09) (0.12) (0.11) --
In excess of net realized gains..................... -- (0.15) -- --
-------- -------- ------- -------
Total Distributions.............................. (0.38) (0.55) (0.39) (0.30)
-------- -------- ------- -------
NET ASSET VALUE, END OF PERIOD........................ $ 15.34 $ 12.99 $ 11.28 $ 11.28
======== ======== ======= =======
Total Return.......................................... 21.31% 20.88% 3.58% 16.06%(b)
RATIOS/SUPPLEMENTARY DATA:
Net Assets, End of Period (000)..................... $206,659 $145,603 $89,355 $82,358
Ratio of expenses to average net assets............. 0.86% 0.82% 0.66% 0.40%(c)
Ratio of net investment income to average
net assets....................................... 2.07% 2.40% 2.51% 3.08%(c)
Ratio of expenses to average net assets*............ 1.10% 1.10% 1.15% 1.17%(c)
Ratio of net investment income to average net
assets*........................................... 1.83% 2.11% 2.02% 2.31%(c)
Portfolio turnover(d)............................... 19.82% 8.73% 21.30% 27.17%
Average commission rate(e).......................... $0.0721
</TABLE>
_________________
* During the period, certain fees were voluntarily reduced. If such voluntary
fee reductions had not occurred, the ratios would have been as indicated.
(a) Period from commencement of operations.
(b) Not annualized.
(c) Annualized.
(d) Portfolio turnover is calculated on the basis of the Fund as a whole
without distinguishing between the classes of shares issued.
(e) Represents the total dollar amount of commissions paid on security
transactions divided by total number of shares purchased and sold by the
Fund for which commissions were charged.
See notes to financial statements
-62-
[LOGO OF BB&T MUTUAL FUNDS APPEARS HERE]
<PAGE> 123
BALANCED FUND
Class A Shares
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
For the year ended September 30,
------------------------------------- July 1, 1993 to
1996 1995 1994 September 30, 1993 (a)
------------- -------- ---------- -------------------------
<S> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD................... $ 11.04 $ 9.76 $ 10.20 $10.00
------- ------ ------- ------
INVESTMENT ACTIVITIES..................................
Net investment income................................ 0.43 0.44 0.38 0.08
Net realized and unrealized gains on investments..... 0.92 1.27 (0.44) 0.21
------- ------ -------- ------
Total from Investment Activities.................. 1.35 1.71 (0.06) 0.29
------- ------ -------- ------
DISTRIBUTIONS
Net investment income................................ (0.43) (0.43) (0.38) (0.09)
------- ------ -------- ------
Total Distributions............................... (0.43) (0.43) (0.38) (0.09)
------- ------ -------- ------
NET ASSET VALUE, END OF PERIOD......................... $ 11.96 $11.04 $ 9.76 $10.20
======= ====== ======= ======
Total Return (excludes sales charge)................... 12.43% 18.00% (0.64)% 2.88%(b)
RATIOS/SUPPLEMENTARY DATA:
Net Assets, End of Period (000)...................... $12,456 $9,257 $ 8,560 $2,569
Ratio of expenses to average net assets.............. 1.20% 1.17% 0.98% 0.50%(c)
Ratio of net investment income to average
net assets........................................ 3.78% 4.27% 4.02% 4.39%(c)
Ratio of expenses to average net assets*............. 1.69% 1.71% 1.75% 2.00%(c)
Ratio of net investment income to average net assets* 3.29% 3.73% 3.25% 2.89%(c)
Portfolio turnover(d)................................ 19.87% 23.68% 12.91% 8.32%
Average commission rate(e)........................... $0.0749
</TABLE>
- ---------------
* During the period, certain fees were voluntarily reduced. If such voluntary
fee reductions had not occurred, the ratios would have been as indicated.
(a) Period from commencement of operations.
(b) Not annualized.
(c) Annualized.
(d) Portfolio turnover is calculated on the basis of the Fund as a whole
without distinguishing between the classes of shares issued.
(e) Represents the total dollar amount of commissions paid on security
transactions divided by total number of shares purchased and sold by the
Fund for which commissions were charged.
See notes to financial statements
-63-
[LOGO OF BB&T MUTUAL FUNDS APPEARS HERE]
<PAGE> 124
BALANCED FUND
Class B Shares
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
January 1, 1996 to
September 30, 1996 (a)
------------------------
<S> <C>
NET ASSET VALUE, BEGINNING OF PERIOD.................. $ 11.54
-------
INVESTMENT ACTIVITIES
Net investment income............................... 0.27
Net realized and unrealized gains on investments.... 0.37
-------
Total from Investment Activities.................. 0.64
-------
DISTRIBUTIONS
Net investment income............................... (0.27)
-------
Total Distributions............................... (0.27)
=======
NET ASSET VALUE, END OF PERIOD........................ $ 11.91
=======
Total Return (excludes redemption charge)............. 5.67%(b)
RATIOS/SUPPLEMENTARY DATA:
Net Assets, End of Period (000)..................... $ 2,339
Ratio of expenses to average net assets............. 1.95%(c)
Ratio of net investment income to average
net assets....................................... 3.13%(c)
Ratio of expenses to average net assets*............ 2.18%(c)
Ratio of net investment income to average
net assets*...................................... 2.90%(c)
Portfolio turnover(d)............................... 19.87%
Average commission rate(e).......................... $0.0749
</TABLE>
________
* During the period, certain fees were voluntarily reduced. If such voluntary
fee reductions had not occurred, the ratios would have been as indicated.
(a) Period from commencement of operations.
(b) Not annualized.
(c) Annualized.
(d) Portfolio turnover is calculated on the basis of the Fund as a whole
without distinguishing between the classes of shares issued.
(e) Represents the total dollar amount of commissions paid on security
transactions divided by total number of shares purchased and sold by the
Fund for which commissions were charged.
See notes to financial statements
-64-
[LOGO OF BB&T MUTUAL FUNDS APPEARS HERE]
<PAGE> 125
BALANCED FUND
Trust Shares
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
For the year ended September 30,
--------------------------------- July 1, 1993 to
1996 1995 1994 September 30, 1993 (a)
--------- --------- ---------- ----------------------
<S> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD..................... $ 11.01 $ 9.74 $ 10.18 $ 10.00
------- ------- ------- -------
INVESTMENT ACTIVITIES
Net investment income.................................. 0.46 0.46 0.40 0.09
Net realized and unrealized gains on investments....... 0.92 1.27 (0.44) 0.18
------- ------- ------- -------
Total from Investment Activities.................... 1.38 1.73 (0.04) 0.27
------- ------- ------- -------
DISTRIBUTIONS
Net investment income.................................. (0.46) (0.46) (0.40) (0.09)
------- ------- ------- -------
Total Distributions................................. (0.46) (0.46) (0.40) (0.09)
------- ------- ------- -------
NET ASSET VALUE, END OF PERIOD........................... $ 11.93 $ 11.01 $ 9.74 $ 10.18
======= ======= ======= =======
Total Return............................................. 12.74% 18.23% (0.42)% 2.74%(b)
RATIOS/SUPPLEMENTARY DATA:
Net Assets, End of Period (000)........................ $69,374 $49,794 $39,715 $20,374
Ratio of expenses to average net assets................ 0.95% 0.92% 0.73% 0.44%(c)
Ratio of net investment income to average net assets... 4.03% 4.51% 4.22% 4.44%(c)
Ratio of expenses to average net assets*............... 1.19% 1.21% 1.25% 1.47%(c)
Ratio of net investment income to average net assets*.. 3.79% 4.22% 3.70% 3.42%(c)
Portfolio turnover(d).................................. 19.87% 23.68% 12.91% 8.32%
Average commission rate(e)............................. $0.0749
</TABLE>
___________
* During the period, certain fees were voluntarily reduced. If such voluntary
fee reductions had not occurred, the ratios would have been as indicated.
(a) Period from commencement of operations.
(b) Not annualized.
(c) Annualized.
(d) Portfolio turnover is calculated on the basis of the Fund as a whole without
distinguishing between the classes of shares issued.
(e) Represents the total dollar amount of commissions paid on security
transactions divided by total number of shares purchased and sold by the
Fund for which commissions were charged.
See notes to financial statements
-65-
[LOGO OF BB&T MUTUAL FUNDS APPEARS HERE]
<PAGE> 126
SMALL COMPANY GROWTH FUND
Class A Shares
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
For the year
ended
September 30, December 7, 1994 to
1996 September 30, 1995 (a)
------------------- -----------------------
<S> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD..................................... $ 14.53 $10.00
------- ------
INVESTMENT ACTIVITIES
Net investment loss.................................................... (0.20) (0.08)
Net realized and unrealized gains on investments....................... 6.73 4.61
------- ------
Total from Investment Activities................................... 6.53 4.53
------- ------
NET ASSET VALUE, END OF PERIOD........................................... $ 21.06 $14.53
======= ======
Total Return (excludes sales charge)..................................... 44.94% 45.30%(b)
RATIOS/SUPPLEMENTARY DATA:
Net Assets, End of Period (000)........................................ $ 7,413 $1,096
Ratio of expenses to average net assets................................ 2.01% 2.50%(c)
Ratio of net investment loss to average net assets..................... (1.26)% (1.56)%(c)
Ratio of expenses to average net assets*............................... 2.26% 2.84%(c)
Ratio of net investment loss to average net assets*.................... (1.51)% (1.90)%(c)
Portfolio turnover(d).................................................. 71.62% 46.97%
Average commission rate(e)............................................. $0.0562
</TABLE>
- --------
* During the period, certain fees were voluntarily reduced. If such voluntary
fee reductions had not occurred, the ratios would have been as indicated.
(a) Period from commencement of operations.
(b) Not annualized.
(c) Annualized.
(d) Portfolio turnover is calculated on the basis of the Fund as a whole without
distinguishing between the classes of shares issued.
(e) Represents the total dollar amount of commissions paid on security
transactions divided by total number of shares purchased and sold by the
Fund for which commissions were charged.
See notes to financial statements
-66-
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<PAGE> 127
SMALL COMPANY GROWTH FUND
Class B Shares
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
January 1, 1996 to
September 30, 1996 (a)
------------------------
<S> <C>
NET ASSET VALUE, BEGINNING OF PERIOD...................................... $ 15.24
-------
INVESTMENT ACTIVITIES
Net investment loss..................................................... (0.21)
Net realized and unrealized gains on investments........................ 5.89
-------
Total from Investment Activities..................................... 5.68
-------
NET ASSET VALUE, END OF PERIOD............................................ $ 20.92
=======
Total Return (excludes redemption charge)................................. 37.27%(b)
RATIOS/SUPPLEMENTARY DATA:
Net Assets, End of Period (000)......................................... $ 3,200
Ratio of expenses to average net assets................................. 2.72%(c)
Ratio of net investment loss to average net assets...................... (2.01)%(c)
Ratio of expenses to average net assets*................................ 2.72%(c)
Ratio of net investment loss to average net assets*..................... (2.01)%(c)
Portfolio turnover(d)................................................... 71.62%
Average commission rate(e).............................................. $0.0562
</TABLE>
- -----------
* During the period, certain fees were voluntarily reduced. If such voluntary
fee reductions had not occurred, the ratios would have been as indicated.
(a) Period from commencement of operations.
(b) Not annualized.
(c) Annualized.
(d) Portfolio turnover is calculated on the basis of the Fund as a whole without
distinguishing between the classes of shares issued.
(e) Represents the total dollar amount of commissions paid on security
transactions divided by total number of shares purchased and sold by the
Fund for which commissions were charged.
See notes to financial statements
-67-
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<PAGE> 128
SMALL COMPANY GROWTH FUND
Trust Shares
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
For the year
ended
September 30, December 7, 1994 to
1996 September 30, 1995 (a)
------------- ----------------------
<S> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD................ $ 14.57 $ 10.00
------- -------
INVESTMENT ACTIVITIES
Net investment loss................................. (0.17) (0.07)
Net realized and unrealized gains on investments.... 6.78 4.64
------- -------
Total from Investment Activities................. 6.61 4.57
------- -------
NET ASSET VALUE, END OF PERIOD........................ $ 21.18 $ 14.57
======= =======
Total Return.......................................... 45.37% 45.70%(b)
RATIOS/SUPPLEMENTARY DATA:
Net Assets, End of Period (000)..................... $36,373 $16,962
Ratio of expenses to average net assets............. 1.79% 2.33%(c)
Ratio of net investment loss to average net assets.. (1.00)% (1.34)%(c)
Ratio of expenses to average net assets*............ 1.79% 2.42%(c)
Ratio of net investment loss to average
net assets*..................................... (1.00)% (1.43)%(c)
Portfolio turnover(d)............................... 71.62% 46.97%
Average commission rate(e).......................... $0.0562
</TABLE>
- ----------
* During the period, certain fees were voluntarily reduced. If such voluntary
fee reductions had not occurred, the ratios would have been as indicated.
(a) Period from commencement of operations.
(b) Not annualized.
(c) Annualized.
(d) Portfolio turnover is calculated on the basis of the Fund as a whole without
distinguishing between the classes of shares issued.
(e) Represents the total dollar amount of commissions paid on security
transactions divided by total number of shares purchased and sold by the
Fund for which commissions were charged.
See notes to financial statements
-68-
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