<PAGE> 1
LOGO
U.S. Treasury Money Market Fund
Prime Money Market Fund
CLASS A SHARES
TRUST CLASS SHARES
BRANCH BANKING & TRUST COMPANY
INVESTMENT ADVISER
BISYS FUND SERVICES
ADMINISTRATOR AND DISTRIBUTOR
PROSPECTUS DATED FEBRUARY 1, 1998
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Prospectus Summary.................................................................... 2
The Group............................................................................. 3
Fee Table............................................................................. 3
Financial Highlights.................................................................. 4
Investment Objectives and Policies.................................................... 6
Investment Restrictions............................................................... 12
Valuation of Shares................................................................... 13
How to Purchase and Redeem Shares..................................................... 14
Dividends and Taxes................................................................... 19
Management of BB&T Mutual Funds Group................................................. 20
General Information................................................................... 24
</TABLE>
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS NOT CONTAINED IN THIS PROSPECTUS IN CONNECTION WITH THE OFFERING
MADE BY THIS PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR
REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE GROUP
OR THE DISTRIBUTOR. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFERING BY THE GROUP
OR BY THE DISTRIBUTOR IN ANY JURISDICTION IN WHICH SUCH OFFERING MAY NOT
LAWFULLY BE MADE.
<PAGE> 3
BB&T MUTUAL FUNDS GROUP
<TABLE>
<S> <C>
3435 Stelzer Road For current yield, purchase,
Columbus, Ohio 43219 and redemption information,
Investment Adviser: Branch Banking call (800) 228-1872
and Trust Company ("BB&T") TDD/TTY call (800) 300-8893
</TABLE>
THE BB&T MUTUAL FUNDS GROUP (the "Group") is an open-end management investment
company offering to the public fourteen separate investment funds (each, a
"Fund"). Each Fund of the Group offers multiple classes of units of beneficial
interest ("Shares"). Three of the Funds (the "Funds of Funds"), offer
Shareholders a professionally-managed investment program by purchasing shares of
other Funds of the Group. The remaining eleven Funds primarily invest in
securities of issuers unrelated to the Group.
THE BB&T U.S. TREASURY MONEY MARKET FUND (the "U.S. Treasury Fund") seeks
current income with liquidity and stability of principal, through investment
exclusively in short-term obligations issued or guaranteed by the U.S. Treasury,
some of which may be subject to repurchase agreements. The U.S. Treasury Fund
seeks to maintain a constant net asset value of $1.00 per share.
THE BB&T PRIME MONEY MARKET FUND (the "Prime Money Market Fund") seeks as high
a level of current income as is consistent with maintaining liquidity and
stability of principal. The Prime Money Market Fund seeks to maintain a constant
net asset value of $1.00 per share.
This Prospectus relates to Class A Shares (formerly the Investor Shares),
which are offered to the general public, and to Trust Shares which are offered
to BB&T and its affiliates and other financial service providers approved by the
Distributor for the investment of funds for which they act in a fiduciary,
advisory, agency, custodial or similar capacity. Through a separate prospectus,
the Group also offers Class B Shares of the U.S. Treasury Fund, which are
offered to the general public.
This Prospectus relates only to the U.S. Treasury Fund and the Prime Money
Market Fund (each a "Money Market Fund"). Interested persons who wish to obtain
a copy of the prospectuses of the BB&T Short-Intermediate U.S. Government Income
Fund, the BB&T Intermediate U.S. Government Bond Fund, the BB&T North Carolina
Intermediate Tax-Free Fund, the BB&T South Carolina Intermediate Tax-Free Fund,
the BB&T Growth and Income Stock Fund, the BB&T Balanced Fund, the BB&T Small
Company Growth Fund, the BB&T Large 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 may
contact the Distributor at the telephone number shown above.
Additional information about each of the Funds contained in a Statement of
Additional Information, has been filed with the Securities and Exchange
Commission. The Statement of Additional Information and the prospectus relating
to the Class B Shares are available upon request without charge by writing to
the Group or by calling the Group at the telephone number shown above. The
Statement of Additional Information bears the same date as this Prospectus and
is incorporated by reference in its entirety into this Prospectus.
This Prospectus sets forth concisely the information about U.S. Treasury and
Prime Money Market Funds that a prospective investor ought to know before
investing. Investors should read this Prospectus and retain it for future
reference.
------------------------
AN INVESTMENT IN THE U.S. TREASURY FUND AND THE PRIME MONEY MARKET FUND IS
NEITHER INSURED NOR GUARANTEED BY THE U.S. GOVERNMENT. THERE CAN BE NO ASSURANCE
THAT THE FUND WILL BE ABLE TO MAINTAIN A STABLE NET ASSET VALUE OF $1.00 PER
SHARE
------------------------
SHARES OF THE BB&T MUTUAL FUNDS GROUP ARE NOT DEPOSITS OR OTHER OBLIGATIONS
OF, OR ENDORSED OR GUARANTEED BY, BRANCH BANKING AND TRUST COMPANY, BB&T
CORPORATION, ANY OF THEIR AFFILIATES, OR ANY OTHER BANK. SUCH SHARES ARE NOT
FEDERALLY INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION, THE FEDERAL
RESERVE BOARD, OR ANY OTHER GOVERNMENTAL AGENCY. INVESTMENT IN THE FUNDS
INVOLVES INVESTMENT RISKS INCLUDING POSSIBLE LOSS OF PRINCIPAL.
------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION ("COMMISSION") OR ANY STATE SECURITIES COMMISSION NOR HAS
THE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR
ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
------------------------
The date of this Prospectus is February 1, 1998.
<PAGE> 4
PROSPECTUS SUMMARY
<TABLE>
<S> <C>
The Group..................... BB&T Mutual Funds Group, (the "Group") a Massachusetts
business trust, is an open-end management investment company
which currently consists of fourteen separately managed
portfolios (each a "Fund"). Three of the Funds (the "Funds
of Funds"), offer Shareholders a professionally-managed
investment program by purchasing shares of other Funds of
the Group. The remaining eleven Funds primarily invest in
securities of issuers unrelated to the Group. This
prospectus relates to the U.S. Treasury and Prime Money
Market Funds only (each a "Money Market Fund.") Each Fund is
authorized to offer three classes of Shares: Class A, Class
B and Trust Class. The Prime Money Market Fund offers only
Class A and Trust Shares. This prospectus relates only to
Trust Shares and Class A Shares of each Money Market Fund.
Investment Objective and
Policies.................... THE U.S. TREASURY FUND seeks current income with liquidity
and stability of principal through investing exclusively in
short-term obligations issued or guaranteed by the U.S.
Treasury, some of which may be subject to repurchase
agreements.
THE PRIME MONEY MARKET FUND seeks as high a level of current
interest income as is consistent with maintaining liquidity
and stability of principal.
Investment Risks.............. Each Money Market Fund's performance may change daily based
on many factors including interest rate levels, the
characteristics of the obligations in each Money Market
Fund's portfolio, and market conditions. The Prime Money
Market Fund may invest in U.S. dollar-denominated
instruments of foreign issuers or municipal securities
backed by the credit of foreign banks, which may be subject
to risks in addition to those inherent in U.S. investments.
(See "Foreign Investments.")
Offering Price................ The public offering price of the Class A Shares and Trust
Shares of the U.S. Treasury and Prime Money Market Funds is
equal to that class' net asset value per Share, which each
Money Market Fund will seek to maintain at $1.00.
Minimum Purchase.............. For Class A Shares there is a $1000 minimum initial purchase
with no minimum investment for subsequent purchases. No
minimum purchase applies to purchases of Trust Shares. (See
"HOW TO PURCHASE AND REDEEM SHARES--Purchases of Trust
Shares and Purchases of Class A Shares.")
Investment Adviser............ Branch Banking and Trust Company, Raleigh, North Carolina.
Dividends..................... The U.S. Treasury and Prime Money Market Funds declare
dividends daily and pay such dividends monthly.
Distributor................... BISYS Fund Services, Columbus, Ohio.
</TABLE>
2
<PAGE> 5
THE GROUP
BB&T Mutual Funds Group (the "Group") is an open-end management investment
company. The Group consists of fourteen series of units of beneficial interest
("Shares"), each representing interests in one of fourteen separate investment
funds (each a "Fund"). Three of the Funds (the "Funds of Funds") offer
Shareholders a professionally-managed investment program by purchasing shares of
other Funds of the Group. The remaining eleven Funds primarily invest in
securities of issuers unrelated to the Group. Each Fund is authorized to offer
three classes of Shares: Class A Shares, Class B Shares and Trust Shares. The
Prime Money Market Fund offers only Class A and Trust Shares.
FEE TABLE
The following Fee Table and example summarize the various costs and expenses
that a Shareholder of Class A and Trust Class Shares of the Money Market Funds
will bear, either directly or indirectly.
<TABLE>
<CAPTION>
PRIME MONEY
U.S. TREASURY FUND MARKET FUND
----------------------- -----------------------
CLASS A TRUST CLASS CLASS A TRUST CLASS
------- ----------- ------- -----------
<S> <C> <C> <C> <C>
SHAREHOLDER TRANSACTION EXPENSES(1)
Maximum Sales Load Imposed on Purchases
(as a percentage of offering price)............... 0% 0% 0% 0%
Maximum Sales Load Imposed on Reinvested Dividends
(as a percentage of offering price)............... 0% 0% 0% 0%
Deferred Sales Load (as a percentage of original
purchase price or redemption proceeds, as
applicable)....................................... 0% 0% 0% 0%
Redemption Fees (as a percentage of amount redeemed,
if applicable)(2)................................... 0% 0% 0% 0%
Exchange Fee.......................................... $ 0 $ 0 $ 0 $ 0
ANNUAL FUND OPERATING EXPENSES (as a percentage of net assets)
Management Fees (after voluntary fee reductions).... .40% .40% .30%(3) .30%(3)
12b-1 Fees (after voluntary fee reductions)......... .25%(4) 0% .25%(4) 0%
Other Expenses (after voluntary fee reductions)..... .35% .35% .35%(5) .35%(5)
---- ---- ---- ----
Total Fund Operating Expenses (after voluntary fee
reductions)....................................... 1.00%(6) .75% .90%(6) .65%(6)
==== ==== ==== ====
</TABLE>
- ---------------
(1) A Participating Organization or Bank (both terms used as defined in this
Prospectus) may charge a Customer's (as defined in the Prospectus) account
fees for automatic investment, exchanges, and other investment management
services provided in connection with investment in a Money Market Fund. (See
"HOW TO PURCHASE AND REDEEM SHARES--Purchases of Trust Shares and Purchases
of Class A Shares" and "HOW TO PURCHASE AND REDEEM SHARES--Exchange
Privilege.")
(2) A wire redemption charge (currently $7.00) may be deducted from the amount
of a wire redemption payment made at the request of a shareholder. Such fee
is currently being waived. (See "HOW TO PURCHASE AND REDEEM
SHARES--Redemption by Telephone.")
(3) Branch Banking and Trust Company ("BB&T") has agreed with the Group to
voluntarily reduce the amount of its investment advisory fee through
September 30, 1998. Absent the voluntary reduction of investment advisory
fees, Management Fees as a percentage of average daily net assets for the
Trust Shares and Class A Shares of the Prime Money Market Fund would be
.40%.
(4) BISYS Fund Services has agreed with the Group to voluntarily reduce the
amount of its distribution fee for Class A Shares. Absent the voluntary fee
reduction of distribution fees, 12b-1 Fees as a percentage of average daily
net assets would be .50% for Class A Shares for each Money Market Fund. (See
"MANAGEMENT OF BB&T MUTUAL FUNDS GROUP--Distributor.")
(5) With respect to Class A and Trust Shares of the Prime Money Market Fund,
"Other Expenses" are based on estimated amounts for the current fiscal year.
Absent voluntary fee reductions, "other expenses" as a percentage of average
daily net assets would be .45% for Class A Shares and Trust Shares of the
Prime Money Market Fund.
(6) As indicated in preceding notes, voluntary fee reductions have lowered this
amount. Lower total fund operating expenses will result in higher yields.
Absent the voluntary reduction of investment advisory fees, distribution
and/or other expenses, Total Fund Operating Expenses for Class A Shares as a
percentage of average daily net assets would be 1.25% for the U.S. Treasury
Fund and 1.35% for the Prime Money Market Fund. Absent the voluntary
reduction of investment advisory fees and other expenses, Total Fund
Operating Expenses for Trust Shares of the Prime Money Market Fund would be
.85%.
3
<PAGE> 6
EXAMPLE:
You would pay the following expenses on a $1,000 investment in Trust Shares
of the Money Market Funds, assuming (1) 5% annual return and (2) redemption
at the end of each time period:
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
<S> <C> <C> <C> <C>
U.S. Treasury Fund............... $ 8 $24 $42 $93
Prime Money Market Fund.......... $ 7 $21 N/A N/A
</TABLE>
You would pay the following expenses on a $1,000 investment in Class A
Shares of the Money Market Funds, assuming (1) 5% annual return and (2)
redemption at the end of each time period:
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
<S> <C> <C> <C> <C>
U.S. Treasury Fund............... $ 10 $32 $55 $122
Prime Money Market Fund.......... $ 9 $29 N/A N/A
</TABLE>
EXAMPLE:
The purpose of the tables above is to assist a potential investor in a Money
Market Fund in understanding the various costs and expenses that an investor in
the Class A or Trust Shares of a Money Market Fund will bear directly or
indirectly. See "MANAGEMENT OF BB&T MUTUAL FUNDS GROUP" for a more complete
discussion of annual operating expenses of each Fund. THE FOREGOING EXAMPLES
SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE EXPENSES. ACTUAL
EXPENSES MAY BE GREATER OR LESS THAN THOSE SHOWN.
The information set forth in the foregoing tables and examples relates only to
Class A and Trust Shares. The Group also offers Class B Shares of the U.S.
Treasury Money Market Fund, which are subject to the same expenses except that
they are subject to a higher distribution costs.
FINANCIAL HIGHLIGHTS
The tables below sets forth financial highlights concerning the investment
results for the U.S. Treasury Fund for the periods indicated. The information
through the year ended September 30, 1997 has been audited by KPMG Peat Marwick
LLP, independent auditors for the Group, whose report thereon, insofar as it
relates to each of the years or periods indicated herein is included in the
Statement of Additional Information. The Prime Money Market Fund had not
commenced operations as of September 30, 1997.
The Class A Shares (formerly the Investor Shares) and Trust Shares of the U.S.
Treasury Fund effectively were operated as a single class of shares from the
commencement of operations of the Fund until January 31, 1993. On February 1,
1993, the U.S. Treasury Fund commenced operating as a multiple class Fund and
assessed Rule 12b-1 fees to Class A Shares (and not to Trust Shares) pursuant to
an exemptive order received from the Securities and Exchange Commission on
January 19, 1993. Information regarding the Class B Shares of the U.S. Treasury
Fund can be obtained in a separate prospectus by writing to the Group at 3435
Stelzer Road, Columbus, Ohio 43219 or by calling (800) 228-1872.
4
<PAGE> 7
<TABLE>
<CAPTION>
U.S. TREASURY MONEY MARKET FUND
-----------------------------------------------------------------------------------------
FOR THE YEAR FOR THE YEAR FOR THE YEAR FOR THE YEAR OCT. 5, 1992
ENDED ENDED ENDED ENDED TO
SEPT. 30, 1997 SEPT. 30, 1996 SEPT. 30, 1995 SEPT. 30, 1995 SEPT. 30, 1993(a)
-------------- -------------- -------------- -------------- -----------------
CLASS A CLASS A CLASS A CLASS A CLASS A
-------------- -------------- -------------- -------------- -----------------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF
PERIOD.............................. $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
------- ------- ------- ------- -------
INVESTMENT ACTIVITIES
Net investment income............... 0.044 0.044 0.047 0.027 0.026
------- ------- ------- ------- -------
Total from Investment
Activities.................... 0.044 0.044 0.047 0.027 0.026
------- ------- ------- ------- -------
DISTRIBUTIONS
Net investment income............... (0.044) (0.044) (0.047) (0.027) (0.026)
------- ------- ------- ------- -------
Total Distributions............. (0.044) (0.044) (0.047) (0.027) (0.026)
------- ------- ------- ------- -------
NET ASSET VALUE, END OF PERIOD........ $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
============ ============ ============ ============ ===============
Total Return........................ 4.50% 4.49% 4.81% 2.76% 2.60%(b)
RATIOS/SUPPLEMENTARY DATA:
Net Assets, End of Period (000)..... $ 32,541 $ 27,931 $ 13,948 $ 1,486 $ 279
Ratio of expenses to average net
assets............................ 0.95% 0.99% 0.98% 0.94% 0.51%(c)
Ratio of net investment income to
average net assets................ 4.41% 4.37% 4.81% 2.89% 2.58%(c)
Ratio of expenses to average net
assets*........................... 1.25% 1.25% 1.24% 1.32% 1.32%(c)
Ratio of net investment income to
average net assets*............... 4.11% 4.11% 4.55% 2.51% 1.77%(c)
</TABLE>
<TABLE>
<CAPTION>
U.S. TREASURY MONEY MARKET FUND
-----------------------------------------------------------------------------------------
FOR THE YEAR FOR THE YEAR FOR THE YEAR FOR THE YEAR NOV. 30, 1992
ENDED ENDED ENDED ENDED TO
SEPT. 30, 1997 SEPT. 30, 1996 SEPT. 30, 1995 SEPT. 30, 1994 SEPT. 30, 1993(a)
-------------- -------------- -------------- -------------- -----------------
TRUST CLASS TRUST CLASS TRUST CLASS TRUST CLASS TRUST CLASS
-------------- -------------- -------------- -------------- -----------------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF
PERIOD.............................. $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
-------------- -------------- -------------- ------- -------
INVESTMENT ACTIVITIES
Net investment income............... 0.046 0.046 0.050 0.030 0.027
-------------- -------------- -------------- ------- -------
Total from Investment
Activities.................... 0.046 0.046 0.050 0.030 0.027
-------------- -------------- -------------- ------- -------
DISTRIBUTIONS
Net investment income............... (0.046) (0.046) (0.050) (0.030) (0.027)
-------------- -------------- -------------- ------- -------
Total Distributions............. (0.046) (0.046) (0.050) (0.030) (0.027)
-------------- -------------- -------------- ------- -------
NET ASSET VALUE, END OF PERIOD........ $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
============ ============ ============ ============ ===============
Total Return........................ 4.71% 4.74% 5.07% 3.01% 2.70%(b)
RATIOS/SUPPLEMENTARY DATA:
Net Assets, End of Period (000)..... $266,840 $205,974 $120,083 $ 77,464 $74,962
Ratio of expenses to average net
assets............................ 0.75% 0.75% 0.72% 0.67% 0.38%(c)
Ratio of net investment income to
average net assets................ 4.61% 4.63% 4.97% 2.97% 2.71%(c)
Ratio of expenses to average net
assets*........................... 0.75% 0.75% 0.75% 0.83% 0.81%(c)
Ratio of net investment income to
average net assets*............... 4.61% 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.
5
<PAGE> 8
INVESTMENT OBJECTIVES AND POLICIES
All instruments in which the Money Market Funds invest are valued based on the
amortized cost valuation technique pursuant to Rule 2a-7 under the Investment
Company Act of 1940 (the "1940 Act"). All instruments in which the Money Market
Funds invest will have remaining maturities of 397 days or less, although
instruments subject to repurchase agreements and certain variable or floating
rate obligations may bear longer maturities. The average dollar weighted
maturity of the securities in each Money Market Fund will not exceed 90 days.
See "VALUATION OF SHARES" and the Statement of Additional Information for
further explanation of the amortized cost valuation method.
All securities acquired by the Money Market Funds will be determined at the
time of purchase by the Group's adviser or sub-adviser, under guidelines
established by the Group's Board of Trustees, to present minimal credit risks.
The Prime Money Market Fund will invest only in issuers or instruments that at
the time of purchase (1) have received the highest short-term rating by at least
two nationally recognized statistical ratings organizations ("NRSROs") (e.g.,
"A-1" by Standard's & Poor's Corporation and "P-1" by Moody's Investors
Services, Inc.); or (2) are single rated and have received the highest
short-term rating by a NRSRO; or (3) are unrated, but are determined to be of
comparable quality by the Investment Adviser or Sub-Adviser pursuant to
guidelines approved by the Board of Trustees, See the Statement of Additional
Information for explanations of the rating systems.
Under the guidelines adopted by the Trustees and in accordance with Rule 2a-7
under the 1940 Act, the Adviser or the Sub-Adviser may be required prompted to
dispose of an obligation held in a Fund's portfolio in the event of certain
developments that indicate a diminishment of the instrument's credit quality,
such as where an NRSRO downgrades an obligation below the second highest rating
category or in the event of a default relating to the financial condition of the
issuer.
U.S. TREASURY FUND
The investment objective of the U.S. Treasury Fund is to seek current income
with liquidity and stability of principal through investing exclusively in
short-term United States dollar-denominated obligations issued or guaranteed by
the U.S. Treasury, some of which may be subject to repurchase agreements.
The investment objective of the Fund is fundamental and may not be changed
without the vote of a majority of the outstanding Shares of the U.S. Treasury
Fund (as defined below under "GENERAL INFORMATION--Miscellaneous.") There can
be, of course, no assurance that the Fund will achieve its investment objective.
Obligations purchased by the U.S. Treasury Fund are limited to U.S.
dollar-denominated obligations which the Board of Trustees has determined
present minimal credit risks.
PRIME MONEY MARKET FUND
The investment objective of the Prime Money Market Fund is to provide as high
a level of current interest income as is consistent with maintaining liquidity
and stability of principal.
The investment objective of the Prime Money Market Fund is fundamental and may
not be changed without the vote of a majority of the outstanding Shares of the
Fund (as defined below under "GENERAL INFORMATION--Miscellaneous.") There can
be, of course, no assurance that the Fund will achieve its investment objective.
The Prime Money Market Fund may invest in a broad range of short-term, high
quality, U.S. dollar-denominated instruments, such as government, bank,
commercial and other obligations, that are available in the money markets. In
particular, the Fund may invest in:
(A) U.S. dollar-denominated obligations issued or supported by the credit of
U.S. or foreign banks or savings institutions with total assets in excess of
$1 billion (including obligations of foreign branches of such banks);
(B) high quality commercial paper and other obligations issued or guaranteed by
U.S. and foreign corporations and other issuers;
(C) asset-backed securities (including interests in pools of assets such as
mortgages, installment purchase obligations and credit card receivables);
(D) securities issued or guaranteed as to principal and interest by the U.S.
Government or by its agencies or instrumentalities and related custodial
receipts;
6
<PAGE> 9
(E) dollar-denominated securities issued or guaranteed by foreign governments or
their political subdivisions, agencies or instrumentalities;
(F) guaranteed investment contracts issued by highly-rated U.S. insurance
companies;
(G) securities issued or guaranteed by state or local governmental bodies; and
(H) repurchase agreements relating to the above instruments.
The Prime Money Market Fund concentrates its investments in obligations issued
by the financial services industry. However, for temporary defensive purposes
during periods when the Adviser or Sub-Adviser believes that maintaining this
concentration may be inconsistent with the best interest of Shareholders, the
Fund will not maintain this concentration. Money market instruments of companies
in the financial services industry include, but are not limited to, certificates
of deposit, commercial paper, bankers' acceptances, demand and time deposits,
and bank notes. These money market obligations are issued by domestic or foreign
banks, savings and loan associations, consumer and industrial finance companies,
securities brokerage companies and a variety of firms in the insurance field.
Financial service companies offering money market issues must have total assets
of $1 billion or more before their issues can be considered for investment.
Because the Fund concentrates more than 25% of its total assets in the financial
services industry, it will be exposed to greater risks associated with that
industry, such as adverse interest rate trends, increased credit defaults,
potentially burdensome government regulation, the availability and cost of
capital funds, and general economic conditions. The Fund will not purchase
securities issued by PNC Bank or BB&T or any of their affiliates.
CORPORATE AND BANK OBLIGATIONS
To the extent consistent with its investment objective, the Prime Money Market
Fund may invest in debt obligations of domestic corporations and banks. Bank
obligations may include certificates of deposit, notes, bankers' acceptances and
fixed time deposits. These obligations may be general obligations of the parent
bank or may be limited to the issuing branch or subsidiary by the terms of the
specific obligation or by government regulation. The Prime Money Market Fund may
also make interest-bearing savings deposits in commercial and savings banks in
amounts not in excess of 5% of its total assets.
PRIVATE PLACEMENT INVESTMENTS
The Prime Money Market Fund may invest in commercial paper issued by
corporations without registration under the Securities Act of 1933 (the "1933
Act") in reliance on the exemption in Section 3(a)(3), and commercial paper
issued in reliance on the so-called "private placement" exemption in Section
4(2) ("Section 4(2) paper"). Section 4(2) paper is restricted as to disposition
under the Federal securities laws in that any resale must similarly be made in
an exempt transaction. Section 4(2) paper is normally resold to other
institutional investors through or with the assistance of investment dealers
which make a market in Section 4(2) paper, thus providing liquidity.
The Prime Money Market Fund may purchase securities which are not registered
under the 1933 Act but which can be sold to "qualified institutional buyers" in
accordance with Rule 144A under the 1933 Act. These securities will not be
considered illiquid so long as the sub-adviser determines that an adequate
trading market exists for the securities. This investment practice could have
the effect of increasing the level of illiquidity in the Fund during any period
that qualified institutional buyers become uninterested in purchasing these
restricted securities.
GUARANTEED INVESTMENT CONTRACTS
The Prime Money Market Fund may make limited investments in guaranteed
investment contracts ("GICs") issued by highly rated U.S. insurance companies.
Under these contracts, the Fund makes cash contributions to a deposit fund of
the insurance company's general account. The insurance company then credits
interest to the Fund on a monthly basis, which is based on an index (such as the
Salomon Brothers CD Index), but is guaranteed not to be less than a certain
minimum rate. The Prime Money Market Fund does not expect to invest more than 5%
of its net assets in GICs at any time during the current fiscal year.
WHEN-ISSUED SECURITIES
The Prime Money Market Fund may purchase securities on a when-issued or
delayed-delivery basis and may purchase or sell securities on a "forward
commitment" basis. These transactions are arrangements in which the Fund
purchases securities with
7
<PAGE> 10
payment and delivery scheduled for a future time. When the Fund agrees to
purchase securities on a when-issued basis, the Fund's custodian must set aside
cash or liquid Fund securities equal to the amount of that commitment in a
separate account and may be required to subsequently place additional assets in
the separate account to maintain equivalence with the Fund's commitment. The
ability to purchase when-issued securities will provide the Fund with the
flexibility of participating in new issues of government securities,
particularly mortgage-related securities. Prior to delivery of when-issued
securities, the securities are subject to fluctuations in value, and no income
accrues until their receipt. The Fund engages in when-issued and
delayed-delivery transactions only with the intent of acquiring Fund securities
consistent with its investment objective and policies, and not for investment
leverage. In when-issued and delayed-delivery transactions, the Fund relies on
the seller to complete the transaction; its failure to do so may cause the Fund
to miss a price or yield considered to be advantageous. The Fund's when-issued
purchases and forward commitments are not expected to exceed 25% of the value of
its total assets absent unusual market conditions.
ASSET-BACKED SECURITIES
The Prime Money Market Fund may invest in securities backed by automobile
receivables and credit-card receivables and other securities backed by other
types of receivables.
Offerings of Certificates for Automobile Receivables ("CARS") are structured
either as flow-through grantor trusts or as pay-through notes. CARS structured
as flow-through instruments represent ownership interests in a fixed pool of
receivables. CARS structured as pay-through notes are debt instruments supported
by the cash flows from the underlying assets. CARS may also be structured as
securities with fixed payment schedules which are generally issued in
multiple-classes. Cash-flow from the underlying receivables is directed first to
paying interest and then to retiring principal via paying down the two
respective classes of notes sequentially. Cash-flows on fixed-payment CARS are
certain, while cash-flows on other types of CARS issues depends on the
prepayment rate of the underlying automobile loans. Prepayments of automobile
loans are triggered mainly by automobile sales and trade-ins. Many people buy
new cars every two or three years, leading to rising prepayment rates as a pool
becomes more seasoned.
Certificates for Amortizing Revolving Debt ("CARDS") represent participation
in a fixed pool of credit card accounts. CARDS pay "interest only" for a
specified period. The CARDS principal balance remains constant during this
period, while any cardholder repayments or new borrowings flow to the issuer's
participation. Once the principal amortization phase begins, the balance
declines with paydowns on the underlying portfolio. Cash flows on CARDS are
certain during the interest-only period. After this initial interest-only
period, the cash flow will depend on how fast cardholders repay their
borrowings. Historically, monthly cardholder repayment rates have been
relatively fast. As a consequence, CARDS amortize rapidly after the end of the
interest-only period. During this amortization period, the principal payments on
CARDS depend specifically on the method for allocating cardholder repayments to
investors. In many cases, the investor's participation is based on the ratio of
the CARDS' balance to the total credit card portfolio balance. This ratio can be
adjusted monthly or can be based on the balances at the beginning of the
amortization period. In some issues, investors are allocated most of the
repayments, regardless of the CARDS' balance. This method results in especially
fast amortization.
Credit support for asset-backed securities may be based on the underlying
assets or provided by a third party. Credit enhancement techniques include
letters of credit, insurance bonds, limited guarantees (which are generally
provided by the issuer), senior-subordinated structures and over
collateralization. Asset-backed securities purchased by the Prime Money Market
Fund will be subject to the same quality requirements as other securities
purchased by the Fund.
COLLATERALIZED MORTGAGE OBLIGATIONS
Although under normal market conditions it does not expect to do so, except in
connection with repurchase agreements, the Prime Money Market Fund, may also
invest in collateralized mortgage obligations ("CMOs"). CMOs are
mortgage-related securities which are structured pools of mortgage pass-through
certificates or mortgage loans. CMOs are issued with a number of classes or
series which have different maturities and which may represent interests in some
or all of the interest or principal on the underlying collateral or a
combination thereof. CMOs of different classes are generally retired in sequence
as the underlying mortgage loans in the mortgage pool are repaid. In the event
8
<PAGE> 11
of sufficient early prepayments on such mortgages, the class or series of CMO
first to mature generally will be retired prior to its maturity. Thus, the early
retirement of a particular class or series of CMO held by the Prime Money Market
Fund would have the same effect as the prepayment of mortgages underlying a
mortgage-backed pass-through security.
Certain debt securities such as, but not limited to, mortgage backed
securities, CMOs and asset-backed securities, as well as securities subject to
prepayment of principal prior to the stated maturity date, are expected to be
repaid prior to their stated maturity dates. As a result, the effective maturity
of these securities is expected to be shorter than the stated maturity. For
purposes of calculating the Prime Money Market Fund's weighted average portfolio
maturity, the effective maturity of such securities will be used.
CMOs may include stripped mortgage securities. Such securities are derivative
multi-class mortgage securities issued by agencies or instrumentalities of the
United States Government, or by private originators of, or investors in,
mortgage loans, including savings and loan associations, mortgage banks,
commercial banks, investment banks and special purpose subsidiaries of the
foregoing. Stripped mortgage securities are usually structured with two classes
that receive different proportions of the interest and principal distributions
on a pool of mortgage assets. A common type of stripped mortgage security will
have one class receiving all of the interest from the mortgage assets (the
interest-only or "IO" class), while the other class will receive all of the
principal (the principal-only or "PO" class). The yield to maturity on an IO
class is extremely sensitive to the rate of principal payments (including
prepayments) on the related underlying mortgage assets, and a rapid rate of
principal payments may have a material adverse effect on the securities' yield
to maturity. Generally, the market value of the PO class is unusually volatile
in response to changes in interest rates. If the underlying mortgage assets
experience greater than anticipated prepayments of principal, the Fund may fail
to fully recoup its initial investment in these securities even if the security
is rated in the highest rating category.
Although stripped mortgage securities are purchased and sold by institutional
investors through several investment banking firms acting as brokers or dealers,
these securities were only recently developed. As a result, established trading
markets have not fully developed. Stripped mortgage securities issued or
guaranteed by the U.S. Government and held by the Fund may be considered liquid
securities pursuant to guidelines established by the Group's Board of Trustees.
The Fund will not purchase a stripped mortgage security that is illiquid, if, as
a result thereof, more than 10% of the value of the Fund's net assets would be
invested in such securities and other illiquid securities.
Unless stated otherwise, the Prime Money Market Fund will limit its investment
in CMOs to 25% of the value of its total assets.
MUNICIPAL OBLIGATIONS
The Fund may, when deemed appropriate by its sub-adviser, invest in high
quality short-term obligations issued by state and local governmental issuers.
The Prime Money Market Fund may invest in participation certificates in a
lease, an installment purchase contract, or a conditional sales contract ("lease
obligations") entered into by a state or political subdivision to finance the
acquisition or construction of equipment, land or facilities. Although lease
obligations are not general obligations of the issuer for which the state or
other governmental body's unlimited taxing power is pledged, certain lease
obligations are backed by a covenant to appropriate money to make the lease
obligation payments. However, under certain lease obligations, the state or
governmental body has no obligation to make these payments in future years
unless money is appropriated on a yearly basis. Although "non-appropriation"
lease obligations are secured by the leased property, disposition of the
property in the event of foreclosure might prove difficult. These securities
represent a relatively new type of financing that is not yet marketable as 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.
FOREIGN INVESTMENTS
The Prime Money Market Fund may invest in debt obligations of foreign
corporations and banks. The Prime Money Market Fund may invest in
9
<PAGE> 12
Eurodollar Certificates of Deposits ("ECDs") which are U.S. dollar denominated
certificates of deposit issued by offices of foreign and domestic banks located
outside the United States; Eurodollar Time Deposits ("ETDs") which are U.S.
dollar denominated deposits in a foreign branch of a U.S. bank or a foreign
bank; Canadian Time Deposits ("CTDs") which are essentially the same as ETDs
except they are issued by Canadian offices of major Canadian banks; and 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.
The Prime Money Market Fund will not invest in excess of 10% of its net assets
in time deposits, including ETDs and CTDs but not including certificates of
deposit, with maturities in excess of seven days which are subject to penalties
upon early withdrawal.
The Prime Money Market Fund may invest in commercial paper (including variable
amount master demand notes) issued by U.S. or foreign corporations. The Prime
Money Market Fund may also invest in Canadian Commercial Paper ("CCP"), which is
commercial paper issued by a Canadian corporation or a Canadian counterpart of a
U.S. corporation, and in Europaper, which is U.S. dollar denominated commercial
paper of a foreign issuer.
Investments in ECDs, ETDs, CTDs, Yankee CDs, CCP, and Europaper may subject
the Prime Money Market Fund to investment risks that differ in some respects
from those related to investments in obligations of U.S. domestic issuers. Such
risks include future adverse political and economic developments, the possible
imposition of foreign withholding taxes on interest income, possible seizure,
currency blockage, nationalization, or expropriation of foreign deposits, the
possible establishment of exchange controls, or the adoption of other foreign
governmental restrictions which might adversely effect the payment of principal
and interest on such obligations. In addition, foreign branches of U.S. banks
and foreign banks may be subject to less stringent reserve requirements and to
different accounting, auditing, reporting, and record keeping standards than
those applicable to domestic branches of U.S. banks. The Prime Money Market Fund
will acquire securities issued by foreign branches of U.S. banks, foreign banks,
or other foreign issuers only when the Adviser or Sub-Adviser believes that the
risks associated with such instruments are minimal and only when such
instruments are denominated and payable in United States dollars.
VARIABLE AND FLOATING RATE INSTRUMENTS
The Prime Money Market Fund may purchase rated and unrated variable and
floating rate instruments, which may have a stated maturity in excess of 13
months but will, in any event, permit the Fund to demand payment of the
principal of the instrument at least once every 13 months upon not more than 30
days' notice (unless the instrument is guaranteed by the U.S. Government or any
agency or instrumentality thereof).
VARIABLE AMOUNT DEMAND NOTES
Variable amount master demand notes in which the Prime Money Market Fund may
invest are unsecured demand notes that permit the indebtedness thereunder to
vary, and that provide for periodic adjustments in the interest rate according
to the terms of the instrument. Because master demand notes are direct lending
arrangements between the Prime Money Market Fund and the issuer, they are not
normally traded. Although there is no secondary market in the notes, the Prime
Money Market Fund may demand payment of principal and accrued interest at any
time. While the notes are not typically rated by credit rating agencies, issuers
of variable amount master demand notes (which are normally manufacturing,
retail, financial, and other business concerns) must satisfy the same criteria
as to quality as set forth above for commercial paper. PIMC 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. In determining average weighted 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. The period of time remaining until the principal
amount can be recovered under a variable master demand note may not exceed seven
days.
MONEY MARKET FUNDS
In connection with the management of its daily cash positions, the Prime Money
Market Fund may invest in securities issued by other investment companies which
invest in short-term, high quality debt securities and which determine their net
asset value
10
<PAGE> 13
per share based on the amortized cost or penny-rounding method of valuation.
Securities of other investment companies will be acquired by the Fund within the
limits prescribed by the 1940 Act. As a shareholder of another investment
company, the Fund would bear, along with other shareholders, its pro rata
portion of the other investment company's expenses, including advisory fees.
These expenses would be in addition to the advisory fees and other expenses the
Fund bear directly in connection with its own operations.
UNINVESTED CASH RESERVES
The Prime Money Market Fund may hold uninvested cash reserves pending
investment during temporary defensive periods or if, in the opinion of the
Fund's sub-adviser, suitable obligations are unavailable. During normal market
periods, no more than 20% of the Fund's total assets will be held uninvested.
Uninvested cash reserves will not earn income.
COMMON INVESTMENT POLICIES OF THE MONEY MARKET FUNDS
REPURCHASE AGREEMENTS
Securities held by each Money Market Fund may be subject to repurchase
agreements. A Money Market Fund will enter into repurchase agreements for the
purposes of maintaining liquidity and obtaining favorable yields. Under the
terms of a repurchase agreement, a Money Market Fund acquires securities from
financial institutions or registered broker-dealers, subject to the seller's
agreement to repurchase such securities at a mutually agreed upon date and
price. The seller is required to maintain the value of the collateral held
pursuant to the agreement at not less than the repurchase price (including
accrued interest). If the seller under a repurchase agreement were to default on
its repurchase obligation or become insolvent, a Fund would suffer a loss to the
extent that the proceeds from a sale of the underlying portfolio securities were
less than the repurchase price under the agreement, or to the extent that the
disposition of such securities by a Fund were delayed pending court action.
Additionally, if the seller should be involved in bankruptcy or insolvency
proceedings, a Fund could incur delays and costs in selling the underlying
security or could suffer a loss of principal and interest if such Fund were
treated as an unsecured creditor and required to return the underlying security
to the seller's estate. A Fund will enter into repurchase agreements with
financial institutions or registered broker-dealers deemed creditworthy by BB&T
(or PNC Institutional Management Corporation ("PIMC")), the Prime Money Market
Fund's investment sub-adviser). Except as described in the Statement of
Additional Information, there is no aggregate limitation on the amount of a
Money Market Fund's total assets that may be invested in instruments which are
subject to repurchase agreements. Repurchase agreements are considered to be
loans by a Fund under the Investment Company Act of 1940.
REVERSE REPURCHASE AGREEMENTS
In accordance with the investment restrictions described below, each Money
Market Fund may borrow funds for temporary purposes by entering into reverse
repurchase agreements. A Money Market Fund will enter into reverse repurchase
agreements for the purpose of meeting liquidity needs. Pursuant to such
agreements, a Money Market Fund would sell portfolio securities to financial
institutions such as banks and broker-dealers, and agree to repurchase them at a
mutually agreed-upon date and price. Reverse repurchase agreements include the
risk that the market value of the securities sold by a Fund may decline below
the price at which a Money Market Fund is obligated to repurchase the
securities. Reverse repurchase agreements are considered to be borrowings by a
Money Market Fund under the Investment Company Act of 1940.
U.S. GOVERNMENT SECURITIES
The U.S. Treasury Fund may invest in U.S. Government Securities to the extent
that they are obligations issued or guaranteed by the U.S. Treasury.
Types of U.S. Government Securities in which the Prime Money Market Fund will
invest include obligations issued or guaranteed as to payment of principal and
interest by the full faith and credit of the U.S. Government, such as Treasury
bills, notes, bonds and certificates of indebtedness, and obligations issued or
guaranteed by the agencies or instrumentalities of the U.S. Government, but not
supported by such full faith and credit. Obligations of certain agencies and
instrumentalities of the U.S. Government, such as the Government National
Mortgage Association and the Export-Import Bank of the United States, are
supported by the full faith and credit of the U.S. Treasury; others, such as
those of the Federal National Mortgage Associa-
11
<PAGE> 14
tion, are supported by the right of the issuer to borrow from the Treasury;
others are supported by the discretionary authority of the U.S. Government to
purchase the agency's obligations; still others, such as those of the Federal
Farm Credit Banks, or the Federal Home Loan Mortgage Corporation, are supported
only by the credit of the instrumentality. No assurance can be given that the
U.S. Government would provide financial support to U.S. Government-sponsored
agencies or instrumentalities if it is not obligated to do so by law.
Although under normal market conditions, the Prime Money Market Fund does not
expect to do so, except in connection with repurchase agreements, it may invest
in U.S. Government Securities that are mortgage-backed pass-through securities.
Interest and principal payments (including prepayments) on the mortgages
underlying such securities are passed through to the holders of the security.
Prepayments occur when the borrower under an individual mortgage prepays the
remaining principal before the mortgage's scheduled maturity date. As a result
of the pass-through of prepayments of principal on the underlying securities,
mortgage-backed pass-through securities are often subject to more rapid
prepayments of principal than their stated maturity would indicate. Because the
prepayment characteristics of the underlying mortgages vary, it is not possible
to predict accurately the realized yield or average life of a particular issue
of pass-through certificates. Prepayments are important because of their effect
on the yield and price of the securities. During periods of declining interest
rates, such prepayments can be expected to accelerate, and the Funds would be
required to reinvest the proceeds at the lower interest rates then available. In
addition, prepayments of mortgages which underlie securities purchased at a
premium may not have been fully amortized at the time the obligation is repaid.
As a result of these principal prepayment features, mortgage-backed pass-through
securities are generally more volatile investments than other U.S. Government
Securities.
SECURITIES LENDING
In order to generate additional income, each Money Market Fund may, from time
to time, lend its portfolio securities to broker-dealers, banks or institutional
borrowers of securities. While the lending of securities may subject a Fund to
certain risks, such as delays or the inability to regain the securities in the
event the borrower was to default on its lending agreement or enter into
bankruptcy, the Fund will receive 100% collateral in the form of cash or U.S.
Government Securities. This collateral will be valued daily by BB&T (or PIMC
with respect to the Prime Money Market Fund) and should the market value of the
loaned securities increase, the borrower will furnish additional collateral to
the Money Market Fund. During the time portfolio securities are on loan, the
borrower will pay the Money Market Fund any dividends or interest paid on such
securities. Loans are subject to termination by a Money Market Fund or the
borrower at any time. While a Money Market Fund will not have the right to vote
securities on loan, the Funds intend to terminate the loan and regain the right
to vote if that is considered important with respect to the investment. The
Money Market Funds will only enter into loan arrangements with broker-dealers,
banks or other institutions which BB&T (or PIMC with respect to the Prime Money
Market Fund) has determined are creditworthy under guidelines established by the
Group's Board of Trustees. The U.S. Treasury Fund will restrict its securities
lending to 30% of its total assets and the Prime Money Market Fund will restrict
its securities lending to 33 1/3% of its total assets.
INVESTMENT RESTRICTIONS
The U.S. Treasury and Prime Money Market Funds are subject to a number of
investment restrictions that may be changed only by a vote of a majority of the
outstanding shares of the particular Fund (see "GENERAL INFORMATION--
Miscellaneous").
The U.S. Treasury Fund and Prime Money Market may not:
1. Purchase securities of any issuer, other than obligations issued or
guaranteed by the U.S. Government if, as a result, with respect to 75% of its
portfolio, more than 5% of the value of the Fund's total assets would be
invested in such issuer. In addition, although not a fundamental investment
restriction (and therefore subject to change without shareholder vote), to the
extent required by rules of the Securities and Exchange Commission the U.S.
Treasury Fund and the Prime Money Market Fund will apply this restriction to
100% of its portfolio, except that for the Prime Money Market Fund, 25% of the
value of its total assets
12
<PAGE> 15
may be invested in any one issuer for a period of up to three business days.
2. Borrow money or issue senior securities, except that a Money Market Fund
may borrow from banks or enter into reverse repurchase agreements for
temporary purposes in amounts up to 10% (one-third with respect to the Prime
Money Market Fund) of the value of its total assets at the time of such
borrowing; or mortgage, pledge, or hypothecate any assets, except in
connection with any such borrowing and in amounts not in excess of (one-third
of the value of the Fund's total assets at the time of such borrowing with
respect to the Prime Money Market Fund) the lesser of the dollar amounts
borrowed or 10% of the value of a Fund's total assets at the time of its
borrowing. The Prime Money Market Fund will not purchase securities while
borrowings (including reverse repurchase agreements) in excess of 5% of its
total assets are outstanding. The U.S. Treasury Fund will not purchase
securities while borrowings are outstanding.
3. Make loans, except that each of the Money Market Funds may purchase or
hold debt securities and lend portfolio securities in accordance with its
investment objective and policies and may enter into repurchase agreements.
The following is a non-fundamental investment restriction of the U.S. Treasury
and Prime Money Market Funds and therefore subject to change without shareholder
vote.
The U.S. Treasury and Prime Money Market Funds may not:
1. Invest more than 10% of its net assets in instruments which are not
readily marketable.
VALUATION OF SHARES
The net asset value of the U.S. Treasury Fund and the Prime Money Market Fund
is determined and the Shares are priced as of 12:00 p.m. and as of the close of
regular trading of the New York Stock Exchange (the "NYSE") (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 is open
for trading, and any other day (other than a day during 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 instruments that the
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,
Martin Luther King, Jr. Day, Presidents' Day, Good Friday, Memorial Day,
Independence Day, Labor Day, Thanksgiving Day and Christmas Day. Net asset value
per Share for purposes of pricing sales and redemptions is calculated by
determining the value of the class's proportional interest in the securities and
other assets of a Fund, less (i) such class's proportional share of general
liabilities and (ii) the liabilities allocable only to such class, and dividing
such amount by the number of relevant class Shares outstanding.
The assets in the U.S. Treasury Fund and the Prime Money Market Fund are
valued based upon the amortized cost method. This method values a security at
its cost on the date of purchase and thereafter assumes a constant amortization
to maturity of any discount or premium, regardless of the impact of fluctuating
interest rates on the market value of the security. If the Board of Trustees
determines that the extent of any deviation from a $1.00 price per share may
result in material dilution or other unfair results to Shareholders, it will
take such steps as it considers appropriate to eliminate or reduce these
consequences to the extent reasonably practicable. This may include selling
portfolio securities prior to maturity to realize capital gains or losses or to
shorten the average portfolio maturity of a Fund, adjusting or withholding
dividends, or utilizing a net asset value per share determined by using
available market quotations. Although the Group seeks to maintain the U.S.
Treasury and Prime Money Market Fund's net asset value per Share at $1.00, there
can be no assurance that net asset value will not vary.
For further information about the valuation of investments, see the Statement
of Additional Information.
13
<PAGE> 16
HOW TO PURCHASE AND REDEEM SHARES
DISTRIBUTOR
Shares are sold on a continuous basis by the Group's Distributor, BISYS Fund
Services. The principal office of the Distributor is 3435 Stelzer Road,
Columbus, Ohio 43219. If you wish to purchase Shares, contact the Group at (800)
228-1872.
PURCHASES OF TRUST SHARES
Trust Shares may be purchased through procedures established by the
Distributor in connection with the requirements of fiduciary, advisory, agency,
custodial and other similar accounts maintained by or on behalf of Customers of
Branch Banking & Trust Company or one of its affiliates (individually a "Bank"
and collectively the "Banks") or other financial service providers approved by
the Distributor.
Shares of the Group sold to the Banks acting in a fiduciary, advisory,
custodial, or other similar capacity on behalf of Customers will normally be
held of record by the Banks. With respect to Shares so sold, it is the
responsibility of the Banks to transmit purchase or redemption orders to the
Distributor and to deliver Federal funds for purchase on a timely basis.
Beneficial ownership of the Shares will be recorded by the Banks and reflected
in the account statements provided by the Banks to Customers.
Trust Shares of each of the Money Market Funds are sold at the net asset value
per Trust Share next determined after receipt by the Distributor of an order in
good form to purchase Trust Shares (see "VALUATION OF SHARES"). There is no
sales charge imposed by the Group in connection with the purchase of the Group's
Trust Shares.
There is no minimum or subsequent investment requirement for Trust Shares.
There is no limit on the amount of Trust Shares that may be purchased.
PURCHASES OF CLASS A SHARES
Class A Shares may be purchased through procedures established by the
Distributor in connection with the requirements of qualified accounts maintained
by or on behalf of certain persons ("Customers") by Participating Organizations
under the Group's Distribution and Shareholder Services Plan (see "MANAGEMENT OF
BB&T MUTUAL FUNDS GROUP--Distribution Plan").
Investors purchasing Shares of the U.S. Treasury Fund are generally required
to purchase Class A or Trust Shares, since such Shares are not subject to any
initial sales charge or contingent deferred sales charge. Investors purchasing
Shares of the Prime Money Market Fund may only purchase Class A or Trust Shares.
Shares of the Group sold to Participating Organizations acting in a fiduciary,
advisory, custodial, or other similar capacity on behalf of Customers will
normally be held of record by the Participating Organizations. With respect to
Shares so sold, it is the responsibility of the Participating Organization to
transmit purchase or redemption orders to the Distributor and to deliver federal
funds for purchase on a timely basis. Beneficial ownership of the Shares will be
recorded by the Participating Organizations and reflected in the account
statements provided by the Participating Organizations to Customers.
Investors may purchase Class A Shares by completing and signing an Account
Registration Form (found at the back of the prospectus) and mailing it, together
with a check (or other negotiable bank draft or money order) in at least the
minimum initial purchase amount, payable to the Group, to BB&T Mutual Funds
Group, P.O. Box 182533, Columbus, OH 43218-2533. Investors may obtain an Account
Registration Form and additional information regarding the Group by contacting
their local BB&T office. Subsequent purchases of Class A Shares may be made at
any time by mailing a check (or other negotiable bank draft or money order) to
the above address.
If an Account Registration Form has been previously received by the
Distributor, investors may also purchase Class A Shares by telephone. Telephone
orders may be placed by calling the Group at (800) 228-1872. Payment for Class A
Shares ordered by telephone may be made by check or by sending funds
electronically to the Group's transfer agent. To make payments electronically,
investors must call the Group at (800) 228-1872 to obtain instructions regarding
the bank account number into which the funds should be wired and other pertinent
information.
The minimum investment is $1,000 for the initial purchase of Class A Shares.
There is no minimum investment for subsequent purchases. The minimum initial
investment amount may be waived if
14
<PAGE> 17
purchases are made in connection with qualified retirement plans, automatic
investment plans or payroll deduction plans. There is no limit on the amount of
Class A Shares that may be purchased.
Every Shareholder will be mailed a confirmation of each new transaction in the
Shareholder's account. In the case of Class A Shares held of record by a
Participating Organization but beneficially owned by a Customer, confirmations
of purchases, exchanges and redemptions of Class A Shares by a Participating
Organization will be sent to the Customer by the Participating Organization.
Certificates representing Shares will not be issued.
Class A Shares of the U.S. Treasury Fund and the Prime Money Market Fund are
sold at net asset value without imposition of a sales charge.
From time to time dealers who receive dealer discounts and broker commissions
from the Distributor may reallow all or a portion of such dealer discounts and
broker commissions to other dealers or brokers.
The Distributor, at its expense, will also provide additional compensation to
dealers in connection with sales of Class A Shares of any of the Funds of the
Group. Compensation will also include financial assistance to dealers in
connection with conferences, sales or training programs for their employees,
seminars for the public, advertising campaigns regarding one or more of the
Funds, and/or other dealer-sponsored special events. In some instances, this
compensation will be made available only to dealers whose representatives have
sold a significant amount of such Shares. Compensation will include payment for
travel expenses, including lodging, incurred in connection with trips taken by
invited registered representatives and members of their families to locations
within or outside of the United States for meetings or seminars of a business
nature. Compensation will also include the following types of non-cash
compensation offered through sales contests: (1) vacation trips, including the
provision of travel arrangements and lodging at luxury resorts at exotic
locations, (2) tickets for entertainment events (such as concerts, cruises and
sporting events) and (3) merchandise (such as clothing, trophies, clocks and
pens). Dealers may not use sales of a Fund's Shares to qualify for this
compensation to the extent such may be prohibited by the laws of any state or
any self-regulatory agency, such as the National Association of Securities
Dealers, Inc. None of the aforementioned compensation is paid for by any Fund or
its shareholders.
AUTO INVEST PLAN
BB&T Mutual Funds Group Auto Invest Plan enables Shareholders to make regular
purchases of Class A Shares through automatic deduction from their bank
accounts. With Shareholder authorization, the Group's transfer agent will deduct
the amount specified (subject to the applicable minimums) from the Shareholder's
bank account and will automatically invest that amount in Class A Shares at the
public offering price on the date of such deduction. The required minimum
initial investment when opening an account using the Auto Invest Plan is $50 per
Fund; the minimum amount for subsequent automatic investments in a Fund is $50.
To participate in the Auto Invest Plan, Shareholders should complete the
appropriate section of the Account Registration Form or a supplemental sign-up
form that can be acquired by calling the Distributor. For a Shareholder to
change the Auto Invest instructions or to discontinue the feature, the request
must be made in writing to the BB&T Mutual Funds Group, P.O. Box 182533,
Columbus, OH 43218-2533. The Auto Invest Plan may be amended or terminated
without notice at any time by the Distributor.
BB&T MUTUAL FUNDS GROUP INDIVIDUAL RETIREMENT ACCOUNT ("IRA")
A BB&T Mutual Funds Group IRA enables individuals, even if they participate in
an employer-sponsored retirement plan, to establish their own retirement program
by purchasing Class A Shares for an IRA. BB&T Mutual Funds Group IRA
contributions may be tax-deductible and earnings are tax deferred. Under the Tax
Reform Act of 1986 and Taxpayer Relief Act of 1997, the tax deductibility of IRA
contributions is restricted or eliminated for individuals who participate in
certain employer pension plans and whose annual income exceeds certain limits.
Existing IRAs and future contributions up to the IRA maximums, whether
deductible or not, still earn income on a tax-deferred basis.
All BB&T Mutual Funds Group IRA distribution requests must be made in writing
to BISYS Fund Services. Any additional deposits to a BB&T Mutual Funds Group IRA
must distinguish the type and year of the contribution.
For more information on a BB&T Mutual Funds Group IRA call the Group at (800)
228-1872. Shareholders are advised to consult a tax adviser on BB&T Mutual Funds
Group IRA contribution and withdrawal requirements and restrictions.
15
<PAGE> 18
ADDITIONAL INFORMATION ABOUT PURCHASING SHARES
Purchases of Class A or Trust Shares will be effected only on a Business Day
(as defined in "VALUATION OF SHARES"). An order for the U.S. Treasury Fund and
the Prime Money Market Fund received prior to a Valuation Time on any Business
Day will be executed at the net asset value determined as of the next Valuation
Time on the date of receipt. An order for a Money Market Fund received after the
last Valuation Time on any Business Day will be executed at the net asset value
determined as of the next Valuation Time on the next Business Day.
An order to purchase Class A and Trust Shares of the Money Market Funds will
be deemed to have been received by the Distributor only when federal funds with
respect thereto are available to the Group's transfer agent for investment.
Federal funds are monies credited to a bank's account within a Federal Reserve
Bank. Payment for an order to purchase Shares of the Money Market Funds which is
transmitted by federal funds wire will be available the same day for investment
by the Group's transfer agent, if received prior to the last Valuation Time (see
"VALUATION OF SHARES"). It is strongly recommended that investors of substantial
amounts use federal funds to purchase Shares of the Money Market Funds.
Shares of the Money Market Funds purchased before 12:00 noon, Eastern Time,
begin earning dividends on the same Business Day. All Shares of the Money Market
Funds continue to earn dividends through the day before their redemption.
Depending upon the terms of a particular Customer account, a Participating
Organization or Bank may charge a Customer's account fees for services provided
in connection with investment in the Group. Information concerning this
Prospectus should be read in conjunction with any such information received from
the Participating Organizations or Banks.
The Group reserves the right to reject any order for the purchase of its Class
A or Trust Shares in whole or in part, including purchases made with foreign and
third party drafts or checks.
EXCHANGE PRIVILEGE
TRUST SHARES
Trust Shares of each Money Market Fund may be exchanged for Trust Shares of
the other Funds and the Funds of Funds, provided that the Shareholder making the
exchange is eligible on the date of the exchange to purchase Trust Shares (with
certain exceptions and subject to the terms and conditions described in this
prospectus). Trust Shares of each Money Market Fund may also be exchanged for
Class A Shares, if the Shareholder ceases to be eligible to purchase Trust
Shares. Trust Shares of each Money Market Fund may not be exchanged for Class B
Shares.
The Group does not impose a charge for processing exchanges of its Trust
Shares. However, the exchange of Trust Shares for Class A Shares will require
payment of the sales charge unless the sales charge is waived. Shareholders may
exchange their Trust Shares for Trust Shares of another Fund on the basis of the
relative net asset value of the Shares exchanged.
CLASS A
Class A Shares of each Money Market Fund may be exchanged for Class A Shares
of the other Funds, provided that the Shareholder making the exchange is
eligible on the date of the exchange to purchase Class A Shares (with certain
exceptions and subject to the terms and conditions described in this
prospectus). Class A Shares may not be exchanged for Class B Shares of the other
Funds, and may be exchanged for Trust Shares of the other Funds only if the
Shareholder becomes eligible to purchase Trust Shares. Only residents of North
Carolina may exchange the Class A Shares of the Funds for Class A Shares of the
North Carolina Fund. Only residents of South Carolina may exchange their Class A
Shares of the other Funds for Class A Shares of the South Carolina Fund.
Shareholders may exchange Class A Shares of the Money Market Funds, for which no
sales load was paid, for Class A Shares of a Fund which has a variable net asset
value (a "Variable NAV Fund"). Under such circumstances, the cost of the
acquired Class A Shares will be the net asset value per share plus the
appropriate sales load. If Class A Shares of the Money Market Funds were
acquired in a previous exchange involving Shares of a Variable NAV Fund, then
such Shares of the Money Market Funds may be exchanged for Shares of a Variable
NAV Fund without payment of any additional sales load within a twelve month
period. Under such circumstances, the Shareholder must notify the Distributor
that a sales load was originally paid. Depending upon the terms of a particular
Customer account, a Participating Organization may charge a
16
<PAGE> 19
fee with regard to such an exchange. Information about such charges will be
supplied by the Participating Organization.
ADDITIONAL INFORMATION ABOUT EXCHANGES
An exchange is considered a sale of Shares and will result in a capital gain
or loss for federal income tax purposes, which, in general, is calculated by
netting the Shareholder's tax cost (or "basis") in the Shares surrendered and
the value of the Shares received in the exchange. If a Shareholder exchanges
Class A Shares within 90 days of acquiring them and if a sales charge is waived
on the exchange, for purposes of measuring the capital gain or loss on the
exchange, the Shareholder's basis in the surrendered Shares is reduced by the
lesser of (i) the sales charge paid for the surrendered shares or (ii) the
amount of the sales charge that is waived on the exchange.
A Shareholder wishing to exchange Class A Shares purchased directly from the
Group may do so by contacting the Group at (800) 228-1872 or by providing
instructions to the Transfer Agent. If not selected on the Account Registration
form, the Shareholder will automatically receive Exchange privileges.
A Shareholder wishing to exchange Class A or Trust Shares purchased through a
Participating Organization or Bank may do so by contacting the Participating
Organization or Bank. If an exchange request in good order is received by the
Distributor or the Transfer Agent by 12:00 noon (Eastern Time) on any Business
Day, the exchange usually will occur on that day. Any Shareholder who wishes to
make an exchange should obtain and review a prospectus describing the Fund and
class of Shares which he or she wishes to acquire before making the exchange.
The exchange privilege may be exercised only in those states where the class of
Shares of such other Fund may legally be sold. The Group reserves the right to
change the terms and conditions of the exchange privilege discussed herein upon
sixty days' written notice.
The Group's exchange privilege is not intended to afford shareholders a way to
speculate on short-term movements in the market. Accordingly, in order to
prevent excessive use of the exchange privilege that may potentially disrupt the
management of the Funds and increase transaction costs, the Funds have
established a policy of limiting excessive exchange activity. Exchange activity
will not be deemed excessive if limited to four substantive exchange redemptions
from a Fund during any calendar year.
AUTO EXCHANGE PLAN
BB&T Mutual Funds Group Auto Exchange enables Shareholders to make regular,
automatic withdrawals from Class A Shares of a BB&T Mutual Fund and use those
proceeds to benefit from dollar-cost-averaging by automatically making purchases
of shares of another BB&T Mutual Fund. With shareholder authorization, the
Group's transfer agent will withdraw the amount specified (subject to the
applicable minimums) from the shareholder's account and will automatically
invest that amount in Class A Shares of the BB&T Mutual Fund designated by the
Shareholder at the public offering price on the date of such deduction. The Auto
Exchange feature can only be used within the same class of shares. In order to
participate in the Auto Exchange, Shareholders must have a minimum initial
purchase of $10,000 in their BB&T Mutual Fund account.
To participate in the Auto Exchange, Shareholders should complete the
appropriate section of the Account Registration Form, which can be acquired by
calling the Distributor. To change the Auto Exchange instructions or to
discontinue the feature, a Shareholder must send a written request to the BB&T
Mutual Funds Group, P.O. Box 182533, Columbus, OH 43218-2533. The Auto Exchange
may be amended or terminated without notice at any time by the Distributor.
REDEMPTION OF SHARES
Shareholders may redeem their Class A and Trust Shares without charge on any
day that net asset value is calculated (see "VALUATION OF SHARES") and Shares
may ordinarily be redeemed by mail or by telephone. However, all or part of a
Customer's Shares may be required to be redeemed in accordance with instructions
and limitations pertaining to his or her account held by a Participating
Organization or Bank. For example, if a Customer has agreed to maintain a
minimum balance in his or her account, and the balance in that account falls
below that minimum, the Customer may be obliged to redeem, or the Participating
Organization or Bank may redeem for and on behalf of the Customer, all or part
of the Customer's Shares to the extent necessary to maintain the required
minimum balance.
17
<PAGE> 20
REDEMPTION BY MAIL
A written request for redemption must be received by the Group in order to
constitute a valid tender for redemption. The signature on the written request
must be guaranteed by a bank, broker, dealer, credit union, securities exchange,
securities association, clearing agency or savings association, as those terms
are defined in Rule 17Ad-15 under the Securities Exchange Act of 1934 if (a) a
redemption check is to be payable to anyone other than the Shareholder(s) of
record or (b) a redemption check is to be mailed to the Shareholder(s) at an
address other than the address of record or other than to a commercial bank
designated on the Account Registration Form of such Shareholder(s). The
Distributor reserves the right to reject any signature guarantee if (1) it has
reason to believe that the signature is not genuine, (2) it has reason to
believe that the transaction would otherwise be improper, or (3) the guarantor
institution is a broker or dealer that is neither a member of a clearing
corporation nor maintains net capital of at least $100,000. Proceeds may be
mailed to the address of record or sent electronically or mailed to a previously
designated bank account without a signature guarantee. See "Redemption by
Telephone" for further discussion on sending proceeds to your bank account.
REDEMPTION BY TELEPHONE
Shares may be redeemed by telephone if the Shareholder selected that option on
the Account Registration Form. A Shareholder may have the proceeds mailed to the
address of record or sent electronically or mailed directly to a domestic
commercial bank account previously designated by the Shareholder on the Account
Registration Form. Under most circumstances, such payments will be transmitted
on the next Business Day following receipt of a valid request for redemption.
Such electronic redemption requests may be made by the Shareholder by telephone
to the Transfer Agent. The Transfer Agent may reduce the amount of a wire
redemption payment by its then-current wire redemption charge. Such charge is
currently being waived. There is no charge for having payment of redemption
requests mailed or sent via the Automated Clearing House to a designated bank
account. For telephone redemptions, call the Group at (800) 228-1872. If not
selected on the Account Registration form, the Shareholder will automatically
receive telephone redemption privileges. None of the Distributor, the Group's
transfer agent, BB&T or the Group will be liable for any losses, damages,
expense or cost arising out of any telephone transaction (including exchanges
and redemptions) effected in accordance with the Group's telephone transaction
procedures, upon instructions reasonably believed to be genuine. The Group will
employ procedures designed to provide reasonable assurance that instructions
communicated by telephone are genuine; if these procedures are not followed, the
Group may be liable for any losses due to unauthorized or fraudulent
instructions. These procedures include recording all phone conversations,
sending confirmations to Shareholders within 72 hours of the telephone
transaction, verifying the account name and a shareholder's account number or
tax identification number and sending redemption proceeds only to the address of
record or to a previously authorized bank account. If, due to temporary adverse
conditions, investors are unable to effect telephone transactions, Shareholders
may also mail the redemption request to the Group.
CHECK WRITING SERVICE
Shareholders of Class A Shares of the U.S. Treasury Fund and the Prime Money
Market Fund may write checks on Fund accounts for $100 or more. Once a
Shareholder has signed and returned a signature card, he or she will receive a
supply of checks. A check may be made payable to any person, and the
Shareholder's account will continue to earn dividends until the check clears.
Because of the difficulty of determining in advance the exact value of a Fund
account, a Shareholder may not use a check to close his or her account. The
Shareholder's account may be charged a fee for stopping payment of a check upon
the Shareholder's request or if the check cannot be honored because of
insufficient funds or other valid reasons.
AUTO WITHDRAWAL PLAN
BB&T Mutual Funds Group Auto Withdrawal Plan enables Shareholders to make
regular redemptions of Class A Shares of a Fund. With Shareholder authorization,
the Group's transfer agent will automatically redeem Class A Shares at the net
asset value of the applicable Fund on the dates of withdrawal and have the
amount specified transferred according to the instructions of the Shareholder.
Shareholders participating in the Auto Withdrawal Plan must maintain a minimum
account balance of $1,000 in the Fund from which Class A Shares are being
redeemed. Purchase of additional Class A Shares concurrent with with-
18
<PAGE> 21
drawals may be disadvantageous to certain Shareholders because of tax
liabilities.
To participate in the Auto Withdrawal Plan, Shareholders should complete a
supplemental sign-up form that can be acquired by calling the Distributor. For a
Shareholder to change the Auto Withdrawal instructions or to discontinue the
feature, the request must be made in writing to the BB&T Mutual Funds Group,
P.O. Box 182533, Columbus, OH 43218-2533. The Auto Withdrawal Plan may be
amended or terminated without notice at any time by the Distributor.
PAYMENTS TO SHAREHOLDERS
Redemption orders are effected at the net asset value per Share next
determined after the Shares are properly tendered for redemption, as described
above. Payment to Shareholders for Shares redeemed will be made within seven
days after receipt by the Distributor of the request for redemption. However, to
the greatest extent possible, the U.S. Treasury Fund and the Prime Money Market
Fund will attempt to honor requests from its Shareholders for same day payment
upon redemption of Shares if the request for redemption is received by the
Transfer Agent before 12:00 noon Eastern Time, on a Business Day or, if the
request for redemption is received after 12:00 noon Eastern Time, to honor
requests for payment on the next Business Day, unless it would be
disadvantageous to a Fund or its Shareholders to sell or liquidate portfolio
securities in an amount sufficient to satisfy requests for payments in that
manner.
At various times, a Fund may be requested to redeem Shares for which it has
not yet received good payment. In such circumstances, the Group may delay the
forwarding of proceeds only until payment has been collected for the purchase of
such Shares, which may take up to 10 days or more. To avoid delay in payment
upon redemption shortly after purchasing Shares, investors should purchase
Shares by certified check or by wire transfer. The Group intends to pay cash for
all Shares redeemed, but under abnormal conditions which may make payment in
cash unwise, the Group may make payment wholly or partly in portfolio securities
at their then market value equal to the redemption price. In such cases, an
investor may incur brokerage costs in converting such securities to cash.
Due to the relatively high cost of handling small investments, the Group
reserves the right to redeem, at net asset value, the Class A Shares of any
Shareholder if, because of redemptions of Shares by or on behalf of the
Shareholder, the account of such Shareholder in a Fund has a value of less than
$1,000. Accordingly, an investor purchasing Class A Shares of a Fund in only the
minimum investment amount may be subject to such involuntary redemption if he or
she thereafter redeems some of his or her Shares. Before the Group exercises its
right to redeem such Shares and sends proceeds to the Shareholder, the
Shareholder will be given notice that the value of the Class A Shares of a Fund
in his or her account is less than the minimum amount and will be allowed 60
days to make an additional investment in an amount which will increase the value
of the account to at least $1,000.
See "ADDITIONAL PURCHASE AND REDEMPTION INFORMATION" in the Statement of
Additional Information for examples of when the Group may suspend the right of
redemption or redeem Shares involuntarily if it appears appropriate to do so in
light of the Group's responsibilities under the Investment Company Act of 1940.
DIVIDENDS AND TAXES
Each Money Market Fund will be treated as a separate entity for federal income
tax purposes. Each Money Market Fund intends to qualify for treatment as a
"regulated investment company" under the Internal Revenue Code of 1986, as
amended (the "Code"). If so qualified, a Money Market Fund will not have to pay
federal taxes on amounts it distributes to Shareholders. Regulated investment
companies are subject to a federal excise tax if they do not distribute
substantially all of their income on a timely basis. Each Money Market Fund
intends to avoid paying federal income and excise taxes by timely distributing
substantially all its net investment income and net realized capital gains, if
any.
Dividends received by a Shareholder of a Money Market Fund that are derived
from such Fund's investments in U.S. Government Securities may not be entitled
to the exemption from state and local income taxes that would be available if
the Shareholder had purchased U.S. Government Securities directly. Shareholders
are advised to consult their tax adviser concerning the application of state and
19
<PAGE> 22
local taxes to distributions received from a Money Market Fund.
Shareholders will be advised at least annually as to the amount and federal
income tax character of distributions made during the year.
The net investment income of the Shares of the Money Market Funds is declared
daily as a dividend to Shareholders at the close of business on the day of
declaration. Dividends will generally be paid monthly. The Money Market Funds do
not expect to realize any long-term capital gains and, therefore, do not foresee
paying any capital gains dividends.
As a result of the Distribution and Shareholder Services Plan fee applicable
to Class A and Class B Shares, the amount of dividends payable with respect to
the Trust Shares will exceed dividends on Class A Shares, and the amount of
dividends on Class A Shares will exceed the dividends on Class B Shares.
A Shareholder will automatically receive all income dividends and capital gain
distributions in additional full and fractional Shares at net asset value as of
the date of declaration unless the Shareholder elects to receive such dividends
or distributions in cash. Such election, or any revocation thereof, must be made
in writing to the BB&T Mutual Funds Group, P.O. Box 182533, Columbus, OH
43218-2533, and will become effective with respect to dividends and
distributions having record dates after its receipt by the transfer agent.
Reinvested dividends receive the same tax treatment as dividends paid in cash.
Dividends are paid in cash not later than seven Business Days after a
Shareholder's complete redemption of his or her Shares. If you elect to receive
distributions in cash and checks (1) are returned and marked as "undeliverable"
or (2) remain uncashed for six months, your cash election will be changed
automatically and your future dividend and capital gains distributions will be
reinvested in the Fund at the per share net asset value determined as of the
date of payment of the distribution. In addition, any undeliverable checks or
checks that remain uncashed for six months will be canceled and will be
reinvested in the Fund at the per share net asset value determined as of the
date of cancellation.
Dividends are generally taxable in the taxable year received. However,
dividends declared in October, November or December to Shareholders of record
during such a month and paid during the following January are treated for tax
purposes as if they were received by each Shareholder on December 31 of the year
in which the dividends were declared.
Dividends will generally be taxable to a Shareholder as ordinary income to the
extent of the Shareholder's ratable share of the net investment income of a
Fund. Because all of the net investment income of the Money Market Funds is
expected to be interest income, it is anticipated that no distributions from
such Funds will qualify for the dividends received deduction. Shareholders who
are not subject to tax on their income generally will not have to pay federal
income tax on amounts distributed to them.
Dividends that are derived from interest on a Fund's investments in U.S.
Government Securities and that are received by a Shareholder who is a North
Carolina or South Carolina resident are currently eligible for exemption from
those states' income taxes. Such dividends may be eligible for exemption from
the state and local taxes of other jurisdictions as well, although state and
local tax authorities may not agree with this view. However, in North Carolina
and South Carolina, as well as in other states, distribution of income derived
from repurchase agreements and securities lending transactions generally will
not qualify for exemption from state and local income taxes.
The foregoing is a summary of certain federal, state and local income tax
consequences of investing in a Money Market Fund. Shareholders should consult
their own tax advisers concerning the tax consequences of an investment in a
Money Market Fund with specific reference to their own tax situation.
MANAGEMENT OF BB&T MUTUAL FUNDS GROUP
TRUSTEES OF THE GROUP
Overall responsibility for management of the Group rests with the Board of
Trustees of the Group, who are elected by the Shareholders of the Group. There
are currently five Trustees, two of whom are "interested persons" of the Group
within the meaning of that term under the Investment Company Act of 1940. The
Trustees, in turn, elect the officers of the Group to supervise actively its
day-to-day operations. The Trustees of the Group,
20
<PAGE> 23
their current addresses, and principal occupations during the past five years
are as follows:
<TABLE>
<CAPTION>
POSITION(S) HELD PRINCIPAL OCCUPATION DURING THE PAST 5
NAME AND ADDRESS WITH THE GROUP YEARS
- ---------------------------- ---------------------- ----------------------------------------
<S> <C> <C>
*Walter B. Grimm Chairman of the Board From June, 1992 to present, employee of
3435 Stelzer Road BISYS Fund Services; from 1987 to 1992,
Columbus, OH 43219 President of Leigh
Consulting/Investments (investment firm)
William E. Graham, Jr. Trustee From January 1994 to present, Counsel,
1 Hannover Square Hunton & Williams; from 1985 to
Fayetteville Street Mall December, 1993, Vice Chairman, Carolina
P.O. Box 109 Power & Light Company
Raleigh, NC 27602
Thomas W. Lambeth Trustee From 1978 to present, Executive
101 Reynolda Village Director, Z. Smith Reynolds Foundation
Winston-Salem, NC 27106
*W. Ray Long Trustee Executive Vice President, Branch Banking
434 Fayetteville Street Mall and Trust Company
Raleigh, NC 27601
Robert W. Stewart Trustee Retired; Chairman and Chief Executive
201 Huntington Road Officer of Engineered Custom Plastics
Greenville, SC 29615 Corporation from 1969 to 1990
</TABLE>
- ---------------
* Indicates an "interested person" of the Group as defined in the Investment
Company Act of 1940.
The Trustees receive fees and are reimbursed for expenses in connection with
each meeting of the Board of Trustees they attend. However, no officer or
employee of BISYS Fund Services, BISYS Fund Services Ohio, Inc. or Branch
Banking and Trust Company receives any compensation from the Group for acting as
a Trustee. The officers of the Group (see the Statement of Additional
Information) receive no compensation directly from the Group for performing the
duties of their offices. BISYS Fund Services receives fees from the Group for
acting as Administrator and BISYS Fund Services Ohio, Inc. receives fees from
the Group for acting as Transfer Agent and for providing fund accounting
services to the Group. Walter B. Grimm is an employee of BISYS Fund Services and
W. Ray Long is an employee of the investment adviser, BB&T.
INVESTMENT ADVISER
BB&T is the investment adviser of the U.S. Treasury and Prime Money Market
Funds. BB&T is the oldest bank in North Carolina and is the principal bank
affiliate of BB&T Corporation, a bank holding company that is a North Carolina
corporation, headquartered in Winston-Salem, North Carolina. As of December 31,
1996, BB&T Corporation had assets of approximately $25 billion. Through its
subsidiaries, BB&T Corporation operates over 425 banking offices in North
Carolina, South Carolina and Virginia, providing a broad range of financial
services to individuals and businesses.
In addition to general commercial, mortgage and retail banking services, BB&T
also provides trust, investment, insurance and travel services. BB&T has
provided investment management services through its Trust and Investment
Services Division since 1912. While BB&T has not provided investment advisory
services to registered investment companies other than the Group, it has
experience in managing collective investment funds with investment portfolios
and objectives comparable to those of the Group. BB&T employs an experienced
staff of professional portfolio managers and traders who use a disciplined
investment process that focuses on maximization of risk-adjusted investment
returns. BB&T has managed common and collective investment funds for its
fiduciary accounts for more than 15 years and currently manages assets of more
than $4.5 billion.
Subject to the general supervision of the Group's Board of Trustees and in
accordance with the investment objectives and restrictions of a Fund,
21
<PAGE> 24
BB&T manages the U.S. Treasury Fund, makes decisions with respect to, and places
orders for, all purchases and sales of its investment securities, and maintains
its records relating to such purchases and sales.
Under an investment advisory agreement between the Group and BB&T, the fee
payable to BB&T by the Money Market Funds for investment advisory services is
the lesser of: (a) a fee computed daily and paid monthly at the annual rate of
forty one hundredths of one percent (.40%) of each Money Market Fund's average
daily net assets; or (b) such fee as may from time to time be agreed upon in
writing by the Group and BB&T. A fee agreed to in writing from time to time by
the Group and BB&T 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 the fund during the period when such lower fee is
in effect.
For the fiscal year ended September 30, 1997, the U.S. Treasury Fund paid
investment advisory fees of .40% of its average daily net assets. The Prime
Money Market Fund had not commenced operations as of September 30, 1997.
INVESTMENT SUB-ADVISER
PNC Institutional Management Corporation ("PIMC") serves as the Investment
Sub-Adviser to the Prime Money Market Fund pursuant to a Sub-Advisory Agreement
with BB&T. Under the Sub-Advisory Agreement, PIMC manages the Fund, selects
investments and places all orders for purchases and sales of the Prime Money
Market Fund's securities, subject to the general supervision of the Group's
Board of Trustees and BB&T and in accordance with the Prime Money Market Fund's
investment objective, policies and restrictions.
PIMC is a wholly-owned subsidiary of PNC Asset Management Group, Inc.
("PAMG"). PAMG was organized in 1994 to perform advisory services for investment
companies, and has its principal offices at 1600 Market Street, 29th Floor,
Philadelphia, Pennsylvania 19103. PAMG is an indirect wholly-owned subsidiary of
PNC Bank Corp., a multi-bank holding company. PIMC's principal business address
is 400 Bellevue Parkway, 4th Floor, Wilmington, Delaware 19809.
As sub-adviser, PIMC is responsible for the day-to-day management of the Prime
Money Market Fund, and generally makes all purchase and sale investment
decisions for the Fund. PIMC also provides research and credit analysis.
Portfolio transactions for the Fund may be directed through broker/ dealers who
sell Fund shares, subject to the requirements of best execution.
For its services and expenses incurred under the Sub-Advisory Agreement, PIMC
is entitled to a fee, payable by BB&T. The fee is computed daily and paid
monthly at the annual rate of nine one-hundredths of one percent (.09%) or such
lower fee as may be agreed upon in writing by BB&T and PIMC.
ADMINISTRATOR AND DISTRIBUTOR
BISYS Fund Services is the administrator for each Fund and also acts as the
Group's principal underwriter and distributor (the "Administrator" or the
"Distributor," as the context indicates) under agreements approved by the
Group's Board of Trustees. BISYS Fund Services is wholly owned by The BISYS
Group, Inc., 150 Clove Road, Little Falls, New Jersey 07424, a publicly owned
company engaged in information processing, loan servicing and 401(k)
administration and recordkeeping services to and through banking and other
financial organizations.
The Administrator generally assists in all aspects of a Fund's administration
and operation. Under a management and administration agreement between the Group
and the Administrator, the fee payable by a Fund to the Administrator for
management administration services is the lesser of (a) a fee computed at the
annual rate of twenty one-hundredths of one percent (.20%) of a 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 the Fund during the
period when such lower fee is in effect. For the fiscal year ended September 30,
1997, the U.S. Treasury Fund paid .20% of its average daily net assets. The
Prime Money Market Fund had not commenced operations as of September 30, 1997.
EXPENSES
BB&T and the Administrator each bear all expenses in connection with the
performance of their services as investment adviser and administrator,
22
<PAGE> 25
respectively, other than the cost of securities (including brokerage
commissions, if any) purchased for a Fund. Each Fund bears the following
expenses relating to its operations: taxes, interest, any brokerage fees and
commissions, fees and travel expenses of the Trustees of the Group, Securities
and Exchange Commission fees, state securities qualification and renewal fees,
costs of preparing and printing prospectuses for regulatory purposes and for
distribution to current Shareholders, outside auditing and legal expenses,
amortized organizational expenses, advisory and administration fees, fees and
out-of-pocket expenses of the custodian and the transfer agent, fees and
out-of-pocket expenses for fund accounting services, expenses incurred for
pricing securities owned by a Fund, certain insurance premiums, costs of
maintenance of a Fund's existence, costs and expenses of Shareholders' and
Trustees' reports and meetings, and any extraordinary expenses incurred in its
operation. As a general matter, expenses are allocated to the Class A, Class B
and Trust Class of a Fund on the basis of the relative net asset value of each
class. At present, the only expenses that will be borne solely by Class A and
Class B Shares, other than in accordance with the relative net asset value of
the class, are expenses under the Group's Distribution and Shareholder Services
Plan ("Distribution Plan") which relate only to the Class A and Class B Shares.
For the fiscal year ended September 30, 1997, total operating expenses for the
U.S. Treasury Fund as a percentage of average daily net assets was .75% for
Trust Shares and .95% for Class A Shares.
The organizational expenses of the Prime Money Market Fund have been
capitalized and are being amortized in the first two years of the Fund's
operations. Such amortization will reduce the amount of income available for
payment as dividends.
BANKING LAWS
BB&T and PIMC each believes that it possesses the legal authority to perform
the investment advisory and sub-advisory services for the Group contemplated by
its investment advisory agreement with the Group and investment sub-advisory
agreement with BB&T and described in this Prospectus without violation of
applicable banking laws and regulations, and has so represented to the Group.
Future changes in federal or state statutes and regulations relating to
permissible activities of banks or bank holding companies and their subsidiaries
and affiliates as well as further judicial or administrative decisions or
interpretations of present and future statutes and regulations could change the
manner in which BB&T and PIMC could continue to perform such services for the
Group. See "MANAGEMENT OF BB&T MUTUAL FUNDS GROUP--Glass Steagall Act" in the
Statement of Additional Information for further discussion of applicable banking
laws and regulations.
DISTRIBUTION PLAN
The Group's Class A and Class B Shares are sold on a continuous basis by the
Distributor. Under the Group's Distribution and Shareholder Services Plan (the
"Distribution Plan"), a Fund will pay a monthly distribution fee to the
Distributor as compensation for its services in connection with the Distribution
Plan at an annual rate equal to fifty one-hundredths of one percent (.50%) of
the average daily net assets of Class A Shares of each Fund and one percent
(1.00%) of the average daily net assets of Class B Shares of each Fund. The
Distributor may periodically waive all or a portion of the fee with respect to a
Fund in order to increase the net investment income of the Fund available for
distribution as dividends. The Distributor has agreed with the Group to reduce
its fee under the Distribution Plan to an amount not to exceed twenty-five
one-hundredths of one percent (.25%) of the average daily net assets of Class A
Shares of each Fund. The Distributor may use the distribution fee to provide
distribution assistance with respect to a Fund's Class A and Class B Shares or
to provide shareholder services to the holders of such Shares. The Distributor
may also use the distribution fee (i) to pay financial institutions and
intermediaries (such as insurance companies and investment counselors but not
including banks), broker-dealers, and the Distributor's affiliates and
subsidiaries compensation for services or reimbursement of expenses incurred in
connection with distribution assistance or (ii) to pay banks, other financial
institutions and intermediaries, broker-dealers, and the Distributor's
affiliates and subsidiaries compensation for services or reimbursement of
expenses incurred in connection with the provision of shareholder services. All
payments by the Distributor for distribution assistance or shareholder services
under the Distribution Plan will be made pursuant to an agreement (a "Servicing
Agreement") between the Distributor and such bank, other financial institution
or inter-
23
<PAGE> 26
mediary, broker-dealer, or affiliate or subsidiary of the Distributor
(hereinafter referred to individually as "Participating Organizations"). A
Servicing Agreement will relate to the provision of distribution assistance in
connection with the distribution of a Fund's Class A and Class B Shares to the
Participating Organization's customers on whose behalf the investment in such
Shares is made and/or to the provision of shareholder services to the
Participating Organization's customers owning a Fund's Class A and Class B
Shares. Under the Distribution Plan, a Participating Organization may include
Southern National Corporation or a subsidiary bank or nonbank affiliates, or the
subsidiaries or affiliates of those banks. A Servicing Agreement entered into
with a bank (or any of its subsidiaries or affiliates) will contain a
representation that the bank (or subsidiary or affiliate) believes that it
possesses the legal authority to perform the services contemplated by the
Servicing Agreement without violation of applicable banking laws (including the
Glass-Steagall Act) and regulations.
The distribution fee will be payable without regard to whether the amount of
the fee is more or less than the actual expenses incurred in a particular year
by the Distributor in connection with distribution assistance or shareholder
services rendered by the Distributor itself or incurred by the Distributor
pursuant to the Servicing Agreements entered into under the Distribution Plan.
If the amount of the distribution fee is greater than the Distributor's actual
expenses incurred in a particular year (and the Distributor does not waive that
portion of the distribution fee), the Distributor will realize a profit in that
year from the distribution fee. If the amount of the distribution fee is less
than the Distributor's actual expenses incurred in a particular year, the
Distributor will realize a loss in that year under the Distribution Plan and
will not recover from a Fund the excess of expenses for the year over the
distribution fee, unless actual expenses incurred in a later year in which the
Distribution Plan remains in effect were less than the distribution fee paid in
that later year.
The Distribution Plan also contains a so-called "defensive" provision
applicable to all classes of Shares. Under this defensive provision to the
extent that any payment made to the Administrator, including payment of
administration fees, should be deemed to be indirect financing of any activity
primarily intended to result in the sale of Shares issued by the Group's Funds
within the context of Rule 12b-1 under the 1940 Act, such payment shall be
deemed to be authorized by the Distribution Plan.
The Glass-Steagall Act and other applicable laws prohibit banks generally from
engaging in the business of underwriting securities, but in general do not
prohibit banks from purchasing securities as agent for and upon the order of
customers. Accordingly, the Group will require banks acting as Participating
Organizations to provide only those services which, in the banks' opinion, are
consistent with the then current legal requirements. It is possible, however,
that future legislative, judicial or administrative action affecting the
securities activities of banks will cause the Group to alter or discontinue its
arrangements with banks that act as Participating Organizations, or change its
method of operations. It is not anticipated, however, that any change in a
Fund's method of operations would affect its net asset value per share or result
in financial loss to any customer.
GENERAL INFORMATION
DESCRIPTION OF THE GROUP AND ITS SHARES
The Group was organized as a Massachusetts business trust on October 1, 1987
and commenced active operation on September 24, 1992. The Group has an unlimited
number of authorized Shares of beneficial interest which may, without
Shareholder approval, be divided into an unlimited number of series of such
Shares, and which are presently divided into fourteen series of Shares, one for
each of the following Funds: 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
South Carolina Intermediate Tax-Free Fund, the BB&T U.S. Treasury Money Market
Fund, the BB&T Balanced Fund, the BB&T Small Company Growth Fund, the BB&T
International Equity Fund, the BB&T Large Company Growth Fund, the BB&T Prime
Money Market 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.
Each Fund is authorized to issue three classes of shares: Class A, Class B and
Trust
24
<PAGE> 27
Shares. Currently, the Prime Money Market Fund, the Short-Intermediate Fund, the
North Carolina Fund, the South Carolina Fund and the Funds of Funds are not
offering Class B Shares. Each Share represents an equal proportionate interest
in a Fund with other Shares of the same series and class, and is entitled to
such dividends and distributions out of the income earned on the assets
belonging to that Fund as are declared at the discretion of the Trustees (see
"Miscellaneous" below).
Shareholders are entitled to one vote per Share (with proportional voting for
fractional Shares) on such matters as Shareholders are entitled to vote.
Shareholders vote in the aggregate and not by series or class on all matters
except (i) when required by the Investment Company Act of 1940, 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, 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 classes.
As used in this Prospectus and in the Statement of Additional Information, a
"vote of a majority of the outstanding Shares" of the Group or a particular Fund
means the affirmative vote, at a meeting of Shareholders duly called, of the
lesser of (a) 67% or more of the votes of Shareholders of the Group or such Fund
present at such meeting at which the holders of more than 50% of the votes
attributable to the Shareholders of record of the Group or such Fund are
represented in person or by proxy, or (b) the holders of more than 50% of the
outstanding votes of Shareholders of the Group or such Fund.
Overall responsibility for the management of the Group is vested in the Board
of Trustees. See "MANAGEMENT OF BB&T MUTUAL FUNDS GROUP--Trustees of the Group."
Individual Trustees are elected by the Shareholders and may be removed by the
Board of Trustees or Shareholders at a meeting held for such purpose in
accordance with the provisions of the Declaration of Trust and the By-laws of
the Group and Massachusetts law. See "ADDITIONAL INFORMATION--Miscellaneous" in
the Statement of Additional Information for further information.
Although the Group is not required to hold annual meetings of Shareholders,
Shareholders holding at least 10% of the Group's outstanding Shares have the
right to call a meeting to elect or remove one or more of the Trustees of the
Group. Shareholder inquiries should be directed to the Secretary of the Group at
3435 Stelzer Road, Columbus, Ohio 43219.
As of January 22, 1998, BB&T owned of record substantially all of the Trust
Shares of the U.S. Treasury Fund and the Prime Money Market Fund and held voting
or investment power with respect to more than 95% of the Trust Shares of each of
the U.S. Treasury Fund and the Prime Money Market Fund. BB&T may therefore be
deemed to be a "controlling person" of the Trust Shares of the U.S. Treasury
Fund and the Prime Money Market Fund within the meaning of the Investment
Company Act of 1940. As of January 22, 1998, National Financial Services Corp.,
P.O. Box 3752, Church Street Station, New York, NY 10008-3752 is the record
owner with respect to 66.42% of the Class A Shares of the U.S. Treasury Fund and
may therefore be deemed to be controlling person of the Class A Shares of the
Fund within the meaning of the Investment Company Act of 1940.
CUSTODIAN, TRANSFER AGENT AND FUND ACCOUNTANT
Star Bank N.A., 425 Walnut Street, Cincinnati, Ohio 45201, serves as Custodian
for the Money Market Funds.
BISYS Fund Services Ohio, Inc. serves as transfer agent for and provides fund
accounting services to the Group.
PERFORMANCE INFORMATION
From time to time, the U.S. Treasury and Prime Money Market Fund's annualized
"yield" and "effective yield" and total return for Class A and Trust Class
Shares may be presented in advertisements, sales literature and Shareholder
reports. The "yield" of each Money Market Fund is based upon the income earned
by the Fund over a seven-day period and then annualized, i.e. the income earned
in the period is assumed to be earned every seven days over a 52-week period and
is stated as a percentage of the investment. The "effective yield" of a Money
Market Fund is calculated similarly but when annualized, the income earned by
the investment is assumed to be reinvested in Shares of the Group and thus
compounded in the course of a 52-week period. The effective yield will be higher
than the yield because of the compounding effect of this assumed reinvestment.
Total return is calculated for the past year and the period since the
establishment of each Money Mar-
25
<PAGE> 28
ket Fund. Average annual total return is measured by comparing the value of an
investment in a Fund at the beginning of the relevant period to the redemption
value of the investment at the end of the period (assuming immediate
reinvestment of any dividends or capital gains distributions). Aggregate total
return is calculated similarly to average annual total return except that the
return figure is aggregated over the relevant period instead of annualized.
Yield, effective yield and total return will be calculated separately for each
Class of Shares. Because Class A Shares are subject to lower Distribution Plan
fees than Class B Shares, the yield and total return for Class A Shares will be
higher than that of the Class B Shares for the same period. Because Trust Shares
are not subject to Distribution Plan fees, the yield and total return for Trust
Shares will be higher than that of the Class A and Class B Shares for the same
period.
Investors may also judge the performance of a Money Market Fund by comparing
its performance to the performance of other mutual funds with comparable
investment objectives and policies through various mutual fund or market indices
and data such as that provided by Lipper Analytical Services, Inc.,
IBC/Donoghue's Money Fund Report and Ibbotson Associates, Inc. References may
also be made to indices or data published in Money Magazine, Forbes, Barron's,
The Wall Street Journal, The New York Times, Business Week, American Banker,
Fortune, Institutional Investor, Ibbotson Associates, Inc., Morningstar, Inc.,
CDA/ Weisenberger, Pension and Investments, U.S.A. Today and local newspapers.
In addition to performance information, general information about the Funds that
appears in a publication such as those mentioned above may be included in
advertisements and in reports to Shareholders.
Information about the performance of a Money Market Fund is based on a Fund's
record up to a certain date and is not intended to indicate future performance.
Yield and total return of any investment are generally functions of portfolio
quality and maturity, type of investments and operating expenses. Yields and
total returns of a Money Market Fund will fluctuate. Any fees charged by the
Participating Organizations to their customers in connection with investment in
a Fund are not reflected in the Group's performance information.
Further information about the performance of each Fund of the Group is
contained in the Group's annual report to Shareholders, which may be obtained
without charge by calling (800) 228-1872.
MISCELLANEOUS
Shareholders will receive unaudited semi-annual reports describing the
investment operations of each of the Funds and annual financial statements
audited by independent public accountants.
Inquiries regarding the Group may be directed in writing to the Group at the
following address: the BB&T Mutual Funds Group, P.O. Box 182533, Columbus, OH
43218-2533 or by calling toll free (800) 228-1872.
26
<PAGE> 29
[THIS PAGE INTENTIONALLY LEFT BLANK]
<PAGE> 30
[THIS PAGE INTENTIONALLY LEFT BLANK]
<PAGE> 31
[THIS PAGE INTENTIONALLY LEFT BLANK]
<PAGE> 32
INVESTMENT ADVISER
BRANCH BANKING AND TRUST COMPANY
434 FAYETTEVILLE STREET MALL
RALEIGH, NC 27601
INVESTMENT SUB-ADVISER
(PRIME MONEY MARKET FUND ONLY)
PNC INSTITUTIONAL MANAGEMENT CORPORATION
400 BELLEVUE PARKWAY
WILMINGTON, DE 19809
ADMINISTRATOR AND DISTRIBUTOR
BISYS FUND SERVICES
3435 STELZER ROAD
COLUMBUS, OH 43219
LEGAL COUNSEL
ROPES & GRAY
ONE FRANKLIN SQUARE
1301 K STREET, N.W.
SUITE 800 EAST
WASHINGTON, DC 20005
TRANSFER AGENT
BISYS FUND SERVICES OHIO, INC.
3435 STELZER ROAD
COLUMBUS, OH 43219
AUDITORS
KPMG PEAT MARWICK LLP
TWO NATIONWIDE PLAZA, SUITE 1600
COLUMBUS, OH 43215
<PAGE> 33
BB&T MUTUAL FUNDS
Small Company Growth Fund
TRUST SHARES
BRANCH BANKING & TRUST COMPANY
INVESTMENT ADVISER
BISYS FUND SERVICES
ADMINISTRATOR AND DISTRIBUTOR
PROSPECTUS DATED FEBRUARY 1, 1998
<PAGE> 34
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Prospectus Summary.................................................................... 2
The Group............................................................................. 3
Fee Table............................................................................. 3
Financial Highlights.................................................................. 5
Investment Objective and Policies..................................................... 6
Investment Restrictions............................................................... 13
Valuation of Shares................................................................... 13
How to Purchase and Redeem Shares..................................................... 14
Dividends and Taxes................................................................... 16
Management of BB&T Mutual Funds Group................................................. 18
General Information................................................................... 21
</TABLE>
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS NOT CONTAINED IN THIS PROSPECTUS IN CONNECTION WITH THE OFFERING
MADE BY THIS PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR
REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE GROUP
OR THE DISTRIBUTOR. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFERING BY THE GROUP
OR BY THE DISTRIBUTOR IN ANY JURISDICTION IN WHICH SUCH OFFERING MAY NOT
LAWFULLY BE MADE.
<PAGE> 35
BB&T MUTUAL FUNDS GROUP
BB&T SMALL COMPANY GROWTH FUND
<TABLE>
<S> <C>
3435 Stelzer Road For current yield, purchase,
Columbus, Ohio 43219 and redemption information,
Investment Adviser: Branch Banking call (800) 228-1872
and Trust Company ("BB&T") TDD/TTY call (800) 300-8893
</TABLE>
THE BB&T SMALL COMPANY GROWTH FUND (the "Small Company Growth Fund") is a
separate investment fund of the BB&T Mutual Funds Group (the "Group"), an
open-end management investment company offering to the public fourteen separate
investment funds (each a "Fund"). Each Fund of the Group offers multiple classes
of units of beneficial interest ("Shares"). Three of the Funds, (the "Funds of
Funds"), offer Shareholders a professionally-managed investment program by
purchasing shares of other Funds of the Group. The remaining eleven Funds
primarily invest in securities of issuers unrelated to the Group.
The BB&T Small Company Growth Fund seeks long-term capital appreciation
through investment primarily in a diversified portfolio of equity and
equity-related securities of small capitalization growth companies.
This Prospectus relates to the Trust Shares of the Small Company Growth Fund,
which are offered to BB&T and its affiliates and other financial service
providers approved by the Distributor for the investment of funds for which they
act in a fiduciary, advisory, agency, custodial or similar capacity. Through a
separate prospectus, the Group also offers Class A and Class B Shares of the
Small Company Growth Fund, which are offered to the general public. Additional
information about each of the Funds, contained in a Statement of Additional
Information, has been filed with the Securities and Exchange Commission. The
Statement of Additional Information and the prospectus relating to the Class A
and Class B Shares are available upon request without charge by writing to the
Group or by calling the Group at the telephone number shown above. The Statement
of Additional Information bears the same date as this Prospectus and is
incorporated by reference in its entirety into this Prospectus.
This Prospectus sets forth concisely the information about the Small Company
Growth Fund's Trust Shares that a prospective investor ought to know before
investing. Investors should read this Prospectus and retain it for future
reference.
------------------------
SHARES OF THE BB&T MUTUAL FUNDS GROUP ARE NOT DEPOSITS OR OTHER OBLIGATIONS
OF, OR ENDORSED OR GUARANTEED BY, BRANCH BANKING AND TRUST COMPANY, BB&T
CORPORATION, ANY OF THEIR AFFILIATES, OR ANY OTHER BANK. SUCH SHARES ARE NOT
FEDERALLY INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION, THE FEDERAL
RESERVE BOARD, OR ANY OTHER GOVERNMENTAL AGENCY.
------------------------
INVESTMENT IN THE FUNDS INVOLVES INVESTMENT RISKS INCLUDING POSSIBLE LOSS OF
PRINCIPAL. THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE
SECURITIES AND EXCHANGE COMMISSION ("COMMISSION") OR ANY STATE SECURITIES
COMMISSION NOR HAS THE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON
THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
------------------------
PROSPECTUS DATED FEBRUARY 1, 1998
<PAGE> 36
PROSPECTUS SUMMARY
The Small Company Growth
Fund..................... This prospectus relates to only the Trust Class
Shares of the Small Company Growth Fund, one class
of a separately managed portfolio of BB&T Mutual
Funds Group (the "Group"). The Group, a
Massachusetts business trust, is an open-end
management investment company which currently
consists of fourteen separately managed portfolios
(each a "Fund"). Like most of the Group's Funds,
the Small Company Growth Fund offers to the public
three classes of Shares: Class A, Class B and Trust
Class.
Investment Objective and
Policies................. The Small Company Growth Fund seeks long-term
capital appreciation through investment primarily
in a diversified portfolio of equity and
equity-related securities of small capitalization
growth companies.
Investment Risks........... The Small Company Growth Fund's performance may
change daily based on many factors including
interest rate levels, the quality of the
obligations in the Fund's portfolio, and market
conditions.
Offering Price............. The public offering price of the Small Company
Growth Fund is equal to its net asset value per
Trust Share. (See "HOW TO PURCHASE AND REDEEM
SHARES--Purchases of Trust Shares.")
Minimum Purchase........... No minimum purchase applies to purchases of Trust
Shares.
Investment Adviser......... Branch Banking and Trust Company, Raleigh, North
Carolina.
Investment Sub-Adviser..... PNC Equity Advisors Company, Philadelphia,
Pennsylvania
Dividends.................. The Small Company Growth Fund declares and pays
dividends quarterly.
Distributor................ BISYS Fund Services, Columbus, Ohio.
2
<PAGE> 37
THE GROUP
BB&T Mutual Funds Group (the "Group") is an open-end management investment
company. The Group consists of fourteen series of units of beneficial interest
("Shares"), each representing interests in one of fourteen separate investment
funds (each a "Fund"). Three of the Funds (the "Funds of Funds") offer
Shareholders a professionally-managed investment program by purchasing shares of
other Funds of the Group. The remaining eleven Funds primarily invest in
securities of issuers unrelated to the Group. Each Fund is authorized to offer
three classes of Shares: Class A Shares, Class B Shares and Trust Shares.
FEE TABLE
The following Fee Table and example summarize the various costs and expenses
that a Shareholder of Trust Shares of the Small Company Growth Fund will bear,
either directly or indirectly.
<TABLE>
<CAPTION>
SMALL COMPANY
GROWTH FUND
-------------
TRUST CLASS
-------------
<S> <C>
SHAREHOLDER TRANSACTION EXPENSES(1)
Maximum Sales Load Imposed on Purchases (as a percentage of offering
price)................................................................. 0%
Maximum Sales Load Imposed on Reinvested Dividends (as a percentage of
offering price)........................................................ 0%
Deferred Sales Load (as a percentage of original purchase price or
redemption proceeds, as applicable).................................... 0%
Redemption Fees (as a percentage of amount redeemed, if applicable)(2)...... 0%
Exchange Fee................................................................ $ 0
ANNUAL FUND OPERATING EXPENSES (as a percentage of net assets)
Management Fees........................................................... 1.00%
12b-1 Fees................................................................ 0%
Other Expenses............................................................ .64%
-----
Total Fund Operating Expenses............................................. 1.64%
=====
</TABLE>
- ---------------
(1) A Participating Organization or Bank (both terms used as defined in this
Prospectus) may charge a Customer's (as defined in the Prospectus) account
fees for automatic investment, exchanges, and other investment management
services provided in connection with investment in Trust Shares of the Fund.
(See "HOW TO PURCHASE AND REDEEM SHARES--Purchases of Trust Shares" and "HOW
TO PURCHASE AND REDEEM SHARES--Exchange Privilege.")
(2) A wire redemption charge (currently $7.00) may be deducted from the amount
of a wire redemption payment made at the request of a shareholder. Such fee
is currently being waived. (See "HOW TO PURCHASE AND REDEEM
SHARES--Redemption by Telephone.")
3
<PAGE> 38
EXAMPLE:
You would pay the following expenses on a $1,000 investment in Trust Shares of
the Small Company Growth Fund, assuming (1) 5% annual return and (2) redemption
at the end of each time period:
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
-------- --------- --------- ----------
<S> <C> <C> <C> <C>
Small Company Growth Fund............ $17 $52 $89 $194
</TABLE>
Trust Shares are not subject to a 12b-1 fee and are not sold pursuant to a
sales charge.
The purpose of the table above is to assist a potential investor in the Fund
in understanding the various costs and expenses that an investor in the Trust
Shares of the Fund will bear directly or indirectly. See "MANAGEMENT OF BB&T
MUTUAL FUNDS GROUP" for a more complete discussion of annual operating expenses
of the Fund. THE FOREGOING EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF
PAST OR FUTURE EXPENSES. ACTUAL EXPENSES MAY BE GREATER OR LESS THAN THOSE
SHOWN.
4
<PAGE> 39
FINANCIAL HIGHLIGHTS
The table below sets forth financial highlights concerning the investment
results for the Small Company Growth Fund for the periods indicated. The
information through the year ended September 30, 1997 has been audited by KPMG
Peat Marwick LLP, independent auditors for the Group, whose report thereon,
insofar as it relates to each of the years or periods indicated herein is
included in the Statement of Additional Information.
Information regarding the Class A and Class B Shares can be obtained in a
separate prospectus by writing to the Group at 3435 Stelzer Road, Columbus, Ohio
43219 or by calling (800) 228-1872.
<TABLE>
<CAPTION>
SMALL COMPANY GROWTH FUND
----------------------------------------------------------
FOR THE YEAR FOR THE YEAR
ENDED ENDED DEC. 7. 1994 TO
SEPT. 30, 1997 SEPT. 30, 1996 SEPT. 30, 1995(A)
--------------- --------------- ------------------
TRUST CLASS TRUST CLASS TRUST CLASS
--------------- --------------- ------------------
<S> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD.......... $ 21.18 $ 14.57 $ 10.00
------- ------- -------
INVESTMENT ACTIVITIES
Net investment loss......................... (0.11) (0.17) (0.07)
Net realized and unrealized gains on
investments.............................. 2.47 6.78 4.64
------- ------- -------
Total from Investment Activities......... 2.36 6.61 4.57
------- ------- -------
DISTRIBUTIONS
Net realized gains.......................... (0.02) -- --
------- ------- -------
Total Distributions...................... (0.02) -- --
------- ------- -------
NET ASSET VALUE, END OF PERIOD................ $ 23.52 $ 21.18 $ 14.57
======= ======= =======
Total Return.................................. 11.17% 45.37% 45.70%(b)
RATIOS/SUPPLEMENTARY DATA:
Net Assets, End of Period (000)............. $58,660 $36,373 $ 16,962
Ratio of expenses to average net assets..... 1.64% 1.79% 2.33%(c)
Ratio of net investment loss to average net
assets................................... (1.04)% (1.00)% (1.34)%(c)
Ratio of expenses to average net assets*.... 1.64% 1.79% 2.42%(c)
Ratio of net investment loss to average net
assets*.................................. (1.04)% (1.00)% (1.43)%(c)
Portfolio Turnover(d)......................... 80.66% 71.62% 46.97%
Average commission rate(e).................... $0.0570 $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.
5
<PAGE> 40
INVESTMENT OBJECTIVES AND POLICIES
THE SMALL COMPANY GROWTH FUND The Small Company Growth Fund's investment
objective is to seek long-term capital appreciation through investment primarily
in a diversified portfolio of equity and equity-related securities of small
capitalization growth companies. The investment objective of the Fund is
fundamental and may not be changed without the vote of a majority of the
outstanding Shares of the Fund (as defined below under "GENERAL INFORMATION
Miscellaneous"). There can be, of course, no assurance that the Fund will
achieve its investment objective.
The Small Company Growth Fund will invest in companies that are considered to
have favorable and above average earnings growth prospects and, as a matter of
fundamental policy, at least 65% of the Fund's total assets will be invested in
small companies with a market capitalization under $1 billion at the time of
purchase. In making portfolio investments, the Small Company Growth Fund will
assess characteristics such as financial condition, revenue, growth,
profitability, earnings per share growth and trading liquidity. The remainder of
the Fund's assets, if not invested in the securities of small companies, will be
invested in the instruments described below and under "Specific Investment
Policies."
Smaller, less seasoned companies may be subject to greater business risk than
larger, established companies. They may be more vulnerable to changes in
economic conditions, specific industry conditions, market fluctuations and other
factors affecting the profitability of companies. Therefore, the stock price of
smaller capitalization companies may be subject to greater price fluctuations
than that of larger, established companies. Due to these and other risk factors,
the price movement of the securities held by the Fund may be volatile and the
net asset value of a share of the Fund may fluctuate more than that of a share
of a fund that invests in larger established companies.
Depending upon the performance of the portfolio investments of the Small
Company Growth Fund the net asset value per Share of the Fund will fluctuate.
SPECIFIC INVESTMENT POLICIES
The following is a description of certain of the permitted investments for the
Small Company Growth Fund. For a more detailed description, see the Statement of
Additional Information.
REPURCHASE AGREEMENTS
Securities held by the Small Company Growth Fund may be subject to repurchase
agreements. The Fund will enter into repurchase agreements for the purposes of
maintaining liquidity and obtaining favorable yields. Under the terms of a
repurchase agreement, the Fund acquires securities from financial institutions
or registered broker-dealers, subject to the seller's agreement to repurchase
such securities at a mutually agreed upon date and price. The seller is required
to maintain the value of the collateral held pursuant to the agreement at not
less than the repurchase price (including accrued interest). If the seller under
a repurchase agreement were to default on its repurchase obligation or become
insolvent, the Fund would suffer a loss to the extent that the proceeds from a
sale of the underlying portfolio securities were less than the repurchase price
under the agreement, or to the extent that the disposition of such securities by
the Fund were delayed pending court action. Additionally, if the seller should
be involved in bankruptcy or insolvency proceedings, the Fund could incur delays
and costs in selling the underlying security or could suffer a loss of principal
and interest if the Fund were treated as an unsecured creditor and required to
return the underlying security to the seller's estate. The Fund will enter into
repurchase agreements with financial institutions or registered broker-dealers
deemed creditworthy by the Fund's investment sub-adviser. Except as described in
the Statement of Additional Information, there is no aggregate limitation on the
amount of the Fund's total assets that may be invested in instruments which are
subject to repurchase agreements. Repurchase agreements are considered to be
loans by a Fund under the Investment Company Act of 1940.
6
<PAGE> 41
REVERSE REPURCHASE AGREEMENTS
In accordance with the investment restrictions described below, the Small
Company Growth Fund may borrow funds for temporary purposes by entering into
reverse repurchase agreements. The Fund will enter into reverse repurchase
agreements for the purpose of meeting liquidity needs. Pursuant to such
agreements, the Fund would sell portfolio securities to financial institutions
such as banks and broker-dealers, and agree to repurchase them at a mutually
agreed-upon date and price. Reverse repurchase agreements include the risk that
the market value of the securities sold by the Fund may decline below the price
at which the Fund is obligated to repurchase the securities. Reverse repurchase
agreements are considered to be borrowings by the Fund under the Investment
Company Act of 1940.
WHEN-ISSUED SECURITIES
The Small Company Growth Fund may purchase securities on a when-issued or
delayed-delivery basis and may purchase and sell securities on a "forward
commitment" basis. These transactions are arrangements in which the Fund
purchases securities with payment and delivery scheduled for a future time. When
the Fund agrees to purchase securities on a when-issued basis, the Fund's
custodian must set aside cash or liquid Fund securities equal to the amount of
that commitment in a separate account and may be required to subsequently place
additional assets in the separate account to maintain equivalence with the
Fund's commitment. The ability to purchase when-issued securities will provide
the Fund with the flexibility of participating in new issues of government
securities, particularly mortgage-related securities. Prior to delivery of
when-issued securities, the securities are subject to fluctuations in value, and
no income accrues until their receipt. The Fund engages in when-issued and
delayed-delivery transactions only with the intent of acquiring Fund securities
consistent with its investment objective and policies, and not for investment
leverage. In when-issued and delayed-delivery transactions, the Fund relies on
the seller to complete the transaction; its failure to do so may cause the Fund
to miss a price or yield considered to be advantageous. The Small Company Growth
Fund's when-issued purchases and forward commitments are not expected to exceed
25% of the value of its total assets absent unusual market conditions.
SHORT-TERM OBLIGATIONS
The Small Company Growth Fund may invest in high quality, short-term
obligations (with maturities of 12 months or less) such as domestic and foreign
commercial paper (including variable-amount master demand notes), bankers'
acceptances, certificates of deposit and demand and time deposits of domestic
and foreign branches of U.S. banks and foreign banks, and repurchase agreements.
Such investments will be limited to those obligations which, at the time of
purchase, (i) possess one of the two highest short-term ratings from at least
two nationally recognized statistical rating organizations ("NRSROs") (for
example, commercial paper rated "A-1" or "A-2" by S&P and "P-1" or "P-2" by
Moody's), or (ii) do not possess a rating (i.e., are unrated) but are determined
by PNC Equity Advisors Company ("PEAC") to be of comparable quality to rated
instruments eligible for purchase. Under normal market conditions, the Small
Company Growth Fund will limit its investment in short-term obligations to 35%
of its total assets.
The Small Company Growth Fund may invest in short-term obligations in order to
acquire interest income combined with liquidity. For temporary defensive
purposes, as determined by PEAC, these investments may constitute 100% of the
Fund's portfolio and, in such circumstances, will constitute a temporary
suspension of the Fund's attempts to achieve its investment objective.
U.S. GOVERNMENT SECURITIES
The Small Company Growth Fund may invest in securities issued or guaranteed by
the U.S. Government or its agencies or instrumentalities ("U.S. Government
Securities"), some of which may be subject to repurchase agreements. The types
of U.S. Government Securities in which the Fund will invest include obligations
issued or guaranteed as to payment of principal and interest by the full faith
and credit of the U.S. Government, such as Treasury bills, notes, bonds and
certificates of indebtedness, and obligations issued or guaranteed by the
7
<PAGE> 42
agencies or instrumentalities of the U.S. Government, but not supported by such
full faith and credit. Obligations of certain agencies and instrumentalities of
the U.S. Government, such as the Government National Mortgage Association and
the Export-Import Bank of the United States, are supported by the full faith and
credit of the U.S. Treasury; others, such as those of the Federal National
Mortgage Association, are supported by the right of the issuer to borrow from
the Treasury; others are supported by the discretionary authority of the U.S.
Government to purchase the agency's obligations; still others, such as those of
the Federal Farm Credit Banks, or the Federal Home Loan Mortgage Corporation,
are supported only by the credit of the instrumentality. No assurance can be
given that the U.S. Government would provide financial support to U.S.
Government-sponsored agencies or instrumentalities if it is not obligated to do
so by law.
U.S. Government Securities may include mortgage-backed pass-through
securities. Interest and principal payments (including prepayments) on the
mortgages underlying such securities are passed through to the holders of the
security. Prepayments occur when the borrower under an individual mortgage
prepays the remaining principal before the mortgage's scheduled maturity date.
As a result of the pass-through of prepayments of principal on the underlying
securities, mortgage-backed pass-through securities are often subject to more
rapid prepayments of principal than their stated maturity would indicate.
Because the prepayment characteristics of the underlying mortgages vary, it is
not possible to predict accurately the realized yield or average life of a
particular issue of pass-through certificates. Prepayments are important because
of their effect on the yield and price of the securities. During periods of
declining interest rates, such prepayments can be expected to accelerate, and
the Fund would be required to reinvest the proceeds at the lower interest rates
then available. In addition, prepayments of mortgages which underlie securities
purchased at a premium may not have been fully amortized at the time the
obligation is repaid. As a result of these principal prepayment features,
mortgage-backed pass-through securities are generally more volatile investments
than other U.S. Government Securities.
The Small Company Growth Fund may also invest in "zero coupon" U.S. Government
Securities. These securities tend to be more volatile than other types of U.S.
Government Securities. Zero coupon securities are debt instruments that do not
pay current interest and are typically sold at prices greatly discounted from
par value. The return on a zero coupon obligation, when held to maturity, equals
the difference between the par value and the original purchase price.
COLLATERALIZED MORTGAGE OBLIGATIONS
The Small Company Growth Fund may also invest in collateralized mortgage
obligations ("CMOs"). CMOs are mortgage-related securities which are structured
pools of mortgage pass-through certificates or mortgage loans. CMOs are issued
with a number of classes or series which have different maturities and which may
represent interests in some or all of the interest or principal on the
underlying collateral or a combination thereof. CMOs of different classes are
generally retired in sequence as the underlying mortgage loans in the mortgage
pool are repaid. In the event of sufficient early prepayments on such mortgages,
the class or series of CMO first to mature generally will be retired prior to
its maturity. Thus, the early retirement of a particular class or series of CMO
held by the Fund would have the same effect as the prepayment of mortgages
underlying a mortgage-backed pass-through security.
Certain debt securities such as, but not limited to, mortgage-backed
securities, CMOs and asset-backed securities, as well as securities subject to
prepayment of principal prior to the stated maturity date, are expected to be
repaid prior to their stated maturity dates. As a result, the effective maturity
of these securities is expected to be shorter than the stated maturity. For
purposes of calculating the Fund's weighted average portfolio maturity, the
effective maturity of such securities will be used.
CMOs may include stripped mortgage securities. Such securities are derivative
multi-class mortgage securities issued by agencies or instrumentalities of the
United States Government, or by private origi-
8
<PAGE> 43
nators of, or investors in, mortgage loans, including savings and loan
associations, mortgage banks, commercial banks, investment banks and special
purpose subsidiaries of the foregoing. Stripped mortgage securities are usually
structured with two classes that receive different proportions of the interest
and principal distributions on a pool of mortgage assets. A common type of
stripped mortgage security will have one class receiving all of the interest
from the mortgage assets (the interest-only or "IO" class), while the other
class will receive all of the principal (the principal-only or "PO" class). The
yield to maturity on an IO class is extremely sensitive to the rate of principal
payments (including prepayments) on the related underlying mortgage assets, and
a rapid rate of principal payments may have a material adverse effect on the
securities' yield to maturity. Generally, the market value of the PO class is
unusually volatile in response to changes in interest rates. If the underlying
mortgage assets experience greater than anticipated prepayments of principal,
the Fund may fail to fully recoup its initial investment in these securities
even if the security is rated in the highest rating category.
Although stripped mortgage securities are purchased and sold by institutional
investors through several investment banking firms acting as brokers or dealers,
these securities were only recently developed. As a result, established trading
markets have not fully developed. Stripped mortgage securities issued or
guaranteed by the U.S. Government and held by the Fund may be considered liquid
securities pursuant to guidelines established by the Group's Board of Trustees.
The Fund will not purchase a stripped mortgage security that is illiquid if, as
a result thereof, more than 15% of the value of its net assets would be invested
in such securities and other illiquid securities.
Unless stated otherwise, the Fund will limit its investment in CMOs to 25% of
the value of its total assets.
COMMERCIAL BONDS
The Small Company Growth Fund may invest up to 35% of its total assets, in
bonds, notes and debentures of a wide range of U.S. corporate issuers.
Debentures represent unsecured promises to pay, while notes and bonds may be
secured by mortgages on real property or security interests in personal
property. Bonds, notes and debentures in which the Small Company Growth Fund may
invest may differ in interest rates, maturities and times of issuance and may
include CMOs (which are described above).
The Small Company Growth Fund will invest only in bonds, notes, and debentures
which are rated at the time of purchase within the three highest rating groups
assigned by an NRSRO (for example, at least A by Moody's or S&P), or, if
unrated, which PEAC deems to be of comparable quality. The applicable ratings
are described in the Appendix to the Statement of Additional Information. In the
event that the rating of any debt securities falls below the third highest
rating category, the Fund will not be obligated to dispose of such obligations
and may continue to hold such obligations if, in the opinion of PEAC such
investment is considered appropriate under the circumstances.
OPTIONS AND FUTURES CONTRACTS
To the extent consistent with its investment objective, the Small Company
Growth Fund may engage in writing call options from time to time as PEAC deems
to be appropriate. Options are written solely as covered call options (options
on securities owned by a Fund). Such options must be listed on a national
securities exchange and issued by the Options Clearing Corporation. In order to
close out an option position, the Fund will enter into a "closing purchase
transaction"--the purchase of a call option on the same security with the same
exercise price and expiration date as any call option which it may previously
have written. Upon the sale of a portfolio security upon which it has written a
covered call option, the Fund must effect a closing purchase transaction so as
to avoid converting a covered call into a "naked call," i.e., a call option on a
security not owned by the Fund. If the Fund is unable to effect a closing
purchase transaction, it will not be able to sell the underlying security until
the option expires or the Fund delivers the underlying security upon exercise.
When writing a covered call option, the Fund, in return for the premium, gives
up the opportunity for profit from a price increase in the underlying security
above the exer-
9
<PAGE> 44
cise price but retains the risk of loss should the price of the security
decline.
To the extent consistent with its investment objective, the Small Company
Growth Fund may write covered call options, buy put options, buy call options
and write secured put options for the purpose of hedging or earning additional
income, which may be deemed speculative. These options may relate to particular
securities, financial instruments, foreign currencies, stock or bond indices or
the yield differential between two securities, and may or may not be listed on a
securities exchange and may or may not be issued by the Options Clearing
Corporation. The Fund will not purchase put and call options when the aggregate
premiums on outstanding options exceed 5% of its net assets at the time of
purchase, and will not write options on more than 25% of the value of its net
assets (measured at the time an option is written). Options trading is a highly
specialized activity that entails greater than ordinary investment risks. In
addition, unlisted options are not subject to the protections afforded
purchasers of listed options issued by the Options Clearing Corporation, which
performs the obligations of its members if they default.
To the extent consistent with its investment objective, the Small Company
Growth Fund may also invest in futures contracts and options on futures
contracts to commit funds awaiting investment in stocks or maintain cash
liquidity or for other hedging purposes. The value of the Fund's contracts may
equal or exceed 100% its total assets, although the Fund will not purchase or
sell a futures contract unless immediately afterwards the aggregate amount of
margin deposits on its existing futures positions plus the amount of premiums
paid for related futures options entered into for other than bona fide hedging
purposes is 5% or less of its net assets.
Futures contracts obligate the Small Company Growth Fund at maturity, to take
or make delivery of securities, the cash value of a securities index or a stated
quantity of a foreign currency. The Fund may sell a futures contract in order to
offset an expected decrease in the value of its portfolio positions that might
otherwise result from a market decline or currency exchange fluctuation. The
Fund may do so either to hedge the value of its securities portfolio as a whole,
or to protect against declines occurring prior to sales of securities in the
value of the securities to be sold. In addition, the Fund may utilize futures
contracts in anticipation of changes in the composition of its holdings or in
currency exchange rates.
The Small Company Growth Fund may purchase and sell call and put options on
futures contracts traded on an exchange or board of trade. When the Fund
purchases an option on a futures contract, it has the right to assume a position
as a purchaser or a seller of a futures contract at a specified exercise price
during the option period. When the Fund sells an option on a futures contract,
it becomes obligated to sell or buy a futures contract if the option is
exercised. In connection with the Fund's position in a futures contract or
related option, the Fund will create a segregated account of liquid assets or
will otherwise cover its position in accordance with applicable SEC
requirements.
The risks related to the use of futures contracts include: (i) the correlation
between movements in the market price of the portfolio investments (held or
intended for purchase) being hedged and in the price of the futures contract may
be imperfect; (ii) possible lack of a liquid secondary market for closing out
futures positions; (iii) the need for additional portfolio management skills and
techniques; (iv) losses due to unanticipated market movements; and (v) a
purchaser's inability to predict correctly the direction of securities prices,
interest rates, currency exchange rates, and other economic factors. Successful
use of futures is subject to the ability correctly to predict movements in the
direction of the market. For example, if the Fund uses futures contracts as a
hedge against the possibility of a decline in the market adversely affecting
securities held by it and securities prices increase instead, the Fund will lose
part or all of the benefit of the increased value of its securities that it has
hedged because the Fund will have approximately equal offsetting losses in its
future positions. 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 future pricing. As a result, a
relatively small price movement in a fu-
10
<PAGE> 45
tures contract may result in immediate and substantial loss or gain to the
investor. Thus, a purchase or sale of a futures contract may result in losses or
gains in excess of the amount invested in the contract.
The Fund's ability to engage in options and futures transactions and to sell
related securities may be limited by tax considerations.
FOREIGN INVESTMENTS
The Small Company Growth Fund may invest in foreign securities through the
purchase of American Depository Receipts ("ADRs") or the purchase of securities
on the New York Stock Exchange. The Fund may also invest in securities issued by
foreign branches of U.S. banks and foreign banks and in Canadian Commercial
Paper and Europaper. ADRs typically are issued by an American bank or trust
company and evidence ownership of underlying securities issued by a foreign
corporation. Unsponsored ADR programs are organized independently and without
the cooperation of the issuer of the underlying securities. As a result,
available information concerning the issuers may not be as current as for
sponsored ADRs, and the prices of unsponsored ADRs may be more volatile than if
such instruments were sponsored by the issuer.
Investing in foreign securities involves considerations not typically
associated with investing in securities of companies organized and operated in
the United States. Because foreign securities generally are denominated and pay
dividends or interest in foreign currencies, the value of a Fund that invests in
foreign securities as measured in U.S. dollars will be affected favorably or
unfavorably by changes in exchange rates. The Fund's investments in foreign
securities may also be adversely affected by changes in foreign political or
social conditions, diplomatic relations, confiscatory taxation, expropriation,
limitation on the removal of funds or assets, or imposition of (or change in)
exchange control regulations. In addition, changes in government administrations
or economic or monetary policies in the U.S. or abroad could result in
appreciation or depreciation of portfolio securities and could favorably or
adversely affect the Fund's operations. Special tax considerations apply to
foreign securities.
In general, less information is publicly available with respect to foreign
issuers than is available with respect to U.S. companies. Most foreign companies
are also not subject to the uniform accounting and financial reporting
requirements applicable to issuers in the United States. While the volume of
transactions effected on foreign stock exchanges has increased in recent years,
it remains appreciably below that of the New York Stock Exchange. Accordingly,
the Fund's foreign investments may be less liquid and their prices may be more
volatile than comparable investments in securities in U.S. companies. In
addition, there is generally less government supervision and regulation of
securities exchanges, brokers and issuers in foreign countries than in the
United States.
OTHER INVESTMENT PRACTICES
For liquidity purposes, the Small Company Growth Fund may invest in money
market funds. The Fund may invest up to 5% of the value of its total assets in
the securities of any one money market mutual fund (including Shares of the
Prime Money Market Fund and the U.S. Treasury Fund pursuant to exemptive relief
granted by the Securities and Exchange Commission) and up to 10% of its total
assets in more than one money market mutual fund. In order to avoid the
imposition of additional fees as a result of investments in Shares of the Prime
Money Market Fund and the U.S. Treasury Fund, BB&T and BISYS Fund Services (the
"Administrator") (see "MANAGEMENT OF BB&T MUTUAL FUNDS GROUP"-- "Investment
Adviser" and "Administrator and Distributor") will reduce that portion of their
usual asset-based service fees from the Fund by an amount equal to their service
fees from the Prime Money Market Fund and the U.S. Treasury Fund that are
attributable to the Fund investments. BB&T and the Administrator will promptly
forward such fees to the Fund. The Fund will incur additional expenses due to
the duplication of expenses as a result of investing in securities of other
unaffiliated money market mutual funds. Additional restrictions on the Fund's
investments in the securities of an unaffiliated money market fund and/or the
Prime Money Market Fund or the U.S. Treasury Fund are contained in the Statement
of Additional Information.
11
<PAGE> 46
In order to generate additional income, the Small Company Growth Fund may,
from time to time, lend its portfolio securities to broker-dealers, banks or
institutional borrowers of securities. While the lending of securities may
subject the Fund to certain risks, such as delays or the inability to regain the
securities in the event the borrower was to default on its lending agreement or
enter into bankruptcy, the Fund will receive 100% collateral in the form of cash
or U.S. Government Securities. This collateral will be valued daily by PEAC and
should the market value of the loaned securities increase, the borrower will
furnish additional collateral to the Fund. During the time portfolio securities
are on loan, the borrower will pay the Fund any dividends or interest paid on
such securities. Loans are subject to termination by the Fund or the borrower at
any time. While the Fund will not have the right to vote securities on loan, the
Fund intends to terminate the loan and regain the right to vote if that is
considered important with respect to the investment. The Fund will only enter
into loan arrangements with broker-dealers, banks or other institutions which
PEAC has determined are creditworthy under guidelines established by the Group's
Board of Trustees. The Fund will restrict its securities lending to 30% of its
total assets.
In order to generate income, the Small Company Growth Fund may engage in the
technique of short-term trading. Such trading involves the selling of securities
held for a short time, ranging from several months to less than a day. The
object of such short-term trading is to increase the potential for capital
appreciation and/or income of the Fund in order to take advantage of what PEAC
believes are changes in market, industry or individual company conditions or
outlook. Any such trading would increase the portfolio turnover rate of the Fund
and its transaction costs.
PRIVATE PLACEMENT INVESTMENTS
The Small Company Growth Fund may invest in commercial paper issued by
corporations without registration under the Securities Act of 1933 (the "1933
Act") in reliance on the exemption in Section 3(a)(3), and commercial paper
issued in reliance on the so-called "private placement" exemption in Section
4(2) ("Section 4(2) paper"). Section 4(2) paper is restricted as to disposition
under the Federal securities laws in that any resale must similarly be made in
an exempt transaction. Section 4(2) paper is normally resold to other
institutional investors through or with the assistance of investment dealers
which make a market in Section 4(2) paper, thus providing liquidity.
The Small Company Growth Fund may purchase securities which are not registered
under the 1933 Act but which can be sold to "qualified institutional buyers" in
accordance with Rule 144A under the 1933 Act. These securities will not be
considered illiquid so long as PEAC determines that an adequate trading market
exists for the securities. This investment practice could have the effect of
increasing the level of illiquidity in the Fund during any period that qualified
institutional buyers become uninterested in purchasing these restricted
securities.
STANDARD & POOR'S DEPOSITORY RECEIPTS
The Small Company Growth Fund may invest in Standard & Poor's Depository
Receipts ("SPDRs"). SPDRs represent interests in trusts sponsored by a
subsidiary of the American Stock Exchange, Inc. and structured to provide
investors proportionate undivided interests in a securities portfolio consisting
of substantially all of the common stocks (in substantially the same weighting)
as the component common stocks of a particular Standard & Poor's Index, e.g.,
the S&P 500 Index. SPDRs are generally not redeemable, but are exchange traded.
SPDRs are issued by a trust that is a unit investment trust, a type of
registered investment company. SPDRs, therefore, will be acquired by the Fund
only within the limits prescribed under the 1940 Act.
PORTFOLIO TURNOVER
The Portfolio turnover rate for the Small Company Growth Fund was 80.66% in
the fiscal year ended September 30, 1997. The portfolio turnover of the Fund may
vary greatly from year to year as well as within a particular year. High
turnover rates will generally result in higher transaction costs to the Fund and
may result in higher levels of taxable realized gains to the Fund's
shareholders.
12
<PAGE> 47
INVESTMENT RESTRICTIONS
The Small Company Growth Fund is subject to a number of investment
restrictions that may be changed only by a vote of a majority of the outstanding
shares of the Fund (see "GENERAL INFORMATION--Miscellaneous").
The Small Company Growth Fund may not:
1. Purchase any securities that would cause 25% or more of the value of the
Fund's total assets at the time of purchase to be invested in securities of
one or more issuers conducting their principal business activities in the same
industry, provided that (a) there is no limitation with respect to obligations
issued or guaranteed by the U.S. Government or its agencies or
instrumentalities, and repurchase agreements secured by obligations of the
U.S. Government or its agencies or instrumentalities; (b) wholly-owned finance
companies will be considered to be in the industries of their parents if their
activities are primarily related to financing the activities of their parents;
and (c) utilities will be divided according to their services. For example,
gas, gas transmission, electric and gas, electric, and telephone will each be
considered a separate industry.
2. Purchase securities of any one issuer, other than obligations issued or
guaranteed by the U.S. Government or its agencies or instrumentalities if,
immediately after such purchase, more than 5% of the value of the Fund's total
assets would be invested in such issuer, or the Fund would hold more than 10%
of any class of securities of the issuer or more than 10% of the outstanding
voting securities of the issuer, except that up to 25% of the value of the
Fund's total assets may be invested without regard to such limitations. There
is no limit to the percentage of assets that may be invested in U.S. Treasury
bills, notes, or other obligations issued or guaranteed by the U.S. Government
or its agencies or instrumentalities.
3. Borrow money or issue senior securities, except that the Fund may borrow
from banks or enter into reverse repurchase agreements for temporary purposes
in amounts up to 10% of the value of its total assets at the time of such
borrowing; or mortgage, pledge, or hypothecate any assets, except in
connection with any such borrowing and in amounts not in excess of the lesser
of the dollar amounts borrowed or 10% of the value of the Fund's total assets
at the time of its borrowing. The Fund will not purchase securities while
borrowings (including reverse repurchase agreements) in excess of 5% of its
total assets are outstanding.
4. Make loans, except that the Fund may purchase or hold debt securities and
lend portfolio securities in accordance with its investment objective and
policies and may enter into repurchase agreements.
VALUATION OF SHARES
The net asset value of the Small Company Growth 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"). 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 during which no Shares are tendered for redemption and no orders to
purchase Shares are received) during which there is sufficient trading in the
Fund's portfolio instruments that the 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, Martin Luther King, Jr. Day, Presidents'
Day, Good Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving Day
and Christmas Day. Net asset value per Share for purposes of pricing sales and
redemptions is calculated by determining the value of the class's proportional
interest in the securities and other assets of the Fund, less (i) such class's
proportional share of general liabilities and (ii) the liabilities allocable
only to such class, and dividing such amount by the number of relevant class
Shares outstanding.
13
<PAGE> 48
The securities in the Fund will be valued at market value. If market
quotations are not available, the securities will be valued by a method which
the Board of Trustees of the Group believes accurately reflects fair value. For
further information about the valuation of investments, see the Statement of
Additional Information.
HOW TO PURCHASE AND REDEEM SHARES
DISTRIBUTOR
Shares are sold on a continuous basis by the Group's Distributor, BISYS Fund
Services. The principal office of the Distributor is 3435 Stelzer Road,
Columbus, Ohio 43219. If you wish to purchase Shares, contact the Group at (800)
228-1872.
PURCHASES OF TRUST SHARES
Trust Shares may be purchased through procedures established by the
Distributor in connection with the requirements of fiduciary, advisory, agency,
custodial and other similar accounts maintained by or on behalf of Customers of
Branch Banking & Trust Company or one of its affiliates (individually a "Bank"
and collectively the "Banks") or other financial service providers approved by
the Distributor.
Shares of the Group sold to the Banks acting in a fiduciary, advisory,
custodial, or other similar capacity on behalf of Customers will normally be
held of record by the Banks. With respect to Shares so sold, it is the
responsibility of the Banks to transmit purchase or redemption orders to the
Distributor and to deliver Federal funds for purchase on a timely basis.
Beneficial ownership of the Shares will be recorded by the Banks and reflected
in the account statements provided by the Banks to Customers.
Trust Shares of the Fund are sold at the net asset value per Trust Share next
determined after receipt by the Distributor of an order in good form to purchase
Trust Shares (see "VALUATION OF SHARES"). There is no sales charge imposed by
the Group in connection with the purchase of the Fund's Trust Shares. There is
no minimum or subsequent investment requirement for Trust Shares. There is no
limit on the amount of Trust Shares that may be purchased.
Purchases of Trust Shares of the Fund will be effected only on a Business Day
(as defined in "VALUATION OF SHARES"). An order for the Fund received prior to
the Valuation Time on any Business Day will be executed at the net asset value
determined as of the Valuation Time on the date of receipt. An order for the
Fund received after the Valuation Time on any Business Day will be executed at
the net asset value determined as of the Valuation Time on the next Business
Day.
Depending upon the terms of a particular Customer account, a Participating
Organization or Bank may charge a Customer's account fees for services provided
in connection with investment in the Fund. Information concerning this
Prospectus should be read in conjunction with any such information received from
the Participating Organizations or Banks.
The Group reserves the right to reject any order for the purchase of its Trust
Shares in whole or in part, including purchases made with foreign and third
party drafts or checks.
EXCHANGE PRIVILEGE
Trust Shares of the Small Company Growth Fund may be exchanged for Trust
Shares of the other Funds, provided that the Shareholder making the exchange is
eligible on the date of the exchange to purchase Trust Shares (with certain
exceptions and subject to the terms and conditions described in this
prospectus). Trust Shares may also be exchanged for Class A Shares, if the
Shareholder ceases to be eligible to purchase Trust Shares. Trust Shares may not
be exchanged for Class B Shares.
The Group does not impose a charge for processing exchanges of its Trust
Shares. However, the exchange of Trust Shares for Class A Shares will require
payment of the sales charge unless the sales charge is waived. Shareholders may
exchange their
14
<PAGE> 49
Trust Shares for Trust Shares of another Fund on the basis of the relative net
asset value of the Shares exchanged.
An exchange is considered a sale of Shares and will result in a capital gain
or loss for federal income tax purposes, which, in general, is calculated by
netting the Shareholder's tax cost (or "basis") in the Shares surrendered and
the value of the Shares received in the exchange.
A Shareholder wishing to exchange Trust Shares purchased through a
Participating Organization or Bank may do so by contacting the Participating
Organization or Bank. If an exchange request in good order is received by the
Distributor or the Transfer Agent by 12:00 noon (Eastern Time) on any Business
Day, the exchange usually will occur on that day. Any Shareholder who wishes to
make an exchange should obtain and review a prospectus describing the Fund and
class of Shares which he or she wishes to acquire before making the exchange.
The exchange privilege may be exercised only in those states where the class of
Shares of such other Fund may legally be sold. The Group reserves the right to
change the terms and conditions of the exchange privilege discussed herein upon
sixty days written notice.
The Group's exchange privilege is not intended to afford shareholders a way to
speculate on short-term movements in the market. Accordingly, in order to
prevent excessive use of the exchange privilege that may potentially disrupt the
management of the Fund and increase transaction costs, the Group has established
a policy of limiting excessive exchange activity. Exchange activity will not be
deemed excessive if limited to four substantive exchange redemptions from a Fund
during any calendar year.
REDEMPTION OF SHARES
Shareholders may redeem their Trust Shares without charge on any day that net
asset value is calculated (see "VALUATION OF SHARES") and Shares may ordinarily
be redeemed by mail or by telephone. However, all or part of a Customer's Shares
may be required to be redeemed in accordance with instructions and limitations
pertaining to his or her account held by a Participating Organization or Bank.
For example, if a Customer has agreed to maintain a minimum balance in his or
her account, and the balance in that account falls below that minimum, the
Customer may be obliged to redeem, or the Participating Organization or Bank may
redeem for and on behalf of the Customer, all or part of the Customer's Shares
to the extent necessary to maintain the required minimum balance.
REDEMPTION BY MAIL
A written request for redemption must be received by the Group in order to
constitute a valid tender for redemption. The signature on the written request
must be guaranteed by a bank, broker, dealer, credit union, securities exchange,
securities association, clearing agency or savings association, as those terms
are defined in Rule 17Ad-15 under the Securities Exchange Act of 1934 if (a) a
redemption check is to be payable to anyone other than the Shareholder(s) of
record or (b) a redemption check is to be mailed to the Shareholder(s) at an
address other than the address of record or other than to a commercial bank
designated on the Account Registration Form of such Shareholder(s). The
Distributor reserves the right to reject any signature guarantee if (1) it has
reason to believe that the signature is not genuine, (2) it has reason to
believe that the transaction would otherwise be improper, or (3) the guarantor
institution is a broker or dealer that is neither a member of a clearing
corporation nor maintains net capital of at least $100,000. Proceeds may be
mailed to the address of record or sent electronically or mailed to a previously
designated bank account without a signature guarantee. See "Redemption by
Telephone" for further discussion on sending proceeds to your bank account.
REDEMPTION BY TELEPHONE
Shares may be redeemed by telephone if the Shareholder selected that option on
the Account Registration Form. A Shareholder may have the proceeds mailed to the
address of record or sent electronically or mailed directly to a domestic
commercial bank account previously designated by the Shareholder on the Account
Registration Form. Under most circumstances, such payments will be transmitted
on the next Business Day following
15
<PAGE> 50
receipt of a valid request for redemption. Such
electronic redemption requests may be made by the Shareholder by telephone to
the Transfer Agent. The Transfer Agent may reduce the amount of a wire
redemption payment by its then-current wire redemption charge. Such charge is
currently being waived. There is no charge for having payment of redemption
requests mailed or sent via the Automated Clearing House to a designated bank
account. For telephone redemptions, call the Group at (800) 228-1872. If not
selected on the Account Registration form, the Shareholder will automatically
receive telephone redemption privileges. None of the Distributor, the Group's
transfer agent, BB&T or the Group will be liable for any losses, damages,
expense or cost arising out of any telephone transaction (including exchanges
and redemptions) effected in accordance with the Group's telephone transaction
procedures, upon instructions reasonably believed to be genuine. The Group will
employ procedures designed to provide reasonable assurance that instructions
communicated by telephone are genuine; if these procedures are not followed, the
Group may be liable for any losses due to unauthorized or fraudulent
instructions. These procedures include recording all phone conversations,
sending confirmations to Shareholders within 72 hours of the telephone
transaction, verifying the account name and a shareholder's account number or
tax identification number and sending redemption proceeds only to the address of
record or to a previously authorized bank account. If, due to temporary adverse
conditions, investors are unable to effect telephone transactions, Shareholders
may also mail the redemption request to the Group.
PAYMENTS TO SHAREHOLDERS
Redemption orders are effected at the net asset value per Share next
determined after the Shares are properly tendered for redemption, as described
above. Payment to Shareholders for Shares redeemed will be made within seven
days after receipt by the Distributor of the request for redemption. However, to
the greatest extent possible, the Group will attempt to honor requests from
Shareholders for next Business Day payments upon redemptions of Shares if the
request for redemption is received by the Transfer Agent before the last
Valuation Time on a Business Day or, if the request for redemption is received
after the last Valuation Time, to honor requests for payment within two Business
Days, unless it would be disadvantageous to the Group or the Shareholders of the
particular Fund to sell or liquidate portfolio securities in an amount
sufficient to satisfy requests for payments in that manner.
At various times, the Fund may be requested to redeem Shares for which it has
not yet received good payment. In such circumstances, the Group may delay the
forwarding of proceeds only until payment has been collected for the purchase of
such Shares, which may take up to 10 days or more. To avoid delay in payment
upon redemption shortly after purchasing Shares, investors should purchase
Shares by certified check or by wire transfer. The Group intends to pay cash for
all Shares redeemed, but under abnormal conditions which may make payment in
cash unwise, the Group may make payment wholly or partly in portfolio securities
at their then market value equal to the redemption price. In such cases, an
investor may incur brokerage costs in converting such securities to cash.
See "ADDITIONAL PURCHASE AND REDEMPTION INFORMATION" in the Statement of
Additional Information for examples of when the Group may suspend the right of
redemption or redeem Shares involuntarily if it appears appropriate to do so in
light of the Group's responsibilities under the Investment Company Act of 1940.
DIVIDENDS AND TAXES
The Small Company Growth Fund will be treated as a separate entity for federal
income tax purposes. The Fund intends to qualify for treatment as a "regulated
investment company" under the Internal Revenue Code of 1986, as amended (the
"Code"). If qualified, the Fund will not have to pay federal taxes on amounts it
distributes to Shareholders. Regulated investment companies are subject to a
federal excise tax if they do not distribute substantially all of their income
on a timely basis. The Fund
16
<PAGE> 51
intends to avoid paying federal income and excise
taxes by timely distributing substantially all its net investment income and net
realized capital gains.
Dividends received by a Shareholder of the Fund that are derived from such
Fund's investments in U.S. Government Securities may not be entitled to the
exemption from state and local income taxes that would be available if the
Shareholder had purchased U.S. Government Securities directly. Shareholders are
advised to consult their tax adviser concerning the application of state and
local taxes to distributions received from the Fund.
Shareholders will be advised at least annually as to the amount and federal
income tax character of distributions made during the year.
The amount of dividends payable with respect to the Trust Shares will exceed
dividends on Class A Shares, and the amount of dividends on Class A Shares will
exceed dividends on Class B Shares as a result of the Distribution and
Shareholder Services Plan fee applicable to Class A and Class B Shares.
Net realized capital gains, if any, are distributed at least annually to
Shareholders of record. The Small Company Growth Fund declares and pays
dividends quarterly.
A Shareholder will automatically receive all income dividends and capital gain
distributions in additional full and fractional Shares at net asset value as of
the date of declaration unless the Shareholder elects to receive such dividends
or distributions in cash. Such election, or any revocation thereof, must be made
in writing to the BB&T Mutual Funds Group, P.O. Box 182533, Columbus, OH
43218-2533, and will become effective with respect to dividends and
distributions having record dates after its receipt by the transfer agent.
Reinvested dividends receive the same tax treatment as dividends paid in cash.
Dividends are paid in cash not later than seven Business Days after a
Shareholder's complete redemption of his or her Shares. If you elect to receive
distributions in cash and your checks (1) are returned and marked as
"undeliverable" or (2) remain uncashed for six months, your cash election will
be changed automatically and your future dividend and capital gains
distributions will be reinvested in the Fund at the per share net asset value
determined as of the date of payment of the distribution. In addition, any
undeliverable checks or checks that remain uncashed for six months will be
cancelled and will be reinvested in the Fund at the per share net asset value
determined as of the date of cancellation.
Dividends are generally taxable in the taxable year received. However,
dividends declared in October, November or December to Shareholders of record
during such a month and paid during the following January are treated for tax
purposes as if they were received by each Shareholder on December 31 of the year
in which the dividends were declared.
Dividends will generally be taxable to a Shareholder as ordinary income to the
extent of the Shareholder's ratable share of the earnings and profits of a Fund
as determined for tax purposes. Certain dividends paid by the Small Company
Growth Fund, and so designated by the Fund, may qualify for the dividends
received deduction for corporate shareholders. A corporate shareholder will only
be eligible to claim such a dividends received deduction with respect to a
dividend from the Fund if the shareholder held its shares on the ex-dividend
date and for at least 45 more days during the 90-day period surrounding the
ex-dividend date. Distributions designated by the Fund as deriving from net
gains on securities held for more than one year but not more than 18 months and
from net gains on securities held for more than 18 months will be taxable to
Shareholders as such, regardless of how long the Shareholder has held Shares in
the Fund. Shareholders who are not subject to tax on their income generally will
not have to pay federal income tax on amounts distributed to them.
Dividends that are derived from interest on the Fund's investments in U.S.
Government Securities and that are received by a Shareholder who is a North
Carolina or South Carolina resident are currently eligible for exemption from
those states' income taxes. Such dividends may be eligible for exemption from
the state and local taxes of other jurisdictions as well, although state and
local tax authorities may not agree with this view. However, in North Carolina
and South Carolina, as well as in other states, distributions of income derived
from
17
<PAGE> 52
repurchase agreements and securities lending transactions generally will not
qualify for exemption from state and local income taxes.
The foregoing is a summary of certain federal, state and local income tax
consequences of investing in the Fund. Shareholders should consult their own tax
advisers concerning the tax consequences of an investment in the Fund with
specific reference to their own tax situation.
MANAGEMENT OF BB&T MUTUAL FUNDS GROUP
TRUSTEES OF THE GROUP
Overall responsibility for management of the Group rests with the Board of
Trustees of the Group, who are elected by the Shareholders of the Group. There
are currently five Trustees, two of whom are "interested persons" of the Group
within the meaning of that term under the Investment Company Act of 1940. The
Trustees, in turn, elect the officers of the Group to supervise actively its
day-to-day operations. The Trustees of the Group, their current addresses, and
principal occupations during the past five years are as follows:
<TABLE>
<CAPTION>
POSITION(S) HELD
NAME AND ADDRESS WITH THE GROUP PRINCIPAL OCCUPATION DURING PAST 5 YEARS
- ---------------------------- ---------------------- ----------------------------------------
<S> <C> <C>
*Walter B. Grimm Chairman of the Board From June, 1992 to present, employee of
3435 Stelzer Road BISYS Fund Services; from 1987 to June,
Columbus, OH 43219 1992, President of Leigh Consulting/
Investments (investment firm)
William E. Graham, Jr. Trustee From January 1994 to present, Counsel,
1 Hannover Square Hunton & Williams; from 1985 to
Fayetteville Street Mall December, 1993, Vice Chairman, Carolina
P.O. Box 109 Power & Light Company
Raleigh, NC 27602
Thomas W. Lambeth Trustee From 1978 to present, Executive
101 Reynolda Village Director, Z. Smith Reynolds Foundation
Winston-Salem, NC 27106
*W. Ray Long Trustee Executive Vice President, Branch Banking
434 Fayetteville Street Mall and Trust Company
Raleigh, NC 27601
Robert W. Stewart Trustee Retired; Chairman and Chief Executive
201 Huntington Road Officer of Engineered Custom Plastics
Greenville, SC 29615 Corporation from 1969 to 1990
</TABLE>
- ---------------
* Indicates an "interested person" of the Group as defined in the Investment
Company Act of 1940.
The Trustees receive fees and are reimbursed for expenses in connection with
each meeting of the Board of Trustees they attend. However, no officer or
employee of BISYS Fund Services, BISYS Fund Services Ohio, Inc. or Branch
Banking and Trust Company receives any compensation from the Group for acting as
a Trustee. The officers of the Group (see the Statement of Additional
Information) receive no compensation directly from the Group for performing the
duties of their offices. BISYS Fund Services receives fees from the Group for
acting as Administrator and BISYS Fund Services Ohio, Inc. receives fees from
the Group for acting as Transfer Agent and for providing fund accounting
services to the Group. Walter B. Grimm is an employee of BISYS Fund Services and
W.
18
<PAGE> 53
Ray Long is an employee of the investment adviser, BB&T.
INVESTMENT ADVISER
BB&T is the investment adviser of the Small Company Growth Fund. BB&T is the
oldest bank in North Carolina and is the principal bank affiliate of BB&T
Corporation, a bank holding company that is a North Carolina corporation,
headquartered in Winston-Salem, North Carolina. As of December 31, 1996, BB&T
Corporation had assets of approximately $25 billion. Through its subsidiaries,
BB&T Corporation operates over 425 banking offices in North Carolina, South
Carolina and Virginia, providing a broad range of financial services to
individuals and businesses.
In addition to general commercial, mortgage and retail banking services, BB&T
also provides trust, investment, insurance and travel services. BB&T has
provided investment management services through its Trust and Investment
Services Division since 1912. While BB&T has not provided investment advisory
services to registered investment companies other than the Group, it has
experience in managing collective investment funds with investment portfolios
and objectives comparable to those of the Group. BB&T employs an experienced
staff of professional portfolio managers and traders who use a disciplined
investment process that focuses on maximization of risk-adjusted investment
returns. BB&T has managed common and collective investment funds for its
fiduciary accounts for more than 15 years and currently manages assets of more
than $4.5 billion.
Under an investment advisory agreement between the Group and BB&T, the fee
payable to BB&T by the Fund for investment advisory services is the lesser of:
(a) a fee computed daily and paid monthly at the annual rate of one percent
(1.00%) of the Small Company Growth 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 BB&T. A
fee agreed to in writing from time to time by the Group and BB&T may be
significantly lower than the fee calculated at the annual rate and the effect of
such lower fee would be to lower the Fund's expenses and increase the net income
of the Fund during the period when such lower fee is in effect.
For the fiscal year ended September 30, 1997, the Small Company Growth Fund
paid as investment advisory fees 1.00% of its average daily net assets.
INVESTMENT SUB-ADVISER
PEAC serves as the Investment Sub-Adviser to the Small Company Growth Fund
pursuant to a Sub-Advisory Agreement with BB&T. Under the Sub-Advisory
Agreement, PEAC manages the Fund, selects investments and places all orders for
purchases and sales of the Fund's securities, subject to the general supervision
of the Group's Board of Trustees and BB&T and in accordance with the Small
Company Growth Fund's investment objective, policies and restrictions.
The person primarily responsible for the management of the Small Company
Growth Fund is William J. Wykle. Mr. Wykle has served as the Manager of the
Small Company Growth Fund since its inception. Mr. Wykle has been an investment
manager with PEAC since 1995 and has been the portfolio manager of the Compass
Capital Funds(SM) Small Cap Growth Equity Portfolio since its inception. He has
also been Vice President and Small Cap Growth Equity Fund portfolio manager for
PNC Bank since 1992. He has been a portfolio manager at PNC Bank and its
predecessor, Provident National Bank, since 1986.
PEAC is an indirect wholly-owned subsidiary of PNC Bank, National Association
("PNC Bank"), the former Sub-Adviser to the Small Company Growth Fund, with
offices located at 1600 Market Street, Philadelphia, Pennsylvania 19103. At
September 30, 1997, PEAC had approximately $3.2 billion in discretionary assets
under management, including $1.8 billion in mutual fund portfolios and $1.2
billion in bank common trust funds. PNC Bank is a wholly owned indirect
subsidiary of PNC Bank Corp. PNC Bank Corp., a bank holding company
headquartered in Pittsburgh, Pennsylvania, was the 13th largest bank holding
company in the United States based on total assets at September 30, 1997. PNC
Bank Corp. operates banking subsidiaries in Pennsylvania, Delaware, Florida,
Indiana, Kentucky, Massachusetts, New Jersey and Ohio and
19
<PAGE> 54
conducts certain non-banking operations throughout the United States. Its major
businesses include consumer banking, corporate banking, real estate banking,
mortgage banking and asset management. With $129.6 billion in managed assets and
$388.2 billion of assets under administration at September 30, 1997, PNC Bank
Corp. is one of the largest bank money managers as well as one of the largest
institutional mutual fund managers in the United States. Of such amounts at
September 30, 1997, PNC Bank had $115.2 billion in managed assets and $163.9
billion in assets under administration. In addition to asset management and
trust services, PNC Bank also provides a wide range of domestic and
international commercial banking and consumer banking services. PNC Bank's
origins, and in particular its trust administration services, date back to the
mid-to-late 1800s.
For its services and expenses incurred under the Sub-Advisory Agreement, PEAC
is entitled to a fee, payable by BB&T. The fee is computed daily and paid
monthly at the following annual rates (as a percentage of the Small Company
Growth Fund's average daily net assets), which vary according to the level of
Fund assets:
<TABLE>
<CAPTION>
FUND ASSETS ANNUAL FEE
- ------------------ ------------
<S> <C>
Up to $50 million .50%
Next $50 million .45%
Over $100 million .40%
</TABLE>
ADMINISTRATOR AND DISTRIBUTOR
BISYS Fund Services is the administrator for the Small Company Growth Fund and
also acts as the Group's principal underwriter and distributor (the
"Administrator" or the "Distributor," as the context indicates) under agreements
approved by the Group's Board of Trustees. BISYS Fund Services is wholly owned
by The BISYS Group, Inc., 150 Clove Road, Little Falls, New Jersey 07424, a
publicly owned company engaged in information processing, loan servicing and
401(k) administration and recordkeeping services to and through banking and
other financial organizations.
The Administrator generally assists in all aspects of a Fund's administration
and operation. Under a management and administration agreement between the Group
and the Administrator, the fee payable by the Fund to the Administrator for
management administration services is the lesser of (a) a fee computed at the
annual rate of twenty one-hundredths of one percent (.20%) of the 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 the Fund's expenses and increase the net income of the Fund during the
period when such lower fee is in effect.
For the fiscal year ended September 30, 1997, the Small Company Growth Fund
paid administration fees of .20% of its average daily net assets.
EXPENSES
BB&T and the Administrator each bear all expenses in connection with the
performance of their services as investment adviser and administrator,
respectively, other than the cost of securities (including brokerage
commissions, if any) purchased for the Small Company Growth Fund. The Fund bears
the following expenses relating to its operations: taxes, interest, any
brokerage fees and commissions, fees and travel expenses of the Trustees of the
Group, Securities and Exchange Commission fees, state securities qualification
and renewal fees, costs of preparing and printing prospectuses for regulatory
purposes and for distribution to current Shareholders, outside auditing and
legal expenses, amortized organizational expenses, advisory and administration
fees, fees and out-of-pocket expenses of the custodian and the transfer agent,
fees and out-of-pocket expenses for fund accounting services, expenses incurred
for pricing securities owned by the Fund, certain insurance premiums, costs of
maintenance of the Fund's existence, costs and expenses of Shareholders' and
Trustees' reports and meetings, and any extraordinary expenses incurred in its
operation. As a general matter, expenses are allocated to the Class A, Class B
and Trust Class of the Fund on the basis of the relative net asset value of each
class. At present, the only expenses that will be borne solely by Class A and
Class B Shares, other than in accordance with the relative net asset
20
<PAGE> 55
value of the class, are expenses under the Group's Distribution and Shareholder
Services Plan ("Distribution Plan") which relate only to the Class A and Class B
Shares.
For the fiscal year ended September 30, 1997, the Small Company Growth Fund's
total operating expenses for Trust Shares were 1.64% of its average daily net
assets.
BANKING LAWS
BB&T and PEAC each believes that it possesses the legal authority to perform
the investment advisory and sub-advisory services for the Group contemplated by
its investment advisory agreement with the Group and investment and sub-advisory
agreement with BB&T and described in this Prospectus without violation of
applicable banking laws and regulations, and has so represented to the Group.
Future changes in federal or state statutes and regulations relating to
permissible activities of banks or bank holding companies and their subsidiaries
and affiliates as well as further judicial or administrative decisions or
interpretations of present and future statutes and regulations could change the
manner in which BB&T and PEAC could continue to perform such services for the
Group. See "MANAGEMENT OF BB&T MUTUAL FUNDS GROUP--Glass Steagall Act" in the
Statement of Additional Information for further discussion of applicable banking
laws and regulations.
DISTRIBUTION PLAN
The Distribution Plan contains a so-called "defensive" provision applicable to
all classes of Shares. Under this defensive provision to the extent that any
payment made to the Administrator, including payment of administration fees,
should be deemed to be indirect financing of any activity primarily intended to
result in the sale of Shares issued by the Fund within the context of Rule 12b-1
under the 1940 Act, such payment shall be deemed to be authorized by the
Distribution Plan.
GENERAL INFORMATION
DESCRIPTION OF THE GROUP AND ITS SHARES
The Group was organized as a Massachusetts business trust on October 1, 1987
and commenced active operation on September 24, 1992. The Group has an unlimited
number of authorized Shares of beneficial interest which may, without
Shareholder approval, be divided into an unlimited number of series of such
Shares, and which are presently divided into fourteen series of Shares, one for
each of the following Funds: 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
South Carolina Intermediate Tax-Free Fund, the BB&T U.S. Treasury Money Market
Fund, the BB&T Prime Money Market Fund, the BB&T Balanced Fund, the BB&T Large
Company Growth 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. Each
Fund is authorized to issue three classes of shares: Class A, Class B and Trust
Shares. Currently, the Prime Money Market, the Short-Intermediate, the North
Carolina Fund, South Carolina Fund, and the Funds of Funds are not offering
Class B Shares. Each Share represents an equal proportionate interest in a Fund
with other Shares of the same series and class, and is entitled to such
dividends and distributions out of the income earned on the assets belonging to
that Fund as are declared at the discretion of the Trustees (see "Miscellaneous"
below).
Shareholders are entitled to one vote per Share (with proportional voting for
fractional Shares) on such matters as Shareholders are entitled to vote.
Shareholders vote in the aggregate and not by series or class on all matters
except (i) when required by the Investment Company Act of 1940, Shares shall be
voted by individual series, and (ii) when the Trustees have determined that the
matter affects only the interests of a particular series or class.
21
<PAGE> 56
As used in this Prospectus and in the Statement of Additional Information, a
"vote of a majority of the outstanding Shares" of the Group or a particular Fund
means the affirmative vote, at a meeting of Shareholders duly called, of the
lesser of (a) 67% or more of the votes of Shareholders of the Group or such Fund
present at such meeting at which the holders of more than 50% of the votes
attributable to the Shareholders of record of the Group or such Fund are
represented in person or by proxy, or (b) the holders of more than 50% of the
outstanding votes of Shareholders of the Group or such Fund.
Overall responsibility for the management of the Group is vested in the Board
of Trustees. See "MANAGEMENT OF BB&T MUTUAL FUNDS GROUP--Trustees of the Group."
Individual Trustees are elected by the Shareholders and may be removed by the
Board of Trustees or Shareholders at a meeting held for such purpose in
accordance with the provisions of the Declaration of Trust and the By-laws of
the Group and Massachusetts law. See "ADDITIONAL INFORMATION--Miscellaneous" in
the Statement of Additional Information for further information.
Although the Group is not required to hold annual meetings of Shareholders,
Shareholders holding at least 10% of the Group's outstanding Shares have the
right to call a meeting to elect or remove one or more of the Trustees of the
Group. Shareholder inquiries should be directed to the Secretary of the Group at
3435 Stelzer Road, Columbus, Ohio 43219.
As of January 22, 1998 BB&T owned of record substantially all of the Trust
Shares of the Fund and held voting or investment power with respect to more than
95% of the Trust Shares of the Small Company Growth Fund. BB&T may therefore be
deemed to be a "controlling person" of the Trust Shares of the Fund within the
meaning of the Investment Company Act of 1940.
CUSTODIAN, TRANSFER AGENT AND FUND ACCOUNTANT
Star Bank N.A., 425 Walnut Street, Cincinnati, Ohio 45201, serves as Custodian
for the Small Company Growth Fund.
BISYS Fund Services Ohio, Inc. serves as transfer agent for and provides fund
accounting services to the Group.
OTHER CLASSES OF SHARES
In addition to Trust Shares, the Small Company Growth Fund also offers Class A
and Class B Shares. Class A Shares are offered to the general public at net
asset value plus an applicable sales charge. Class B shares are offered to the
general public at net asset value without a sales charge when purchased, but are
subject to a sales charge if a Shareholder redeems them prior to the sixth
anniversary of purchase. Class A and Class B Shares are also subject to a
Distribution and Shareholder Services Plan fee.
PERFORMANCE INFORMATION
From time to time performance information of the Fund showing its average
annual total return, aggregate total return, and/or yield may be presented in
advertisements, sales literature and shareholder reports. Such performance
figures are based on historical earnings and are not intended to indicate future
performance. Average annual total return will be calculated for the period since
the establishment of the Fund and will, unless otherwise noted, reflect the
imposition of the maximum sales charge. Average annual total return is measured
by comparing the value of an investment in the Fund at the beginning of the
relevant period to the redemption value of an investment at the end of the
period (assuming immediate reinvestment of any dividends or capital gains
distributions). Aggregate total return is calculated similarly to average annual
total return except that the return figure is aggregated over the relevant
period instead of annualized. Yield will be computed by dividing the net
investment income per Share for the Fund earned during a recent 30-day period by
its per Share maximum offering price (reduced by any undeclared earned income
expected to be paid shortly as a dividend) on the last day of the period and
annualizing the results.
The Fund may also present its average annual total return, aggregate total
return, yield and/or tax
22
<PAGE> 57
equivalent yield, as the case may be, excluding the effect of a sales charge, if
any.
The Fund may also calculate a distribution rate. Distribution rates will be
computed by dividing the distribution per Share of a class made by the Fund over
a twelve-month period by the maximum offering price per Share. The distribution
rate includes both income and capital gain dividends and does not reflect
unrealized gains or losses. The calculation of income in the distribution rate
includes both income and capital gain dividends and does not reflect unrealized
gains or losses, although the Fund may also present a distribution rate
excluding the effect of capital gains. The distribution rate differs from the
yield, because it includes capital items which are often non-recurring in
nature, and may include returns of principal, whereas yield does not include
such items. The Fund does not intend to publish distribution rates in Fund
advertisements but may publish such rates in supplemental sales literature.
Distribution rates may also be presented excluding the effect of a sales charge,
if any.
Yield, effective yield, total return and distribution rate will be calculated
separately for each Class of Shares. Because Trust Shares are not subject to
Distribution and Shareholder Services Plan fees, the yield and total return for
Trust Shares will be higher than that of the Class A or Class B Shares for the
same period.
Investors may also judge the performance of the Fund by comparing its
performance to the performance of other mutual funds with comparable investment
objectives and policies through various mutual fund or market indices and data
such as that provided by Lipper Analytical Services, Inc., IBC/Donoghue's MONEY
FUND REPORT and Ibbotson Associates, Inc. References may also be made to indices
or data published in Money Magazine, Forbes, Barron's, The Wall Street Journal,
The New York Times, Business Week, American Banker, Fortune, Institutional
Investor, Ibbotson Associates, Inc., Morningstar, Inc., CDA/Weisenberger,
Pension and Investments, U.S.A. Today and local newspapers. In addition to
performance information, general information about the Funds that appears in a
publication such as those mentioned above may be included in advertisements and
in reports to Shareholders.
Information about the performance of the Fund is based on its record up to a
certain date and is not intended to indicate future performance. Yield and total
return of any investment are generally functions of portfolio quality and
maturity, type of investments and operating expenses. Yields and total returns
of a Fund will fluctuate. Any fees charged by the Participating Organizations to
their customers in connection with investment in the Fund are not reflected in
the Group's performance information.
Further information about the performance of the Fund is contained in the
Group's annual report to Shareholders, which may be obtained without charge by
calling (800) 228-1872.
MISCELLANEOUS
Shareholders will receive unaudited semi-annual reports describing the
investment operations of the Small Company Growth Fund and annual financial
statements audited by independent public accountants.
Inquiries regarding the Fund may be directed in writing to the Group at the
following address--the BB&T Mutual Funds Group, P.O. Box 182533, Columbus, OH
43218-2533 or by calling toll free (800) 228-1872.
23
<PAGE> 58
[THIS PAGE INTENTIONALLY LEFT BLANK]
<PAGE> 59
[THIS PAGE INTENTIONALLY LEFT BLANK]
<PAGE> 60
INVESTMENT ADVISER
BRANCH BANKING AND TRUST COMPANY
434 FAYETTEVILLE STREET MALL
RALEIGH, NC 27601
INVESTMENT SUB-ADVISER
PNC EQUITY ADVISORS COMPANY
1600 MARKET STREET, 27TH FLOOR
PHILADELPHIA, PA 19103
ADMINISTRATOR AND DISTRIBUTOR
BISYS FUND SERVICES
3435 STELZER ROAD
COLUMBUS, OH 43219
LEGAL COUNSEL
ROPES & GRAY
ONE FRANKLIN SQUARE
1301 K STREET, N.W., SUITE 800 EAST
WASHINGTON, DC 20005
TRANSFER AGENT
BISYS FUND SERVICES OHIO, INC.
3435 STELZER ROAD
COLUMBUS, OH 43219
AUDITORS
KPMG PEAT MARWICK LLP
TWO NATIONWIDE PLAZA, SUITE 1600
COLUMBUS, OH 43215
<PAGE> 61
----------------
BB&T MUTUAL FUNDS GROUP
STATEMENT OF ADDITIONAL INFORMATION
FEBRUARY 1, 1998
----------------
This Statement of Additional Information is not a Prospectus, but should be
read in conjunction with the Prospectuses of the BB&T Prime Money Market Fund,
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 South Carolina Intermediate Tax-Free Fund, the BB&T
Balanced Fund, the BB&T Large Company Growth 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 are dated February 1, 1998 and the
Prospectuses of the BB&T U.S. Treasury Money Market Fund and the BB&T Prime
Money Market Fund which are dated February 1, 1998. 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.
<PAGE> 62
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
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-19
VALUATION......................................................................................................B-19
Valuation of the Money Market Funds........................................................................B-20
Valuation of the Growth and Income Fund, North Carolina Fund, South Carolina Fund,
Short-Intermediate Fund, Intermediate Bond Fund, Balanced Fund, Large Company
Growth Fund, Small Company Growth Fund, and the Funds of Funds....................................B-21
Valuation of the International Equity Fund.................................................................B-21
ADDITIONAL PURCHASE AND REDEMPTION INFORMATION.................................................................B-22
Purchase of Class A and Class B Shares.....................................................................B-23
Matters Affecting Redemption...............................................................................B-24
ADDITIONAL TAX INFORMATION.....................................................................................B-24
Additional Tax Information Concerning the International Equity Fund........................................B-26
Additional Tax Information Concerning the North Carolina and South
Carolina Funds ............................................................................................B-27
Special Considerations Regarding Investment in South Carolina Tax-Exempt Obligations
.................................................................................................B-35
MANAGEMENT OF BB&T MUTUAL FUNDS GROUP..........................................................................B-35
Officers ..................................................................................................B-35
Investment Adviser.........................................................................................B-37
Investment Sub-Advisers....................................................................................B-39
Portfolio Transactions.....................................................................................B-40
Glass-Steagall Act.........................................................................................B-42
Manager and Administrator..................................................................................B-43
Distributor................................................................................................B-45
Custodian..................................................................................................B-47
Independent Auditors.......................................................................................B-47
Legal Counsel..............................................................................................B-47
PERFORMANCE INFORMATION........................................................................................B-47
Yields of the Money Market Funds...........................................................................B-47
Yields of the Other Funds of the Group.....................................................................B-48
Calculation of Total Return................................................................................B-50
Performance Comparisons....................................................................................B-51
</TABLE>
-i-
<PAGE> 63
<TABLE>
<S> <C>
ADDITIONAL INFORMATION.........................................................................................B-56
Organization and Description of Shares.....................................................................B-56
Shareholder and Trustee Liability..........................................................................B-57
Miscellaneous..............................................................................................B-57
FINANCIAL STATEMENTS...........................................................................................B-70
Independent Auditors' Report...............................................................................B-70
Audited Financial Statements as of September 30, 1997......................................................B-70
APPENDIX.......................................................................................................B-71
</TABLE>
-ii-
<PAGE> 64
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 fourteen series of units of
beneficial interest ("Shares") offered to the public, each representing
interests in one of fourteen separate investment portfolios ("Funds"): the BB&T
U.S. Treasury Money Market Fund (the "U.S. Treasury Fund"), the BB&T Prime
Money Market Fund (the "Prime Money Market Fund" and together with the U.S.
Treasury Fund, the "Money Market Funds") 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 South Carolina
Intermediate Tax-Free Fund (the "South Carolina Fund"), the BB&T Balanced Fund
(the "Balanced Fund"), the BB&T Large Company Growth Fund (the "Large Company
Growth Fund"), the BB&T Small Company Growth Fund (the "Small Company Growth
Fund"), the BB&T International Equity Fund (the "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 (collectively,
the "Funds of Funds") which offer Shareholders a professionally-managed
investment program by purchasing shares of existing Funds of the Group (the
"Underlying Funds"). Each Fund may offer to the public three classes of Shares:
Class A Shares, Class B Shares and Trust Shares. As of the date of this
Statement of Additional Information, Class B Shares were not yet being offered
in the Prime Money Market, Short-Intermediate, North Carolina and South
Carolina Funds and the Funds of Funds. 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 Equity Advisors Company ("PEAC"), CastleInternational Asset
Management Limited
B-1
<PAGE> 65
("CastleInternational") and PNC Institutional Management Corporation ("PIMC")
(PEAC, CastleInternational and PIMC, each a "Sub-Adviser") with regard to
portfolio investments for the Funds and provides a description of relevant
ratings assigned by each such NRSRO. A rating by an NRSRO may be 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.
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 each Fund, except for the U.S. Treasury
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 Prime Money Market Fund, Growth and Income Fund, Large
Company Growth Fund, Small Company Growth Fund, Short-Intermediate Fund,
Intermediate Bond Fund, International Equity 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
B-2
<PAGE> 66
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. The
absence of such an active secondary market, however, could make it difficult
for a 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 a 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 the
Sub-Adviser will consider the earning power, cash flow, and other liquidity
ratios of the issuers of such notes and will continuously monitor their
financial status and ability to meet payment on demand. Where necessary to
ensure that a note is of "high quality," a Fund will require that the issuer's
obligation to pay the principal of the note be backed by an unconditional bank
letter or line of credit, guarantee or commitment to lend. In determining
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 Prime Money Market Fund, Growth and Income
Fund, Balanced Fund, Large Company Growth 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
a 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
B-3
<PAGE> 67
developments, possible seizure, currency blockage, nationalization or
expropriation of foreign investments, less stringent disclosure requirements,
the possible establishment of exchange controls or taxation at the source, and
the adoption of other foreign governmental restrictions.
Additional risks include currency exchange risks, less publicly
available information, the risk that companies may not be subject to the
accounting, auditing and financial reporting standards and requirements of U.S.
companies, the risk that foreign securities markets may have less volume and
therefore many securities traded in these markets may be less liquid and their
prices more volatile than U.S. securities, and the risk that custodian and
brokerage costs may be higher. Foreign issuers of securities or obligations are
often subject to accounting treatment and engage in business practices
different from those respecting domestic issuers of similar securities or
obligations. Foreign branches of U.S. banks and foreign banks may be subject
to less stringent reserve requirements than those applicable to domestic
branches of U.S. banks. The Prime Money Market Fund, Growth and Income Fund,
Balanced Fund, Large Company Growth Fund, Small Company Growth Fund, and the
Funds of Funds will acquire such securities only when BB&T or the Sub-Adviser
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
B-4
<PAGE> 68
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 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 or the Sub-Adviser
deems creditworthy under guidelines approved by the Board of Trustees, subject
to the seller's agreement to repurchase such securities at a mutually
agreed-upon date and price. The repurchase price would generally equal the
price paid by the Fund plus interest negotiated on the basis of current
short-term rates, which may be more or less than the rate on the underlying
portfolio securities. The seller under a repurchase agreement will be required
to maintain the value of collateral held pursuant to the agreement at not less
than the repurchase price (including accrued interest) and BB&T or the
Sub-Adviser will monitor the collateral's value to ensure that it equals or
exceeds the repurchase price (including accrued interest). In addition,
securities subject to repurchase agreements will be held in a segregated
account.
If the seller were to default on its repurchase obligation or become
insolvent, a 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").
B-5
<PAGE> 69
Reverse Repurchase Agreements. As discussed in the Prospectuses, each
of the Funds may borrow funds for temporary purposes by entering into reverse
repurchase agreements in accordance with each 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 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 it
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 or the
Sub- Adviser believes that the credit risk with respect thereto is minimal.
Supranational Organizational Obligations. The Large Company Growth
Fund, Small Company Growth Fund, International Equity Fund and Prime Money
Market 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 Large Company Growth Fund,
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 Large Company Growth
Fund, Small Company Growth Fund and the International Equity Fund may
participate in rights offerings
B-6
<PAGE> 70
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 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 Prime Money Market Fund, the
North Carolina Fund and the South Carolina Fund may acquire variable and
floating rate notes, subject to each 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 a Fund will be
determined by BB&T with respect to the North Carolina and South Carolina Funds,
(or PIMC with respect to the Prime Money Market Fund) 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 a Fund's
investment policies. In making such determinations, BB&T with respect to the
North Carolina and South Carolina Funds (or PIMC with respect to the Prime
Money Market Fund) 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
Prime Money Market Fund, the North Carolina Fund or the South Carolina Fund, a
Fund may resell a note at any time to a third party. The absence of an active
secondary market, however, could make it difficult for a Fund to dispose of a
variable or floating rate note in the event the issuer of the note defaulted on
its payment obligations and a 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.
For purposes of the North Carolina Fund, the South Carolina Fund and
the Prime Money Market Fund, the maturities of the variable and floating rate
notes will be determined in accordance with Rule 2a-7 under the 1940 Act.
B-7
<PAGE> 71
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"). Under normal market conditions, the South
Carolina Fund will invest at least 90% of its total assets in high grade
obligations issued by or on behalf of the State of South 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 South Carolina personal income tax and not treated as a preference item for
purposes of the federal alternative minimum tax for individuals ("South
Carolina Tax-Exempt Obligations"). In addition to North Carolina Tax-Exempt
Obligations and South Carolina Tax-Exempt Obligations, the North Carolina Fund
and the South Carolina Fund may invest in Tax-Exempt Obligations issued by or
on behalf of states other than North Carolina and South 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, North Carolina Tax-Exempt Obligations and South 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.
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.
B-8
<PAGE> 72
As described in the Prospectus, the two principal classifications of
Tax-Exempt Obligations consist of "general obligation" and "revenue" issues.
The North Carolina and South Carolina Funds are permitted to invest in
Tax-Exempt Obligations and may also acquire "moral obligation" issues, which
are normally issued by special purpose authorities. Currently, neither North
Carolina nor South Carolina issuers have authority to issue moral obligation
securities. 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 and South Carolina Funds, 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 or South
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 or South Carolina Funds.
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 generally constitute general
obligations of the issuer for which the lessee's unlimited taxing power is
pledged (in South Carolina, governmental lease obligations are included in
calculation of the general obligation debt limit), 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 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
B-9
<PAGE> 73
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 Large Company Growth Fund, Small Company Growth Fund,
International Equity Fund, and Prime Money Market 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 Fund's custodian will set aside
cash or liquid portfolio securities equal to the amount of the commitment in a
separate account. Normally, the custodian will set aside portfolio securities
to satisfy the purchase commitment, and in such a case, 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 Large Company Growth Fund, Small Company Growth Fund,
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. 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
B-10
<PAGE> 74
provided the difference is maintained by the Fund in cash or cash equivalents
in a segregated account with its custodian.
The purpose of writing covered call options is to generate additional
premium income for the 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 the opinion of a Fund's adviser or sub-adviser, 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.
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.
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 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.
B-11
<PAGE> 75
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 the Sub-Adviser, in determining
whether a particular call option should be written on a particular security,
will consider the reasonableness of the anticipated premium and the likelihood
that a liquid secondary market will exist for those options. The premium
received by a Fund for writing covered call options will be recorded as a
liability in 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.
A Fund will realize a profit or loss from a closing purchase
transaction if the cost of the transaction is less or more than the premium
received from the writing of the option. Because increases in the market price
of a call option will generally reflect increases in the market price of the
underlying security, any loss resulting from the repurchase of a call option is
likely to be offset in whole or in part by appreciation of the underlying
security owned by a Fund.
B-12
<PAGE> 76
Puts. The North Carolina and South Carolina Funds may acquire "puts"
with respect to Tax-Exempt Obligations held in their portfolios and the Funds
of Funds may acquire puts with respect to the securities in their portfolios. A
put is a right to sell a specified security (or securities) within a specified
period of time at a specified exercise price. 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 and South Carolina Funds
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 and South Carolina Funds 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 and South Carolina Funds 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 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
B-13
<PAGE> 77
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. Each Fund of the Group (other
than the U.S. Treasury Money Market Fund) 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 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
B-14
<PAGE> 78
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.
Standard & Poor's Depository Receipts
Each of the Growth and Income Stock Fund, Balanced Fund, Large Company
Growth Fund, and Small Company Growth Fund may invest in Standard & Poor's
Depository Receipts ("SPDRs"). SPDRs represent interests in trusts sponsored by
a subsidiary of the American Stock Exchange, Inc. and are structured to provide
investors proportionate undivided interests in a securities portfolio
constituting substantially all the common stocks (in substantially the same
weighting) as the component common stocks of a particular Standard & Poor's
Index ("S&P Index"), e.g., the S&P 500. SPDRs are not redeemable, but are
exchange traded. SPDRs represent interests in an investment company that is not
actively managed, i.e., securities are held in an effort to track the
performance of the pertinent S&P Index and not for the purpose of selecting
securities that are considered superior investments. The results of SPDRs will
not replicate exactly the performance of the pertinent S&P Index due to
reductions in the SPDRs' performance attributable to transaction and other
expenses, including fees to service providers, borne by the SPDRs. SPDRs
distribute dividends on a quarterly basis. Under the 1940 Act, a fund must
limit investments in SPDRs to 5% of the fund's total assets and 3% of the
outstanding voting securities of the SPDRs issuer. Moreover, a Fund's
investments in SPDRs, when aggregated with all other investments in investment
companies, may not exceed 10% of the Fund's total assets.
B-15
<PAGE> 79
Closed-End Investment Companies
The Balanced Fund may invest in closed-end investment companies that
invest a significant portion of their assets in convertible securities. The
shares of closed-end investment companies, which are not redeemable, will be
purchased only if they are traded on a domestic stock exchange. Closed-end Fund
shares often trade at a substantial discount (or premium) from their net asset
value. Therefore, there can be no assurance that a share of a closed-end Fund,
when sold, will be sold at a price that approximates its net asset value. Under
the 1940 Act, the Balanced Fund will limit investments in each such closed-end
Fund to the lesser of 5% of the Balanced Fund's total assets or 3% of the
closed-end Fund's outstanding voting securities. Furthermore, the Balanced
Fund's investments in all investment companies may not exceed 10% of the Fund's
total assets.
Convertible securities are fixed income-securities which may be
exchanged or converted into a predetermined number of the issuer's underlying
common stock at the option of the holder during a specified time period.
Convertible securities may take the form of convertible perferred stock,
convertible bonds or debentures, units consisting of "usable" bonds and
warrants or a combination of the features of several of these securities.
Convertible bonds and convertible preferred stocks are fixed-income securities
that generally retain the investment characteristics of fixed-income securities
until they have been converted, but also react to movements in the underlying
equity securities. The holder is entitled to receive the fixed-income of a bond
or the dividend preference of a preferred stock until the holder elects to
exercise the conversion privilege. Usable bonds are corporate bonds that can be
used in whole or in part, customarily at full face value, in lieu of cash to
purchase the issuer's common stock. When owned as part of a unit along with
warrants, which are options to buy the common stock, they function as
convertible bonds, except that the warrants generally will expire before the
bond's maturity. Convertible securities are senior to equity securities, and,
therefore, have a claim to assets of the corporation prior to the holders of
common stock in the case of liquidation. However, convertible securities are
generally subordinated to similar non-convertible securities of the same
company. The interest income and dividends from convertible bonds and preferred
stocks provide a stable stream of income with generally higher yields than
common stocks, but lower than non-convertible securities of similar quality.
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 and Prime Money Market Fund) may:
B-16
<PAGE> 80
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;
2. Purchase or sell commodities, commodity contracts (including
futures contracts, with respect to each Fund other than the Large Company
Growth Fund, 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, South Carolina Fund, Short-Intermediate Fund, Intermediate
Bond Fund, Balanced Fund, Large Company Growth 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, South Carolina Fund, Short-Intermediate Fund,
Intermediate Bond Fund, Balanced Fund, Large Company Growth 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 and the Prime
Money Market Fund; (ii) the North Carolina and South Carolina Funds 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 Large Company Growth Fund, the Small Company Growth Fund, the International
Equity Fund, and the Prime Money Market 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 Large Company Growth Fund, the Small Company Growth Fund, the International
Equity Fund, and the Prime Money Market 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, South
B-17
<PAGE> 81
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 and South Carolina Funds may not
invest in private activity bonds where the payment of principal and interest
are the responsibility of a company (including its predecessors) with less than
three years of continuous operation.
The International Equity Fund may not:
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 the
Fund's sale of securities short against the box, and (b) the Fund may obtain
short-term credit as may be necessary for the clearance of 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 Prime Money Market Fund may not:
1. Purchase any securities which would cause, at the time of purchase,
less than 25% of the value of its total assets to be invested in the
obligations of issuers in the financial services industry, or in obligations,
such as repurchase agreements, secured by such obligations (unless the Fund is
in a temporary defensive position) or which would cause, at the time of
purchase, more than 25% of the value of its total assets to be invested in the
obligations of issuers in any other industry. In applying the investment
limitations stated in this paragraph, (i) there is no limitation with respect
to the purchase of (a) instruments issued or guaranteed by the United States,
any state, territory or possession of the United States, the
B-18
<PAGE> 82
District of Columbia or any of their authorities, agencies, instrumentalities
or political subdivisions, (b) instruments issued by domestic banks (which may
include U.S. branches of foreign banks) and (c) repurchase agreements secured
by the instruments described in clauses (a) and (b); (ii) wholly-owned finance
companies will be considered to be in the industries of their parents if their
activities are primarily related to financing the activities of the parents;
and (iii) utilities will be divided according to their services, for example,
gas, gas transmission, electric and gas, electric and telephone will be each
considered a separate industry. For purposes of this limitation, a security is
considered to be issued by the entity (or entities) whose assets and revenues
back the security. A guarantee of a security is not deemed to be a security
issued by the guarantor when the value of all securities issued and guaranteed
by the guarantor, and owned by the Fund, does not exceed 10% of the value of
the Fund's total assets.
2. Underwrite securities except to the extent permitted by the
Investment Company Act of 1940 or the rules or regulations thereunder, as such
statutes, rules or regulations may be amended from time to time.
3. Purchase or sell commodities, commodities contracts, futures
contracts, or real estate except to the extent permitted by the Investment
Company Act of 1940 or the rules or regulations thereunder, as such statutes,
rules or regulations may be amended from time to time.
Although the foregoing investment limitations would permit the Prime
Money Market Fund to invest in options, futures contracts and options on
futures contracts, the Fund does not currently intend to trade in such
instruments or engage in such transactions during the next twelve months
(except to the extent a portfolio security may be subject to a "demand feature"
or "put" as permitted under SEC regulations for money market funds). Prior to
making any such investments, the Prime Money Market Fund would notify its
shareholders and add appropriate descriptions concerning the instruments and
transactions to its Prospectus.
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 deemed to have 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 and the Prime Money Market Fund will limit
their investment in such securities to 10% of their net assets;
None of the Funds (except the Prime Money Market Fund) may:
B-19
<PAGE> 83
1. 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;
2. Invest in any issuer for purposes of exercising control or
management; and
3. 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.
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, 1997, and
September 30, 1996, the portfolio turnover rates for each of the Funds with a
full year of operations in the subject fiscal years (other than the U.S.
Treasury Fund) were as follows: Short-Intermediate Fund: 87.99% and 54.82%,
respectively; Intermediate Bond Fund: 62.45% and 76.29%, respectively; Growth
and Income Fund: 22.66% and 19.82%, respectively; North Carolina Fund: 16.98%
and 20.90%, respectively; Small Company Growth Fund: 80.66% and 71.62%,
respectively; the common stock portion of the Balanced Fund: 26.57% and 15.01%,
respectively, and the fixed income portion of the Balanced Fund: 27.59% and
4.86%, respectively, and 4.86% with respect to the fixed income portion of its
portfolio and 23.68%, 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 and the Prime Money Market Fund intend
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, 1997 and September 30, 1996, and is expected to
remain zero percent for regulatory purposes.
B-20
<PAGE> 84
VALUATION
The net asset value of each of the Funds, other than the Money Market
Funds, 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 each Money Market
Fund is determined and it Shares are priced as of 12:00 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 Money Market Funds
The U.S. Treasury Fund and the Prime Money Market Fund have elected to
use the amortized cost method of valuation pursuant to Rule 2a-7 under the 1940
Act. This involves valuing an instrument at its cost initially and thereafter
assuming a constant amortization to maturity of any discount or premium,
regardless of the impact of fluctuating interest rates on the market value of
the instrument. This method may result in periods during which value, as
determined by amortized cost, is higher or lower than the price the U.S.
Treasury Fund and the Prime Money Market Fund would receive if it sold the
instrument. The value of securities in the U.S. Treasury Fund and the Prime
Money Market Fund can be expected to vary inversely with changes in prevailing
interest rates.
Pursuant to Rule 2a-7, each Money Market Fund will maintain a
dollar-weighted average portfolio maturity appropriate to its objective of
maintaining a stable net asset value per Share, provided that the Fund will not
purchase any security with a remaining maturity of more than thirteen months
(securities subject to repurchase agreements may bear 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 each
Money Market Fund's investment objective, to stabilize the net asset value per
Share of each Money Market Fund for purposes of sales and redemptions at $1.00.
These procedures include review by the Trustees, at such intervals as they deem
appropriate, to determine the extent, if any, to which the net asset value per
Share of the Money Market Fund calculated by using available market quotations
deviates from $1.00 per Share. In the event such deviation exceeds one-half of
one percent, Rule 2a-7 requires that the Board of Trustees promptly consider
what action, if any, should be initiated. If the Trustees believe that the
extent of any deviation from a Money Market Fund's $1.00 amortized cost price
per Share may result in material dilution or other
B-21
<PAGE> 85
unfair results to new or existing investors, they will take such steps as they
consider appropriate to eliminate or reduce to the extent reasonably
practicable any such dilution or unfair results. These steps may include
selling portfolio instruments prior to maturity, shortening the dollar-weighted
average portfolio maturity, withholding or reducing dividends, reducing the
number of the Fund's outstanding Shares without monetary consideration, or
utilizing a net asset value per Share determined by using available market
quotations.
Valuation of the Growth and Income Fund, North Carolina Fund, South Carolina
Fund, Short- Intermediate Fund, Intermediate Bond Fund, Balanced Fund, Large
Company Growth 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.
B-22
<PAGE> 86
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
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.
B-23
<PAGE> 87
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.
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,
South Carolina Fund, Short- Intermediate Fund, Intermediate Bond Fund, Balanced
Fund, Large Company Growth 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.
Shares of The U.S. Treasury Fund and the Prime Money Market Fund and
Class B Shares of each Fund offering such Shares 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. Shareholders obtaining Class B Shares of a Money
Market 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 Money Market 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.
B-24
<PAGE> 88
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) 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 Internal Revenue Code of 1986, as amended (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) 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 (c)
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.
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-25
<PAGE> 89
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," "constructive sale," and "short
sale" rules), the effect of which may be to accelerate income to the Fund,
defer losses to the Fund, cause adjustments in the holding periods of the
Fund's assets, convert short-term capital losses into long-term capital losses,
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-26
<PAGE> 90
Although each Fund expects to qualify as a "regulated investment
company" (a "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 "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-27
<PAGE> 91
for purposes of the Code. "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, any gain or loss with respect to the
contract shall be treated as short-term capital gain or loss, to the extent of
40% of such gain or loss, and long-term capital gain or loss, to the extent of
60% of such gain or loss. 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 and South Carolina
Funds
As indicated in the Prospectuses, the North Carolina and South
Carolina Funds are designed to provide North Carolina and South Carolina
Shareholders, respectively, with current tax-exempt interest income. The Funds
are not intended to constitute a balanced investment program and are not
designed for investors seeking capital appreciation or maximum tax-exempt
income irrespective of fluctuations in principal. Shares of the North Carolina
and South Carolina Funds would not be suitable for tax-exempt institutions and
may not be suitable for retirement plans qualified under Section 401 of the
Code, so-called Keogh or H.R. 10 plans, and individual retirement accounts.
Such plans and accounts are generally tax-exempt and, therefore, would not
realize any additional benefit from the dividends of the North Carolina and
South Carolina Funds being tax-exempt, and such dividends would be ultimately
taxable to the beneficiaries when distributed to them.
B-28
<PAGE> 92
In addition, the North Carolina and South Carolina Funds may not be
appropriate investments for Shareholders who are "substantial users" of
facilities financed by private activity bonds or "related persons" thereof.
"Substantial user" is defined under U.S. Treasury Regulations to include a
non-exempt person who regularly uses a part of such facilities in his trade or
business, and whose gross revenues derived with respect to the facilities
financed by the issuance of bonds represent more than 5% of the total revenues
derived by all users of such facilities, or who occupies more than 5% of the
usable area of such facilities, or for whom such facilities or a part thereof
were specifically constructed, reconstructed or acquired. "Related person"
includes certain related natural persons, affiliated corporations, a
partnership and its partners and an S Corporation and its shareholders. Each
Shareholder 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 and
South Carolina Funds 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 and South Carolina Funds 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
and South Carolina Funds, respectively, during such year, regardless of the
period for which the Shares were held.
While the North Carolina and South Carolina Funds do not expect to
realize any significant amount of long-term capital gains, any net realized
long-term capital gains will be distributed annually. The North Carolina and
South Carolina Funds will have no tax liability with respect to such
distributed gains, and the distributions will be taxable to Shareholders as net
gains on securities held for more than one year but not more than 18 months or
as net gains on securities held for more than 18 months, as the case may be,
regardless of how long a Shareholder has held the Shares of the North Carolina
or South Carolina Funds. Such distributions will be designated as a capital
gains dividend in a written notice mailed by the North Carolina and South
Carolina Funds to their respective Shareholders within sixty days after the
close of each Fund's taxable year.
Distributions of exempt-interest dividends, to the extent attributable
to interest on North Carolina and South Carolina Tax-Exempt Obligations and to
interest on direct obligations of the United States (including territories
thereof), are not subject to North Carolina or South Carolina (respectively)
individual or corporate income tax. Distributions of
B-29
<PAGE> 93
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.
Distributions of gains attributable to obligations of the State of South
Carolina are subject to South Carolina individual and corporate income tax.
While the North Carolina and South Carolina Funds do not expect to
earn any significant amount of investment company taxable income, taxable
income earned by the North Carolina and South Carolina Funds will be
distributed to their respective Shareholders. In general, the investment
company taxable income will be the taxable income of each 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 Funds 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 and South Carolina Funds 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 and South Carolina Funds could acquire under the 1940 Act.
Therefore, although the North Carolina and South Carolina Funds will only
acquire a put after concluding that such put will have the tax consequences
described above, the Internal Revenue Service could reach a different
conclusion from that of the North Carolina and South Carolina Funds. If the
North Carolina or South Carolina Funds were 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
and South Carolina Funds. No attempt has been made to present a detailed
explanation of the Federal or state income tax treatment of the North Carolina
and South Carolina Funds or their Shareholders and this discussion is not
intended as a substitute for careful tax planning. Accordingly, potential
purchasers of Shares of the North Carolina and South Carolina Funds are urged
to consult their tax advisers with specific reference to their own tax
situation. In addition, the foregoing discussion is based on tax laws and
regulations which are in effect on the date of this
B-30
<PAGE> 94
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 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.
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.
Fiscal year 1997 ended with a positive General Fund balance of
approximately $760.6 million. Along with additional reserves, $135 million was
reserved in the Reserve for Repair and Renovation of State Facilities, in
addition to a supplemental reserve of $39.3 million for repairs and
renovations. An additional $49.4 million was transferred to the Clean Water
Management Trust Fund and $115 million and $156 million were reserved in
newly-created Disaster Relief and Intangible Tax Refund Reserves, respectively.
No additional amounts were transferred to the Savings Reserve for the year.
After additional reserves, the
B-31
<PAGE> 95
unrestricted General Fund balance at the end of fiscal year 1997 was
approximately $319.9 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, 1996 was $1,422.1 million. The foregoing
results for fiscal year 1997 are based upon unaudited financial information
supplied by the North Carolina General Assembly. Modified accrual basis results
were not available as of the date this summary was prepared.
On August 28, 1997, the North Carolina General Assembly adopted the
biennium budget for 1997 to 1999. The $11.4 billion budget for fiscal year 1998
included a 7.6% increase in spending over the fiscal year 1997 budget.
Highlights of the new budget included increased spending for education, with
$181 million in funding for teacher pay raises averaging 6.5% and $92 million
to implement the newly-enacted Excellent Schools Act, which raises teacher
salaries to the national average over four years and requires teachers at low-
performing schools to pass competency tests. Money was also reserved for
schools that achieve or surpass academic goals, school technology funds, new
school buses, staff development programs, community college job training
programs, and other education purposes. The General Assembly also passed a
welfare reform program, adopted a streamlined process for cleaning up
brownfields for reuse as industrial and commercial sites, and cut the North
Carolina sales tax on food by 1% beginning in 1998.
The General Assembly adjusted downward the General Fund appropriation
support for the continuation budgets by $425.4 million and $242.2 million in
fiscal years 1998 and 1998, respectively, and authorized continuation funding
of $10,439.4 million for fiscal year 1998 and $10,957.5 million for fiscal year
1999. The adjustments included reductions of expenditures resulting from
supporting revenues sources being reclassified from tax and nontax revenues to
departmental receipts, increases in departmental receipts and federal receipts,
reductions of projected operating costs, and other efficiencies and savings.
Increases of $798.7 million for fiscal year 1998 and $574.5 million for fiscal
year 1999 were approved for operating budgets.
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.
B-32
<PAGE> 96
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 July 1997, North Carolina ranked
tenth among the states in non-agricultural employment and eighth in
manufacturing employment. The Commission estimated North Carolina's seasonally
adjusted unemployment rate in September 1997 to be 3.7% of the labor force, as
compared with an unemployment rate of 4.9% 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 and Patton 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.
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 (Swanson). 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.
B-33
<PAGE> 97
An additional lawsuit was filed in 1995 in State court by Federal
pensioners to recover State income taxes paid on Federal retirement benefits
(Patton). 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. Should plaintiffs previal in
Bailey, such a result, the Federal retirees allege, would re-establish the
disparity of treatment between State and Federal pension income which was held
unconstitutional in Davis. The North Carolina Attorney General believes that
sound legal authority and arguments support the denial of this claim. Potential
refunds and interest are estimated to be $585.09 million for the period thorugh
fiscal year 1997. Until this matter is resolved, any additoinal potential
refunds and interest will continue to accrue.
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 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. An appeal from this order is pending in the North Carolina Supreme
Court.
Potential refunds and interest are estimated to be $287.56 million for
the period thorugh fiscal year 1997. Until this matter is resolved, any
additional potential refunds and interest will continue to accrue. 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. The North Carolina
Attorney General's Office believes that sound legal arguments support the
State's position on the merits.
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
B-34
<PAGE> 98
$1.8 billion for schools. These bonds were approved by the voters of the State
in November, 1996. In March 1997, North Carolina issued $450 million of the
authorized school bonds (Public School Building Bonds). In November 1997, North
Carolina issued $250 million of the authorized highway bonds (Highway Bonds).
The offering of the remaining $2.05 billion of these authorized bonds is
anticipated to occur over the next two-five years.
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.
SPECIAL CONSIDERATIONS REGARDING INVESTMENT IN SOUTH CAROLINA TAX-EXEMPT
OBLIGATIONS
The concentration of investments in South Carolina Tax-Exempt
Obligations by the South Carolina Fund raises special investment
considerations. In particular, changes in the economic condition and
governmental policies of South Carolina and its political subdivisions,
agencies, instrumentalities, and authorities could adversely affect the value
of the South Carolina Fund and it portfolio securities. This section briefly
describes current economic trends in South Carolina. The information set forth
below is derived from official statements prepared in connection with the
issuance of South Carolina Tax-Exempt Obligations and other sources that are
generally available to investors. The Group has not independently verified this
information.
The South Carolina Constitution requires the General Assembly to
provide a balanced budget and requires that if a deficit arises, such deficit
must be provided for in the succeeding fiscal year. The State Constitution also
provides that the State Budget and Control Board may, if a deficit appears
likely, effect such reductions in appropriations as may be necessary to prevent
a deficit. In the November 1984 general election the electorate approved a
constitutional amendment providing that annual increases in State
appropriations may not exceed the average growth rate of the economy of the
State and that the annual increases in the number of State employees may not
exceed the average growth of the population of the State. The State
Constitution also establishes a General Reserve Fund to be maintained in an
amount equal to 4% of General Fund revenue for the latest fiscal year. Despite
the efforts of the State Budget and Control Board, deficits were experienced in
the fiscal years ending June 30, 1981, 1982, 1985 and 1986. All such deficits
have been funded out of the General Reserve Fund. For the fiscal years ending
June 30, 1983 and 1984, the State had cash surpluses.
In the November 1988 general election the electorate approved a
constitutional amendment reducing from 4% to 3% the amount of General Fund
revenue which must be kept in the General Reserve Fund and removing the
provisions requiring a special vote to adjust this percentage. The amendment
also created a Capital Reserve Fund equal to 2% of General Fund revenue. Before
March 1 of each year, the Capital Reserve Fund must be used to offset mid-year
budget reductions before mandating cuts in operating appropriations, and after
March 1, the Capital Reserve Fund may be appropriated by a special vote in
separate legislation by
B-35
<PAGE> 99
the General Assembly to finance in cash previously authorized capital
improvement bond projects, retire bond principal or interest on bonds
previously issued, and for capital improvements or other nonrecurring purposes
which must be ranked in order of priority of expenditure. Monies in the Capital
Reserve Fund not appropriated or any appropriation for a particular project or
item which has been reduced due to application of the monies to year-end
deficit, must go back to the General Fund.
For the fiscal year ended June 30, 1989, the State had a surplus of
$129,788,135. At June 30, 1989, the balance in the General Fund was
$87,999,428.
Because of anticipated revenue shortfalls for the fiscal year
1989-1990, the State Budget and Control Board committed $42.4 million of the
$58.7 million Capital Reserve Fund in April 1990. Lack of sufficient funding at
year-end resulted in an additional use of $4.5 million from the Capital Reserve
Fund. After the above reductions, the State had a fiscal year 1989-90 surplus
of $13,159,892 which was used to fund supplemental appropriations at $1,325,000
and the Capital Reserve Fund at $11,834,892. At June 30, 1990, the balance in
the General Reserve Fund was $94,114,351.
During fiscal year 1990-1991, the State Budget and Control Board
approved mid-year budget changes in November 1990 and again in February 1991,
to offset lower revenue estimates. Those changes included committing the
Capital Reserve Fund appropriation and reducing agency appropriations in an
additional amount necessary to offset (together with automatic expenditure
reductions that are tied to revenue levels) what would otherwise be a projected
deficit of approximately $132.6 million. In May 1991, the Budget and Control
Board, responding to April revenue figures and unofficial estimates indicating
an additional shortfall of $30 to $50 million, ordered an immediate freeze on
all personnel activities, from hiring to promotions; a freeze on purchasing,
with limited exceptions; and an indefinite halt to new contracts and contract
renewals. The Board also asked the General Assembly for the power to furlough
government workers periodically during the next fiscal year.
In the past, the State's budgetary accounting principles allowed
revenue to be recorded only when the State received the related cash. On July
30, 1991, the Budget and Control Board approved a change in this principle for
sales tax revenue beginning with the fiscal year ended June 30, 1991. The
Board's resolution requires that sales taxes collected by merchants in June and
received by the State in July be reported as revenue in June rather than in
July. This change resulted in a $5.2 million decrease in reported 1990-1991
sales tax revenue and a one-time $83.1 million addition to fund balance. The
one-time adjustment increases the Fund balance to the level it would be if the
new principle had been in effect in years before 1990-1991. Following such
action, the year-end balance in the General Reserve Fund was $33.4 million.
On July 26, 1991, the Board of Economic Advisors advised the Budget
and Control Board that it projected a revenue shortfall of $148 million for the
fiscal year 1991-1992 budget
B-36
<PAGE> 100
of $3.581 billion. In response, the Budget and Control Board eliminated the 2%
Capital Reserve Fund appropriation of $65.9 million and reduced other
expenditures across the board by 3%. On February 10, 1992, the Board of
Economic Advisers advised the Budget and Control Board that it had revised its
estimate of revenues for the current fiscal year downward by an additional $55
million. At its February 11, 1992 meeting, the Budget and Control Board
responded by imposing an additional 1% across the board reduction of
expenditures (except with respect to approximately $10 million for certain
agencies). At its February 13, 1992 meeting, the Budget and Control Board
restored a portion of the 1% reduction to four education-related agencies
totaling approximately $5.7 million. These expenditure reduction measures, when
coupled with revenue increases projected by the Budget and Control Board,
resulted in an estimated balance of approximately $1.4 million in the General
Fund for the fiscal year 1991-1992. Despite such actions, expenditures exceeded
revenues by $38.2 million and, as required by the South Carolina Constitution,
such amount was withdrawn from the General Reserve Fund to cover the shortfall.
On August 22, 1992, the Budget and Control Board adopted a plan to
reduce appropriations under the 1992 Appropriations Act because of revenue
shortfall projections of approximately $200 million for the 1992-1993 fiscal
year. These reductions were based on the rate of growth in each agency's budget
over the past year. On September 15, 1992, the Supreme Court of South Carolina
enjoined the Budget and Control Board from implementing its proposed plan for
budget reductions on the grounds that the Board had authority to make budget
reductions only across the board based on total appropriations. In response to
this decision, the Board instituted a 4% across the board reduction. On
November 10, 1992, the Budget and Control Board permanently reduced the $88.1
million in appropriations which were set aside on September 15, 1992. This
action along with improved actual revenue collections created a budgetary
surplus of approximately $101 million.
The State had budgetary surpluses for the fiscal years ended June 30,
1994 ($217.48 million), 1995 ($392.68 million) and 1996 ($316.7 million).
During those fiscal years, the General Assembly authorized supplemental
appropriations contingent upon the existence of sufficient year-end surpluses
($165.2 million in 1993-94, $227.1 million in 1994-95 and $324.0 million in
1995-96). However, in Fiscal Year ended June 30, 1996, the actual surplus fell
short of projections and $87.8 million of supplemental appropriations could not
be funded. In Fiscal Years when the actual surpluses exceeded the supplemental
appropriations, the surplus funds were applied to (i) fund items appropriated
from Capital Reserve monies, (ii) maintain full funding of the General Reserve;
(iii) property tax relief; and (iv) such other purposes as directed by the
General Assembly.
The State of South Carolina has not defaulted on its bonded debt since
1879, as noted above. However, the State did experience certain budgeting
difficulties over several recent fiscal years through June 30, 1993, resulting
in mid-year cutbacks in funding of state agencies in those years. Such
difficulties have not to date impacted on the State's ability to pay its
indebtedness but did result in Standard & Poor's Rating Service lowering its
rating on South
B-37
<PAGE> 101
Carolina general obligation bonds from AAA to AA+ on January 29, 1993. South
Carolina's general obligation bonds are rated Aaa by Moody's Investor Services,
Inc. In addition, with the State's economy improving since January 1993, the
State regained its AAA rating from Standard & Poor's Rating Service on July 9,
1996. Such ratings apply only to the general obligation bonded indebtedness of
the State, and do not apply to bonds issued by political subdivisions or to
revenue bonds not backed by the full faith and credit of the State. There can
be no assurance that the economic conditions on which the above ratings are
based will continue or that particular bond issues may not be adversely
affected by changes in economic or political conditions.
South Carolina is primarily a manufacturing state. In 1996, 21.8% of
all jobs in the State were in the manufacturing industry, compared to 15.3%
nationally. While the textile industry is still the major industrial employer
in the State, since 1950 the State's economy has undergone a gradual
transition. The economic base of the State has diversified as the trade and
service sectors developed and with the added development of the durable goods
manufacturing industries.
Personal income in South Carolina grew four and seven-tenths percent
(4.7%) during 1996 compared to income growth of five and four-tenths percent
(5.4%) nationwide and five and six-tenths percent (5.6%) in the Southeast. Over
the last five (5) years (1991-1996) personal income in South Carolina rose at a
compounded annual rate of six and one-tenth percent (6.1%), falling short of
the annual income growth for the Southeast region, at six and eight tenths
percent (6.80%), and outpacing the five and nine tenths percent (5.90%) growth
in the United States in the same period.
Through May 1997, the State's economy has added 23,500 jobs compared
to 31,800 jobs in the same period in 1996, employment in the State increased
one and four-tenths percent (1.4%) while the rate of employment growth in the
United States was two and one-tenth percent (2.1%). Except for January and
February when the unemployment rates in the State were lower than the national
rates, monthly unemployment rates in the State were above national rates during
1996. The unemployment rate for May 1997, the latest month available for South
Carolina was the same as the nation's rate at four and eight-tenths percent
(4.8%).
SPECIAL FACTORS AFFECTING THE SOUTH CAROLINA TAX-EXEMPT SERIES
The State of South Carolina has the power to issue general obligation
bonds based on the full faith and credit of the State. Political subdivisions
are also empowered to issue general obligation bonds, which are backed only by
the full faith and credit of that political subdivision, and not by the
resources of the State of South Carolina or any other political subdivision.
Political subdivisions are empowered to levy ad valorem property taxes on real
property and certain personal property to raise funds for the payment of
general obligation bonds. General obligation debt may be incurred only for a
public purpose which is also a corporate purpose of the applicable political
subdivision.
B-38
<PAGE> 102
Under Article X of the Constitution of the State of South Carolina,
the State may issue general obligation debt without either a referendum or a
supermajority of the General Assembly, within limits defined by reference to
anticipated sources of revenue for bonds issued for particular purposes. A
referendum or supermajority of the General Assembly may authorize additional
general obligation debt. Article X further requires the levy and collection of
an ad valorem tax if debt service payments on general obligation debt are not
made. Under Article X of the Constitution of the State of South Carolina,
political subdivisions are empowered to issue aggregate general obligation
indebtedness up to 8% of the assessed value of all taxable property within the
political subdivision (exclusive of debt incurred before the effective date of
Article X with respect to such subdivisions) without a referendum. A referendum
may authorize additional general obligation debt. The ordinance or resolution
authorizing bonded debt of a political subdivision also directs the levy and
collection of ad valorem taxes to pay the debt. In addition, Article X of the
South Carolina Constitution provides for withholding by the State Treasurer of
any state appropriations to a political subdivision which has failed to make
punctual payment of general obligation bonds. Such withheld appropriations, to
the extent available, shall be applied to the bonded debt. Political
subdivisions are not generally authorized to assess income taxes, or to pledge
any form of tax other than ad valorem property taxes, for the payment of
general obligation bonds. Certain political subdivisions have been authorized
to impose a limited-duration 1% sales tax to defray the debt service on general
obligation bonds.
Industrial development bonds and other forms of revenue bonds issued
by the State or a political subdivision are not secured by the full faith and
credit of the State or the issuing entity. Such bonds are payable only from
revenues derived from a specific facility or revenue source.
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):
Position(s) Held Principal Occupation
Name and Address With the Group During the Past 5 Years
- ---------------- -------------- -----------------------
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.
B-39
<PAGE> 103
Richard B. Ille President and From July 1990 to present,
Secretary employee of 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.
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 to July, 1994,
manager, Broker/Dealer and
Investment Accounting Systems,
Huntington Bank.
Dana Gentile Vice President From 1987 to present, employee of
BISYS Fund Services
The officers of the Group receive no compensation directly from the
Group for performing the duties of their offices. BISYS Fund Services receives
fees from the Group for acting as Administrator and BISYS Fund Services Ohio,
Inc. 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>
Walter B. Grimm None None None None
Chairman of the Board
W. Ray Long None None None None
Trustee
</TABLE>
B-40
<PAGE> 104
<TABLE>
<S> <C> <C> <C> <C>
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
J. David Huber(2) None None None None
Chairman of the Board
Sean M. Kelly(2) None None None None
Chairman of the Board
</TABLE>
(1) Figures are for the Funds' fiscal year ended September 30, 1997. The
Group includes fourteen separate series.
(2) Mr. Huber resigned from the Board on February 7, 1997 and Mr. Kelly
resigned from the Board on March 30, 1997.
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, 1998 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.
B-41
<PAGE> 105
For the fiscal year ended September 30, 1997, the Funds paid the
following investment advisory fees to BB&T: U.S. Treasury Fund: $940,705 (which
was $0 less than the maximum amount of advisory fees, if charged);
Short-Intermediate U.S. Government Fund: $562,927 (which was $94,368 less than
the maximum amount of advisory fees, if charged); Intermediate U.S. Government
Fund: $812,351 (which was $135,725 less than the maximum amount of advisory
fees, if charged); Growth and Income Stock Fund: $2,147,800 (which was $698,408
less than the maximum amount of advisory fees, if charged); North Carolina
Tax-Free Fund: $363,548 (which was $61,045 less than the maximum amount of
advisory fees, if charged); Balanced Fund: $707,060 (which was $229,694 less
than the maximum amount of advisory fees, if charged); International Equity
Fund: $326,911 (from commencement of operations on January 2, 1997) (which was
$6,794 less than the maximum amount of advisory fees, if charged); and Small
Company Growth Fund: $551,965 (which was $0 less than the maximum amount of
advisory fees, if charged). The Funds of Funds, the South Carolina Fund, the
Large Company Growth Fund, and the Prime Money Market Fund had not commenced
operations as of September 30, 1997.
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, the International Equity Fund, the South Carolina
Fund, the Large Company Growth Fund, and the Prime Money Market 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 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, the
B-42
<PAGE> 106
International Equity Fund, the South Carolina Fund, the Large Company Growth
Fund, and the Prime Money Market Fund had not commenced operations as of
September 30, 1995.
Investment Sub-Advisers
Investment sub-advisory and management services are provided to the
Small Company Growth Fund by PNC Equity Advisors Company ("PEAC"), an indirect
wholly-owned subsidiary of PNC Bank Corp., pursuant to a Sub-Advisory Agreement
("Sub-Advisory Agreement") dated as of February 13, 1997 between BB&T and PEAC.
The Sub-Advisory Agreement provides that PEAC 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 PEAC in the performance of its
duties, or from reckless disregard by PEAC of its duties and obligations
thereunder.
Unless sooner terminated, the Sub-Advisory Agreement will continue in
effect until September 30, 1998 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 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 PEAC or by BB&T. The Sub-Advisory
Agreement also terminates automatically in the event of any assignment, as
defined in the 1940 Act. Sub-advisory fees payable to PEAC are borne
exclusively by BB&T as investment adviser to the Small Company Growth Fund.
For the fiscal year ended September 30, 1997, BB&T paid PEAC and PNC
Bank (the former Sub-Adviser to the Small Company Growth Fund) $147,867 and
$124,980, respectively, for sub-advisory services to the Small Company Growth
Fund. For the fiscal year ended September 30, 1996 and for the period from
commencement of operations, December 7, 1994, to September 30, 1995, BB&T paid
$154,356 and $34,132, respectively, in investment sub-advisory fees to PNC Bank.
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, 1998 and thereafter will continue from year to year
if such continuance is
B-43
<PAGE> 107
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.
Sub-advisory fees payable to CastleInternational are borne exclusively by BB&T
as Investment Adviser to the International Equity Fund. For the fiscal year
ended September 30, 1997, BB&T paid CastleInternational $163,456 for the period
commencing January 2, 1997 for sub-advisory services to the International Equity
Fund.
Investment sub-advisory and management services are provided to the
Prime Money Market Fund by PNC Institutional Management Corporation ("PIMC"),
an indirect wholly-owned subsidiary of PNC Bank Corp., pursuant to a
Sub-Advisory Agreement ("Sub- Advisory Agreement") dated as of April 30, 1997
between BB&T and PIMC.
Unless sooner terminated, the Sub-Advisory Agreement will continue in
effect until September, 1998 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, 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 PIMC or by BB&T. The Sub-Advisory Agreement also
terminates automatically in the event of any assignment, as defined in the 1940
Act. Sub-advisory fees payable to PIMC are borne exclusively by BB&T as
Investment Adviser to the Prime Money Market Fund. No such fees were paid in
the fiscal year ended September 30, 1997 because the Prime Money Market Fund
had not commenced operations during that year.
From time to time, advertisements, supplemental sales literature and
information furnished to present or prospective shareholders of the Group may
include descriptions of each 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.
Portfolio Transactions
Pursuant to the Advisory Agreement, BB&T and each Sub-Adviser
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, South Carolina Fund, Short-Intermediate Fund, Intermediate Bond
Fund,
B-44
<PAGE> 108
Large Company Growth Fund, Small Company Growth 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 each Sub-Adviser generally seek 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, 1997, the Growth and Income
Fund paid aggregate brokerage commissions in the amount of $151,013. During the
fiscal year ended September 30, 1997, BB&T directed brokerage transactions for
the Growth and Income Fund to brokers because of research services provided in
the following amounts: aggregate transactions -- $106,698,201; aggregate
commissions: $142,060.
During the fiscal year ended September 30, 1997, the Balanced Fund
paid aggregate brokerage commissions in the amount of $42,859. During the
fiscal year ended September 30, 1997, BB&T directed brokerage transactions for
the Balanced Fund to brokers because of research services provided in the
following amounts: aggregate transactions -- $29,962,265; aggregate
commissions: $41,873.
During the fiscal year ended September 30, 1997, the Small Company
Growth Fund paid aggregate brokerage commissions in the amount of $40,983.
During the fiscal year ended September 30, 1996, the Growth and Income
Fund paid aggregate brokerage commissions in the amount of $173,857. 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.
B-45
<PAGE> 109
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 each Sub-Adviser in its best judgment and in
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 each
Sub-Adviser and does not reduce the advisory fees payable to BB&T or each
Sub-Adviser. Such information may be useful to BB&T or each Sub-Adviser 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 or each Sub-Adviser 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, neither BB&T nor the
Sub-Advisers will 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, a
Sub-Adviser, 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 or any Sub-Adviser. 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 or the Sub-Adviser 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 or the Sub-Adviser may aggregate the securities
to be sold or purchased for a Fund with those to be sold or purchased for the
other Funds or for other investment companies or accounts in order to obtain
best execution. As provided by the Advisory Agreement and the Sub-Advisory
Agreements, in making investment recommendations for the Group, BB&T or the
Sub-Adviser 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 or
a Sub-Adviser or their parents, subsidiaries, or affiliates, and, in dealing
with their customers, BB&T or a Sub-Adviser and
B-46
<PAGE> 110
their parents, subsidiaries, and affiliates will not inquire or take into
consideration whether securities of such customers are held by the Group.
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 and PNC Bank Corp. subsidiaries, PEAC, PIMC, 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 or PNC Bank
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 or PNC
Bank Corp.'s subsidiaries, the Board of Trustees of the Group would review the
Group's relationship with BB&T and the Sub-Adviser 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 or any Sub-Adviser 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
B-47
<PAGE> 111
operations would affect its net asset value per Share or result in financial
losses to any Customer.
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
under the Advisory Agreement and PEAC, CastleInternational, and PIMC under the
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 and the Prime Money
Market 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 and PEAC, CastleInternational
and PIMC under the Sub-Advisory Agreements, 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, 1995, September 30, 1996, and
September 30, 1997 each of the Funds paid the following administration fees to
the Administrator: U.S. Treasury Fund: $204,919, $365,557, and $470,355,
respectively;
B-48
<PAGE> 112
Short-Intermediate Fund: $101,143, $115,305, and $187,425, respectively;
Intermediate Bond Fund: $156,602, $212,620, and $270,652, respectively; Growth
and Income Fund: $231,669 (which is $282 less than the maximum amount of
administration fees, if charged), $402,293, and $579,761, respectively; North
Carolina Fund: $56,787 (which is $18,917 less than the maximum amount of
administration fees, if charged), $53,810 (which is $17,942 less than the
maximum amount of administration fees, if charged), and $121,183, respectively;
and Balanced Fund: $99,630, $148,506, and $190,947, respectively. For the
period from commencement of operations to September 30, 1995 and for the fiscal
years ended September 30, 1996 and September 30, 1997, 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), $61,583, and
$110,393, respectively. For the period from commencement of operations to
September 30, 1997, the International Equity Fund paid $64,023 in
administrative fees to the Administrator. As of September 30, 1997, the Funds
of Funds, the South Carolina Fund, the Large Company Growth Fund, and the Prime
Money Market 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, 2002. 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.
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
B-49
<PAGE> 113
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.
No compensation is paid to the Distributor under the Distribution
Agreement. However, the Distributor is entitled to receive payments under the
Distribution and Shareholder Services Plan, dated October 1, 1992, as restated
February 7, 1997 (the "Distribution Plan"). 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 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 year ended September 30, 1997, each of the Funds paid
the following fees under the Distribution Plan for Class A Shares: U.S.
Treasury Fund: $144,941 (which was $86,964 less than the maximum amount of fees
under the Distribution Plan, if charged); Short-Intermediate Fund: $28,875
(which was $14,429 less than the maximum amount of fees under the Distribution
Plan, if charged); Intermediate Bond Fund: $21,620 (which was $10,814 less than
the maximum amount of fees under the Distribution Plan, if charged); Growth and
Income Stock Fund: $133,421 (which was $66,820 less than the maximum amount of
fees under the Distribution Plan, if charged); North Carolina Fund: $46,373
(which was $32,462 less than the maximum amount of fees under the Distribution
Plan, if charged); Balanced Fund: $73,186 (which was $36,624 less than the
maximum amount of fees under the Distribution Plan, if charged); the Small
Company Growth Fund: $44,868 (which was $22,470 less than the maximum amount of
fees under the Distribution Plan, if charged); and International Equity Fund:
(from the commencement of operations on January 2, 1997): $1,280 (which was
$759 less than the maximum amount of fees under the Distribution Plan, if
charged).
For the fiscal year ended September 30, 1997, each of the Funds paid
the following fees under the Distribution Plan for Class B Share: U.S. Treasury
Fund: $15,309; Intermediate U.S. Government Fund: $4,950; Growth and Income
Stock Fund: $91,332; Balanced Fund: $42,116; Small Company Growth Fund:
$53,561; and International Equity Fund (from commencement of operations on
January 2, 1997): $3,807.
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 Re-Executed Distribution Plan was
approved on February 7, 1997. 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
B-50
<PAGE> 114
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.
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. 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 Auditors
KPMG Peat Marwick LLP ("KPMG") has been selected as independent
auditors. KPMG's address is Two Nationwide Plaza, Suite 1600, Columbus, Ohio
43215.
B-51
<PAGE> 115
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 Money Market Funds
As summarized in the Prospectuses of the U.S. Treasury Fund and the
Prime Money Market Fund under the heading "Performance Information," the
"yield" of the U.S. Treasury Fund and the Prime Money Market Fund for a
seven-day period (a "base period") will be computed by determining the "net
change in value" (calculated as set forth below) of a hypothetical account
having a balance of one share at the beginning of the period, dividing the net
change in account value by the value of the account at the beginning of the
base period to obtain the base period return, and multiplying the base period
return by 365/7 with the resulting yield figure carried to the nearest
hundredth of one percent. Net changes in value of a hypothetical account will
include the value of additional shares purchased with dividends from the
original share and dividends declared on both the original share and any such
additional shares, but will not include realized gains or losses or unrealized
appreciation or depreciation on portfolio investments. Yield may also be
calculated on a compound basis (the "effective yield") which assumes that net
income is reinvested in Fund shares at the same rate as net income is earned
for the base period.
The yield and effective yield of each Money Market Fund will vary in
response to fluctuations in interest rates and in the expenses of each 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 Class A Shares, for the seven-day period ended
September 30, 1997, the yield and effective yield of the U.S. Treasury Fund
calculated as described above was 4.45% and 4.67%, respectively. With respect
to Trust Shares, for the seven-day period ended September 30, 1997, the yield
and effective yield of the U.S. Treasury Fund calculated as described above was
4.65% and 4.88%, respectively. With respect to the Class B Shares, for the
seven-day period ended September 30, 1997, the yield and effective yield of the
U.S. Treasury Fund calculated as described above was 3.67% and 3.84%.
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, South
Carolina Fund, Short-Intermediate Fund, Intermediate Bond Fund, Balanced Fund,
Large Company Growth Fund,
B-52
<PAGE> 116
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 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 and South Carolina Funds may also advertise a "tax
equivalent yield" and a "tax equivalent effective yield." Tax equivalent yield
will be computed by dividing that portion of the North Carolina and South
Carolina Funds' 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 and South Carolina Funds is computed by dividing that
portion of the effective yield of the North Carolina and South Carolina Funds
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 Class A Shares, for the 30-day period ended September
30, 1997, the yields of the Funds were as follows: Short-Intermediate Fund --
4.99% (with maximum sales load) and 5.09% (with no sales load); Intermediate
Bond -- 5.05% (with maximum sales load) and 5.29% (with no sales load); North
Carolina Fund -- 3.38% (with maximum sales load) and 3.45% (with no sales
load); and Balanced Fund -- 2.90% (with maximum sales load) and 3.04% (with no
sales load). With respect to Class A Shares, the tax-equivalent yield for the
B-53
<PAGE> 117
North Carolina Fund for the same period was 4.80% (with maximum sales load) and
5.03% (with no sales load).
With respect to Class B Shares for the 30-day period ended September
30, 1997, the yields of the Funds were as follows: Intermediate Bond -- 4.54%
and Balanced Fund -- 2.29%.
With respect to Trust Shares, for the 30-day period ended September
30, 1997, the yields of each of the Funds (with no sales load) were as follows:
Short-Intermediate Fund -- 5.34%; Intermediate Bond Fund -- 5.54%; North
Carolina Fund -- 3.60%; and Balanced Fund -- 3.28%. With respect to Trust
Shares, the tax-rate yield for the North Carolina Fund for the same period was
5.96%.
Yield information has not been provided for the Funds of Funds, the
South Carolina Fund and the Large Company Growth Fund since those Funds had not
commenced operations as of September 30, 1997.
Investors in the Growth and Income Fund, North Carolina Fund, South
Carolina Fund, Short-Intermediate Fund, Intermediate Bond Fund, Balanced Fund,
Large Company Growth 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.
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 Class A Shares, for the one-year period ended
September 30, 1997, 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 3.93%, 3.11%, 31.15%,
4.11%, 16.31% and 5.92%, respectively. For the same period, average annual
total returns (without sales load) for the
B-54
<PAGE> 118
Short-Intermediate, Intermediate Bond, Growth and Income, North Carolina
Tax-Free, U.S. Treasury, Balanced, and Small Company Growth Funds were 6.07%,
7.93%, 37.80%, 6.28%, 4.50%, 21.76% and 10.90%, respectively.
With respect to Trust Shares, for the one-year period ended September
30, 1997, 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 6.33%, 8.20%, 38.13%, 6.43%, 4.71%, 22.11% and
11.17%, respectively. The Funds of Funds, the South Carolina Fund and the Large
Company Growth Fund had not commenced operations as of September 30, 1997.
With respect to Class B Shares, for the one-year period ended
September 30, 1997, average annual total returns (with maximum sales load) for
the Intermediate Bond, Growth and Income, Balanced, Small Company Growth and
U.S. Treasury Funds were 3.14%, 32.70%, 16.90%, 6.16%, and -.33% respectively.
For the same period, average annual total returns (without sales load) for the
Intermediate Bond, Growth and Income, U.S. Treasury, Balanced and Small Company
Growth Funds were 7.14%, 36.70%, 3.67%, 20.90% and 10.16%, respectively.
With respect to Class A Shares, for the period since commencement of
operations of each of the Funds through September 30, 1997, average annual
total returns (with maximum sales load) for the Short-Intermediate,
Intermediate Bond, Growth and Income, North Carolina, Balanced, Small Company
Growth and International Equity Funds were 4.64%, 4.84%, 18.16%, 3.92%, 11.30%,
32.92%, and 7.78% 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, Small Company
Growth and International Equity Funds were 5.07%, 5.80%, 19.26%, 4.34%, 3.83%,
12.51%, 35.10% and 12.84%, respectively.
With respect to Trust Shares, for the period since commencement of
operations of each of the Funds through September 30, 1997, 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
5.32%, 6.06%, 19.56%, 4.46%, 4.05%, 12.73% and 35.49%, respectively. The Funds
of Funds, the South Carolina Fund and the Large Company Growth Fund had not
commenced operations as of September 30, 1997.
With respect to Class B Shares, for the period since commencement of
operations of each of the Funds through September 30, 1997, average annual
total returns (with maximum sales load) for the Intermediate Bond, Growth and
Income, U.S. Treasury, Balanced, Small Company Growth and International Equity
Funds were .35%, 25.68%, 1.31%, 12.97%, 24.76%, and 7.51% respectively. For the
same period, average annual total returns (without sales load) for the
Intermediate Bond, Growth and Income, U.S. Treasury, Balanced, Small Company
Growth and International Equity Funds were 2.54%, 27.60%, 3.56%, 15.04%,
26.69%, and 12.51% respectively.
B-55
<PAGE> 119
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, the South Carolina Fund or the Large Company Growth 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.
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
B-56
<PAGE> 120
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 a stratified sampling of all listed stocks.
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 and South Carolina
Funds, 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 and South Carolina Funds, which may be higher or lower than
those shown.
B-57
<PAGE> 121
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-58
<PAGE> 122
APPROXIMATE YIELD TABLE: NORTH CAROLINA FUND
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
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%
- ------
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
FROM
$0 TO
$12,750 15.00% 6.00% 20.10% 3.75% 4.38% 5.01% 5.63% 6.26% 6.88%
FROM
$12,751 TO
$24,650 15.00% 7.00% 20.95% 3.80% 4.43% 5.06% 5.69% 6.33% 6.96%
FROM
$24,651 TO
$59,750 28.00% 7.00% 33.04% 4.48% 5.23% 5.97% 6.72% 7.47% 8.21%
FROM
$59,751 TO
$60,000 31.00% 7.00% 35.83% 4.68% 5.45% 6.23% 7.01% 7.79% 8.57%
FROM
$60,001 TO
$124,650 31.00% 7.75% 36.35% 4.71% 5.50% 6.28% 7.07% 7.86% 8.64%
FROM
$124,651 TO
$271,050 36.00% 7.75% 40.96% 5.08% 5.93% 6.78% 7.62% 8.47% 9.32%
OVER
$271,050 39.60% 7.75% 44.28% 5.38% 6.28% 7.18% 8.08% 8.97% 9.87%
- ---------------------------------
6.00% 6.50% 7.00%
- ---------------------------------
<C> <C> <C>
7.51% 8.14% 8.76%
7.59% 8.22% 8.86%
8.96% 9.71% 10.45%
9.35% 10.13% 10.91%
9.43% 10.21% 11.00%
10.16% 11.01% 11.86%
10.77% 11.67% 12.56%
</TABLE>
B-59
<PAGE> 123
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%
- ------
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
FROM
$0 TO
$21,250 15.00% 6.00% 20.10% 3.75% 4.38% 5.01% 5.63% 6.26% 6.88%
FROM
$21,251 TO
$41,200 15.00% 7.00% 20.95% 3.80% 4.43% 5.06% 5.69% 6.33% 6.96%
FROM
$41,201 TO
$99,600 28.00% 7.00% 33.04% 4.48% 5.23% 5.97% 6.72% 7.47% 8.21%
FROM
$99,601 TO
$100,000 31.00% 7.00% 35.83% 4.68% 5.45% 6.23% 7.01% 7.79% 8.57%
FROM
$100,001 TO
$151,750 31.00% 7.75% 36.35% 4.71% 5.50% 6.28% 7.07% 7.86% 8.64%
FROM
$151,751 TO
$271,050 36.00% 7.75% 40.96% 5.08% 5.93% 6.78% 7.62% 8.47% 9.32%
OVER
$271,050 39.60% 7.75% 44.28% 5.38% 6.28% 7.18% 8.08% 8.97% 9.87%
- ----------------------------------
6.00% 6.50% 7.00%
- ----------------------------------
<C> <C> <C>
7.51% 8.14% 8.76%
7.59% 8.22% 8.86%
8.96% 9.71% 10.45%
9.35% 10.13% 10.91%
9.43% 10.21% 11.00%
10.16% 11.01% 11.86%
10.77% 11.67% 12.56%
</TABLE>
B-60
<PAGE> 124
APPROXIMATE YIELD TABLE: SOUTH CAROLINA FUND
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
SINGLE RETURN COMBINED
SAMPLE SOUTH FEDERAL AND
TAXABLE FEDERAL CAROLINA S.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%
- ------
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
FROM
$0 TO
$2250 15.00% 2.50% 17.12% 3.62% 4.22% 4.83% 5.43% 6.03% 6.64%
FROM
$2251 TO
$4500 15.00% 3.00% 17.15% 3.62% 4.22% 4.83% 5.43% 6.04% 6.64%
FROM
$4501 TO
$6750 15.00% 4.00% 18.40% 3.68% 4.29% 4.90% 5.51% 6.13% 6.74%
FROM
$6751 TO
$9000 15.00% 5.00% 19.25% 3.72% 4.33% 4.95% 5.57% 6.19% 6.81%
FROM
$9001 TO
$11,250 15.00% 6.00% 20.10% 3.75% 4.38% 5.01% 5.63% 6.26% 6.88%
FROM
$11,251 TO
$24,650 15.00% 7.00% 20.95% 3.80% 4.43% 5.06% 5.69% 6.33% 6.96%
FROM
$24,651 TO
$59,750 28.00% 7.00% 33.04% 4.48% 5.23% 5.97% 6.72% 7.47% 8.21%
FROM
$59,751 TO
$124,650 31.00% 7.00% 35.83% 4.68% 5.45% 6.23% 7.01% 7.79% 8.57%
FROM
$124,651 TO
$271,050 36.00% 7.00% 40.48% 5.04% 5.88% 6.72% 7.56% 8.40% 9.24%
OVER
$271,050 39.60% 7.00% 43.83% 5.34% 6.23% 7.12% 8.01% 8.90% 9.79%
- ----------------------------------
6.00% 6.50% 7.00%
- ----------------------------------
<C> <C> <C>
7.24% 7.84% 8.45%
7.24% 7.85% 8.45%
7.35% 7.97% 8.58%
7.43% 8.05% 8.67%
7.51% 8.14% 8.76%
7.59% 8.22% 8.86%
8.96% 9.71% 10.45%
9.35% 10.13% 10.91%
10.08% 10.92% 11.76%
10.68% 11.57% 12.46%
</TABLE>
B-61
<PAGE> 125
APPROXIMATE YIELD TABLE: SOUTH CAROLINA FUND
<TABLE>
- -----------------------------------------------------------------------------------------------------------------------------------
MARRIED FILING COMBINED
JOINTLY SOUTH FEDERAL AND
TAXABLE FEDERAL CAROLINA S.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%
- ------
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
FROM
$0 TO
$2250 15.00% 2.50% 17.12% 3.62% 4.22% 4.83% 5.43% 6.03% 6.64%
FROM
$2251 TO
$4500 15.00% 3.00% 17.15% 3.62% 4.22% 4.83% 5.43% 6.04% 6.64%
FROM
$4501 TO
$6750 15.00% 4.00% 18.40% 3.68% 4.29% 4.90% 5.51% 6.13% 6.74%
FROM
$6751 TO
$9000 15.00% 5.00% 19.25% 3.72% 4.33% 4.95% 5.57% 6.19% 6.81%
FROM
$9000 TO
$11,250 15.00% 6.00% 20.10% 3.75% 4.38% 5.01% 5.63% 6.26% 6.88%
FROM
$11,251 TO
$41,200 15.00% 7.00% 20.95% 3.80% 4.43% 5.06% 5.69% 6.33% 6.96%
FROM
$41,201 TO
$99,600 28.00% 7.00% 33.04% 4.48% 5.23% 5.97% 6.72% 7.47% 8.21%
FROM
$99,601 TO
$151,750 31.00% 7.00% 35.83% 4.68% 5.45% 6.23% 7.01% 7.79% 8.57%
FROM
$151,751 TO
$271,050 36.00% 7.00% 40.48% 5.04% 5.88% 6.72% 7.56% 8.40% 9.24%
OVER
$271,050 39.60% 7.00% 43.83% 5.34% 6.23% 7.12% 8.01% 8.90% 9.79%
- ----------------------------------
6.00% 6.50% 7.00%
- ----------------------------------
<C> <C> <C>
7.24% 7.84% 8.45%
7.24% 7.85% 8.45%
7.35% 7.97% 8.58%
7.43% 8.05% 8.67%
7.51% 8.14% 8.76%
7.59% 8.22% 8.86%
8.96% 9.71% 10.45%
9.35% 10.13 10.9158%
10.08% 10.92% 11.76%
10.68% 11.57% 12.46%
</TABLE>
B-62
<PAGE> 126
The "combined Federal and N.C. Marginal Tax Rate" represents the
combined federal and North Carolina and South 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 and South
Carolina Funds. Actual performance of the Funds 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 fourteen series of Shares offered
to the public which represent interests in the U.S. Treasury Fund, Prime Money
Market Fund, Growth and Income Fund, North Carolina Fund, South Carolina Fund,
Short-Intermediate Fund, Intermediate Bond Fund, Balanced Fund, Large Company
Growth Fund, Small Company Growth Fund, and International Equity Fund, BB&T
Capital Manager Conservative Growth Fund, BB&T Capital Manager Moderate Growth
Fund, and BB&T Capital Manager Growth Fund, respectively. 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 on all matters
except (i) when required by the 1940 Act, shares shall be voted by individual
B-63
<PAGE> 127
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-64
<PAGE> 128
views of the Investment Adviser and/or Group officers regarding expected trends
and strategies.
The organizational expenses of each Fund of the Group are amortized
over a period of two years from the commencement of the public offering of
Shares of the Fund. 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 January 22, 1998, 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> <C>
Joseph Riddle III and 2,059,963.900 5.26% 5.26%
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
National Financial Services Corp. 26,026,719.390 66.42%
For the Exclusive Benefit of
Our Customers
P.O. Box 3752 Church Street Station
New York, NY 10008-3752
</TABLE>
B-65
<PAGE> 129
U.S. Treasury Money Market Fund - Class B Shares
<TABLE>
<CAPTION>
Percent Owned
-------------
Name and Address Total Shares Record Only Beneficially
- ---------------- ------------ ----------- ------------
<S> <C> <C> <C>
Burleigh J. Withers 93,944.660 7.92% 7.92%
IRA
424 Sinclair Street
Gastonia, NC 28054-7410
Burleigh J. Withers 95,910.600 8.09% 8.09%
IRA
424 Sinclair Street
Gastonia, NC 28054-7410
Olivia Lynn Thomas 90,754.810 7.65% 7.65%
3224 Wyd Road
Yadkinville, NC 27055-8717
</TABLE>
B-66
<PAGE> 130
Short Intermediate U.S. Government Fund - Class A Shares
<TABLE>
<CAPTION>
Percent Owned
-------------
Name and Address Total Shares Record Only Beneficially
- ---------------- ------------ ----------- ------------
<S> <C> <C> <C>
Henry Fibers, Inc. 77,055.883 16.05% 16.05%
Attn: George F. Henry, Jr.
President
P.O. Box 1675
Gastonia, NC 28053
Intermediate U.S. Government Bond Fund - Class A Shares
Percent Owned
-------------
Name and Address Total Shares Record Only Beneficially
- ---------------- ------------ ----------- ------------
<S> <C> <C> <C>
Federated Bank Trust Agent 57,398.472 13.83%
Agnt For BB&T Trustee
FBO World Acceptance Corp.
Attn: Trust OPS
P.O. Box 418
Pittsburgh, PA 15230-0418
Hardin Wholesale Florist, Inc. 22,085.864 5.32% 5.32%
Employee Stock Ownership Plan
P.O. Box 1129
Liberty, NC 27298
Intermediate U.S. Government Bond Fund - Class B Shares
Percent Owned
-------------
Name and Address Total Shares Record Only Beneficially
- ---------------- ------------ ----------- ------------
<S> <C> <C> <C>
George H. Evans 7,731.959 11.67% 11.67%
P.O. Box 20264
Greensboro, NC 27420
Indiraben D. Patel 5,483.205 7.65% 7.65%
P.O. Box 95
Siler City, NC 27344
</TABLE>
B-67
<PAGE> 131
<TABLE>
<S> <C> <C> <C>
Arvil Howard Ray 5,189.920 7.24% 7.24%
IRA
73 Little River Drive
Sparta, NC 28675
Eleanor G. Major 4,416.637 6.16% 6.16%
IRA Rollover
P.O. Box 125
105 S. Academy
Varnville, SC 29944
Melvin Speight 4,435.470 6.19% 6.19%
4607 Lauressie Ln
Grifton, NC 28530
Growth and Income Stock Fund - Class A Shares
Percent Owned
-------------
Name and Address Total Shares Record Only Beneficially
- ---------------- ------------ ----------- ------------
<S> <C> <C> <C>
Federated Bank Trust Agent 101,761.857 5.39%
Agnt for BB&T Trustee
FBO World Acceptance Corp.
Attn: Trust Ops.
P.O. Box 418
Pittsburgh, PA 15230-0418
North Carolina Intermediate Tax-Free Fund - Class A Shares
Percent Owned
-------------
Name and Address Total Shares Record Only Beneficially
- ---------------- ------------ ----------- ------------
<S> <C> <C> <C>
Helen H. Hendricks 58,243.355 6.10% 6.10%
277 Beechwood Dr.
Mocksville, NC 27028
</TABLE>
B-68
<PAGE> 132
<TABLE>
<CAPTION>
Balanced Fund - Class A Shares
Percent Owned
-------------
Name and Address Total Shares Record Only Beneficially
- ---------------- ------------ ----------- ------------
<S> <C> <C> <C>
NFSC FEBO BBN-021954 135,131.190 9.48% 9.48%
Howell S. Childcare Center Inc.
P.O. Box 607
Attn: Business Mgr
La Grange, NC 28551
Louisberg College Inc. 76,058.733 5.34% 5.34%
Attn: Business Office
501 N. Main Street
Louisberg, NC 27549-2335
Balanced Fund - Trust Shares
Percent Owned
-------------
Name and Address Total Shares Record Only Beneficially
- ---------------- ------------ ----------- ------------
<S> <C> <C> <C>
BB&T Capital Mnager 405,975.301 5.473 5.47
Conservative Growth Fund
434 Fayetteville Street Mall
5th Floor
Raleigh, NC 27601
International Equity Fund - Class A Shares
Percent Owned
-------------
Name and Address Total Shares Record Only Beneficially
- ---------------- ------------ ----------- ------------
<S> <C> <C> <C>
Jerald T. Howell 9,025.653 10.31% 10.31%
628 Walnut Creek Drive
Goldsboro, NC 27530
Poindexter Lumber Company 8,785.072 10.04% 10.04%
P.O. Box 769
Clemmons, NC 27012-0769
Russell J. Labelle 4,924.547 5.63% 5.63%
IRA
P.O. Box 7308
Wilmington, NC 28406
</TABLE>
B-69
<PAGE> 133
<TABLE>
Large Company Growth Fund - Class A Shares
Percent Owned
-------------
Name and Address Total Shares Record Only Beneficially
- ---------------- ------------ ----------- ------------
<S> <C> <C> <C>
Janice I. Nichols 1,543.052 8.17% 8.17%
IRA
160 North St.
Rural Hall, NC 27045
Sherry P. Flockhart 1,067.236 5.65% 5.65%
IRA
3333 Chalmers Dr.
Wilmington, NC 28409
John B. Lane 1,022.422 5.41% 5.41%
IRA
228 Brinton Ct.
Lexington, SC 29072
Mildred H. Reynolds 1,152.604 6.10% 6.10%
172 Henry Middleton Rd.
Warsaw, NC 28398
Jeffrey G. Heath 1,830.808 9.69% 9.69%
and Emmalyn H. Heath
108 Summerplace Dr.
Green, SC 29650
Sibyle A. Hager 1,311.992 6.95% 6.95%
IRA
P.O. Box 782
Conover, NC 28613
</TABLE>
B-70
<PAGE> 134
<TABLE>
<CAPTION>
Large Company Growth Fund - Trust Shares
Percent Owned
-------------
Name and Address Total Shares Record Beneficially
- ---------------- ------------ ------ ------------
<S> <C> <C> <C>
BB&T Capital Manager 340,226.594 7.51% 7.51%
Growth Fund
434 Fayetteville Street Mall
5th Floor
Raleigh, NC 27601
BB&T Capital Manager 230,259.510 5.09% 5.09%
Moderate Growth Fund
434 Fayetteville Street Mall
5th Floor
Raleigh, NC 27601
Large Company Growth Fund - Class B Shares
Percent Owned
-------------
Name and Address Total Shares Record Beneficially
- ---------------- ------------ ------ ------------
<S> <C> <C> <C>
Hunter Joe Flowers 3,916.260 9.22% 9.22%
IRA
105 Tally Ho Vlg.
Wilson, NC 27893
Doris A. Cline 3,450.292 8.12% 8.12%
Route 2 Box 269B
Stedman, NC 28391
Baduvanda U. Changappa 2,066.470 5.34% 5.34%
IRA
715 Wedgewood Rd.
Whiteville, NC 28472
Clyde E. Lanier, Jr. 3,174.083 7.47% 7.47%
Cu st Sarah R. Lanier
UGMANC
1311 E. Fairfield Rd.
High Point, NC 27263
</TABLE>
B-71
<PAGE> 135
<TABLE>
<CAPTION>
Prime Money Market Fund - Class A Shares
Percent Owned
-------------
Name and Address Total Shares Record Only Beneficially
- ---------------- ------------ ----------- ------------
<S> <C> <C> <C>
Catherine Myers 22,727.940 5.40% 5.40%
1032 W. Holly Hill Rd.
Thomasville, NC 27360
Scott E. Reed 42,456.680 10.09% 10.09%
and Pamela H. Reed
JTWRDS
3861 Guinevere Ln.
Winston Salem, NC 27104
Jean B. Manera 75,455.160 17.93% 17.93%
1824 Hunting Rdg.
Raleigh, NC 27615
Patricia A. Evans 34,007.990 8.08% 8.08%
411 Central Ave.
Anderson, SC 29625
Gladys K. Whisnant 26,287.230 6.25% 6.25%
Cedar Glenn Apts.
210 3rd Ave. NE Apt. C14
Conover, NC 28613
Sallie Keel Mitchell 22,000.000 5.23% 5.23%
7417 Chouder Ln.
Wake Forest, NC 27567
Paul E Epley 25,000.000 5.94%
6630 Jenkins Rd.
Morganton, NC 28655
</TABLE>
B-72
<PAGE> 136
<TABLE>
<CAPTION>
South Carolina Intermediate Tax-Free - Class A Shares
Percent Owned
-------------
Name and Address Total Shares Record Only Beneficially
- ---------------- ------------ ----------- ------------
<S> <C> <C> <C>
Sheldonia B. Whitby 4,821.601 20.93% 20.93%
120 S. Bedenbaugh
J. C. Hipp 2,456.127 10.66% 10.66%
Trst Carolina Furniture Co. Inc.
4229 Walnut St.
Loris, SC 29569
Cheryl K. Boone 5,755.942 24.99% 24.99%
Cust. Wilt C. Boone
UGMA SC
1901 Martin Rd.
Chapin, SC 29036
Cheryl K. Boone 5,268.151 22.87% 22.87%
Cust. George D. Boone
UGMA SC
1901 Martin Rd.
Chapin, SC 29036
Leon J. Wise 4,730.369 20.54% 20.54%
2010 Morningside Dr.
West Columbia, SC 29169
</TABLE>
B-73
<PAGE> 137
As of January 22, 1998, 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 over 95% of the Trust Shares of the Funds. 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.
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-74
<PAGE> 138
FINANCIAL STATEMENTS
Independent Auditors Report
Audited Financial Statements as of September 30, 1997 are incorporated by
reference to the Annual Report to Shareholders, dated as of September 30, 1997,
which has been previously sent to Shareholders of each Fund pursuant to the
1940 Act and previously filed with the Securities and Exchange Commission. A
copy of each such report may be obtained without charge by contacting the
Distributor at 3435 Stelzer Road, Columbus, Ohio 43219 or by telephoning
toll-free at (800) 228-1872.
B-75
<PAGE> 139
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.
B-76
<PAGE> 140
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 circumstan ces 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.
B-77
<PAGE> 141
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 repayment
capacity will often be evidenced by many of the
following characteristics:
B-78
<PAGE> 142
-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."
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.
B-79
<PAGE> 143
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-term adverse
changes could cause these securities to be rated below
investment grade.
B-80
<PAGE> 144
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.
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.
B-81
<PAGE> 145
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
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.
B-82
<PAGE> 146
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-83
