Variable Insurance Funds
3435 Stelzer Road
Columbus, Ohio 43219-3035
BB&T: (800) 228-1872
AmSouth: (800) 451-8382
STATEMENT OF ADDITIONAL INFORMATION
May 1, 1999
This Statement of Additional Information ("SAI") describes five investment
portfolios (the "Funds") of Variable Insurance Funds (the "Trust"). The Funds
are:
o BB&T Growth and Income Fund;
o BB&T Capital Manager Fund; *
o AmSouth Regional Equity Fund; *
o AmSouth Select Equity Fund; and
o AmSouth Equity Income Fund.
* As of the date of this SAI, the indicated Funds are not available for
investment.
The Trust offers an indefinite number of transferable units ("Shares") of each
Fund. Shares of the Funds may be sold to segregated asset accounts ("Separate
Accounts") of insurance companies to serve as the investment medium for variable
life insurance policies and variable annuity contracts ("Variable Contracts")
issued by the insurance companies. Shares of the Funds also may be sold to
qualified pension and retirement plans, certain insurance companies, and the
investment advisers and sub-advisers of the Funds. The Separate Accounts invest
in Shares of the Funds in accordance with allocation instructions received from
owners of the Variable Contracts ("Variable Contract Owners").
This SAI is not a Prospectus and is authorized for distribution only when
preceded or accompanied by a Prospectus of the Funds, dated May 1, 1999, as
supplemented from time to time. This SAI contains more detailed information than
that set forth in a Prospectus and should be read in conjunction with the
Prospectus. This SAI incorporates the Funds' financial statements and related
notes and auditors reports from the Funds' annual reports for the fiscal year
ended December 31, 1998, and is incorporated by reference in its entirety into
each Prospectus. Copies of a Prospectus may be obtained by writing the Trust at
3435 Stelzer Road, Columbus, Ohio 43219-3035, or by telephoning the toll free
numbers set forth above.
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TABLE OF CONTENTS
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Page
INVESTMENT OBJECTIVES AND POLICIES........................................................1
Additional Information on the Capital Manager Fund's Investment Policies.........1
Additional Information on Portfolio Instruments..................................1
INVESTMENT RESTRICTIONS..................................................................22
Portfolio Turnover..............................................................24
NET ASSET VALUE..........................................................................25
Valuation of the Funds..........................................................25
ADDITIONAL PURCHASE AND REDEMPTION INFORMATION...........................................25
MANAGEMENT OF THE TRUST..................................................................26
Trustees and Officers...........................................................26
Investment Advisers.............................................................29
Investment Sub-Advisers.........................................................30
Portfolio Transactions..........................................................32
Glass-Steagall Act..............................................................33
Administrator...................................................................34
Expenses........................................................................35
Distributor.....................................................................36
Custodians, Transfer Agent and Fund Accounting Services.........................36
Auditors........................................................................37
Legal Counsel...................................................................37
ADDITIONAL INFORMATION...................................................................37
Description of Shares...........................................................37
Vote of a Majority of the Outstanding Shares....................................38
Principal Shareholders..........................................................39
Shareholder and Trustee Liability...............................................39
Additional Tax Information......................................................39
Performance Information.........................................................42
Miscellaneous...................................................................43
FINANCIAL STATEMENTS.....................................................................44
APPENDIX i.................................................................................i
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The Trust is an open-end management investment company which currently offers
five separate Funds, each with different investment objectives. This SAI
contains information about the following two Funds which, along with the
"Underlying Funds" described below, are advised by Branch Banking and Trust
Company ("BB&T"): the BB&T Growth and Income Fund (the "Growth and Income Fund")
and the BB&T Capital Manager Fund (the "Capital Manager Fund"). In addition,
this SAI contains information about the AmSouth Regional Equity Fund (the
"Regional Equity Fund"), which is advised by AmSouth Bank ("AmSouth"), the
AmSouth Equity Income Fund ("Equity Income Fund"), which is advised by AmSouth,
with Rockhaven Asset Management, LLC ("Rockhaven") serving as sub-adviser, and
the AmSouth Select Equity Fund ("Select Equity Fund"), which is advised by
AmSouth, with OakBrook Investments, LLC ("OakBrook") serving as sub-adviser.
Much of the information contained in this SAI expands upon subjects discussed in
the Prospectuses of the Funds described above. Capitalized terms not defined
herein are defined in such Prospectuses. No investment in a Fund should be made
without first reading the Fund's Prospectus.
INVESTMENT OBJECTIVES AND POLICIES
Additional Information on the Capital Manager Fund's Investment Policies
The Capital Manager Fund seeks its investment objective by investing in a
diversified portfolio of one or more of the following funds (the "Underlying
Funds"), all of which are series of The BB&T Mutual Funds Group, an affiliated
open-end management investment company: the BB&T Growth and Income Stock Fund
(the "BB&T Growth and Income Fund"), the BB&T Balanced Fund, the BB&T Small
Company Growth Fund, the BB&T International Equity Fund, the BB&T
Short-Intermediate U.S. Government Income Fund (the "BB&T Short-Intermediate
Fund"), the BB&T Intermediate U.S. Government Bond Fund (the "BB&T Intermediate
Bond Fund"), and the BB&T U.S. Treasury Money Market Fund (the "BB&T U.S.
Treasury Fund"). Accordingly, the investment performance of the Capital Manager
Fund is directly related to the performance of the Underlying Funds, which may
engage in the investment techniques described below. In addition to shares of
the Underlying Funds, for temporary cash management purposes, the Capital
Manager Fund may invest in short-term obligations (with maturities of 12 months
or less) consisting of commercial paper (including variable amount master demand
notes) and obligations issued or guaranteed by the U.S. Government or its
agencies or instrumentalities. These investments are described below under
"Additional Information on Portfolio Instruments."
Additional Information on Portfolio Instruments
The following policies supplement the investment objectives and policies of the
Funds and the Underlying Funds as set forth in the Prospectuses.
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Bank Obligations. The Growth and Income Fund, the Regional Equity Fund, the
Equity Income Fund, the Select Equity Fund and the Underlying Funds may invest
in bank obligations consisting of bankers' acceptances, certificates of deposit,
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. Bankers' acceptances invested in by
the Funds and the Underlying Funds will be those guaranteed by domestic and
foreign banks having, at the time of investment, 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 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. Certificates of deposit and time
deposits will be those of domestic and foreign banks and savings and loan
associations, if (a) at the time of investment the depository institution has
capital, surplus, and undivided profits in excess of $100,000,000 (as of the
date of its most recently published financial statements), or (b) the principal
amount of the instrument is insured in full by the Federal Deposit Insurance
Corporation.
The Regional Equity Fund, the Select Equity Fund and the Equity Income Fund may
also invest in Eurodollar Certificates of Deposit, which are U.S. dollar
denominated certificates of deposit issued by offices of foreign and domestic
banks located outside the United States; Yankee Certificates of Deposit, 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 ("ETDs"), which are U.S. dollar denominated deposits in a foreign
branch of a U.S. bank or a foreign bank; and Canadian Time Deposits, which are
basically the same as ETDs except they are issued by Canadian offices of major
Canadian banks.
Commercial Paper. Commercial paper consists of unsecured promissory notes issued
by corporations. Except as noted below with respect to variable amount master
demand notes, issues of commercial paper normally have maturities of less than
nine months and fixed rates of return.
The Funds and Underlying Funds (except for the BB&T U.S. Treasury Fund) may
invest in short-term promissory notes (including variable amount master demand
notes) issued by corporations and other entities, such as municipalities, rated
at the time of purchase within the two highest categories assigned by a
nationally recognized statistical rating organization ("NRSRO") (e.g., A-2 or
better by Standard & Poor's Ratings Services ("S&P"), Prime-2 or better by
Moody's Investors Service, Inc. ("Moody's") or F-2 or better by Fitch Investors
Service ("Fitch")) or, if not rated, determined to be of comparable quality to
instruments that are so rated. The Funds, the BB&T Growth and Income Fund and
the BB&T Small Companies Growth Fund may also invest in Canadian Commercial
Paper, 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.
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Variable Amount Master Demand Notes. Variable amount master demand notes, in
which the Funds and the Underlying Funds (except for the BB&T U.S. Treasury
Fund) may invest, are unsecured demand notes that permit the indebtedness
thereunder to vary and provide for periodic adjustments in the interest rate
according to the terms of the instrument. Because master demand notes are direct
lending arrangements between a Fund or Underlying Fund and the issuer, they are
not normally traded. Although there is no secondary market in the notes, a Fund
or Underlying 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 set forth above for commercial paper. BB&T, AmSouth and any sub-adviser each
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 dollar weighted average
portfolio maturity, a variable amount master demand note will be deemed to have
a maturity equal to the longer of the period of time remaining until the next
interest rate adjustment or 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 amount
master demand note shall not exceed seven days.
Short-Term Obligations. The Growth and Income Fund, the Equity Income Fund, the
Regional Equity Fund, the Select Equity Fund, and the Underlying Funds (except
the BB&T U.S. Treasury 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, demand and time deposits of domestic and foreign
branches of U.S. banks and foreign banks, and repurchase agreements, in order to
acquire interest income combined with liquidity. 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 NRSROs, or (ii) do not possess a rating
(i.e., are unrated) but are determined to be of comparable quality to rated
instruments eligible for purchase. Under normal market conditions, a Fund or
Underlying Fund will limit its investment in short-term obligations to 35% of
its total assets. Pending investment or to meet anticipated redemption requests,
the BB&T International Equity Fund may also invest without limitation in
short-term obligations. For temporary defensive purposes, these investments may
constitute 100% of a Fund's or Underlying Fund's portfolio and, in such
circumstances, will constitute a temporary suspension of its attempts to achieve
its investment objective.
Short-Term Trading. In order to generate income, the Growth and Income Fund, the
Equity Income Fund, the Regional Equity Fund, the Select Equity Fund and the
Underlying Funds (except the BB&T U.S. Treasury 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 a Fund or an Underlying Fund in order to take
advantage of what its adviser or sub-adviser believes are changes in market,
industry or individual company conditions or outlook. Any such trading would
increase the portfolio turnover rate of a Fund or Underlying Fund and its
transaction costs.
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Foreign Investments. The Equity Income Fund, the Regional Equity Fund, or the
Select Equity Fund may invest in foreign securities through the purchase of
American Depositary Receipts ("ADRs") or, except for the Select Equity Fund, the
purchase of securities of the Toronto Stock Exchange, but will not do so if
immediately after a purchase and as a result of the purchase, the total value of
such foreign securities owned by a Fund would exceed 25% of the value of its
total assets. The BB&T Balanced Fund, the BB&T Growth and Income Fund and the
BB&T Small Company Growth Fund may invest in foreign securities through the
purchase of ADRs or the purchase of securities on the New York Stock Exchange,
Inc. ("NYSE"). However, the BB&T Growth and Income Fund and the BB&T Balanced
Fund will not do so if immediately after a purchase and as a result of the
purchase the total value of such foreign securities owned by such Underlying
Fund would exceed 25% of the value of its total assets.
From time to time the BB&T International Equity Fund may invest more than 25% of
its total assets in the securities of issuers located in Japan. Investments of
25% of more of the BB&T International Equity Fund's total assets in this or any
other country will make this Underlying Fund's performance more dependent upon
the political and economic circumstances of a particular country than a mutual
fund that is more widely diversified among issuers in different countries. For
example, in the past, events in the Japanese economy as well as social
developments and natural disasters have affected Japanese securities and
currency markets, and have periodically disrupted the relationship of the
Japanese yen with other currencies and with the U.S. dollar. Investment in
foreign securities is subject to special investment risks that differ in some
respects from those related to investments in securities of U.S. domestic
issuers. Such risks include political, social or economic instability in the
country of the issuer, the difficulty of predicting international trade
patterns, the possibility of the imposition of exchange controls, expropriation,
limits on removal of currency or other assets, nationalization of assets,
foreign withholding and income taxation, and foreign trading practices
(including higher trading commissions, custodial charges and delayed
settlements). Such securities may be subject to greater fluctuations in price
than securities issued by U.S. corporations or issued or guaranteed by the U.S.
Government, its agencies or instrumentalities. The markets on which such
securities trade may have less volume and liquidity, and may be more volatile
than securities markets in the U.S. In addition, there may be less publicly
available information about a foreign company than about a U.S. domiciled
company. Foreign companies generally are not subject to uniform accounting,
auditing and financial reporting standards comparable to those applicable to
U.S. domestic companies. There is generally less government regulation of
securities exchanges, brokers and listed companies abroad than in the U.S.
Confiscatory taxation or diplomatic developments could also affect investment in
those countries. In addition, foreign branches of U.S. banks, foreign banks and
foreign issuers may be subject to less stringent reserve requirements and to
different accounting, auditing, reporting, and recordkeeping standards than
those applicable to domestic branches of U.S. banks and U.S. domestic issuers.
Because foreign companies are not subject to uniform accounting, auditing and
financial reporting standards, practices and requirements comparable to those
applicable to U.S. companies, there may be less publicly available information
about a foreign company than about a U.S. company. Volume and liquidity in most
foreign bond markets are less than in the U.S., and securities of many foreign
companies are less liquid and more volatile than securities of comparable U.S.
companies. Fixed commissions on foreign securities exchanges are generally
higher than negotiated commissions on U.S. exchanges, although a Fund or an
Underlying Fund will endeavor to achieve the most favorable net results on
portfolio transactions. There is generally less government supervision and
regulation of securities exchanges, brokers, dealers and listed companies than
in the U.S., thus increasing the risk of delayed settlements of portfolio
transactions or loss of certificates for portfolio securities.
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Foreign markets also have different clearance and settlement procedures, and in
certain markets, there have been times when settlements have been unable to keep
pace with the volume of securities transactions, making it difficult to conduct
such transactions. Such delays in settlement could result in temporary periods
when a portion of the assets of a Fund or Underlying Fund investing in foreign
markets is uninvested and no return is earned thereon. The inability of such a
Fund or Underlying Fund to make intended security purchases due to settlement
problems could cause the Fund or Underlying Fund to miss attractive investment
opportunities. Losses to a Fund or Underlying Fund due to subsequent declines in
the value of portfolio securities, or losses arising out of an inability to
fulfill a contract to sell such securities, could result in potential liability
to the Fund or Underlying Fund. In addition, with respect to certain foreign
countries, there is the possibility of expropriation or confiscatory taxation,
political or social instability, or diplomatic developments which could affect
the investments in those countries. Moreover, individual foreign economies may
differ favorably or unfavorably from the U.S. economy in such respects as growth
of gross national product, rate of inflation, capital reinvestment, resource
self-sufficiency and balance of payments position.
The BB&T International Equity Fund may invest its assets in countries with
emerging economies or securities markets. Political and economic structures in
many of these countries may be undergoing significant evolution and rapid
development, and these countries may lack the social, political and economic
stability characteristics of more developed countries. Some of these countries
may have in the past failed to recognize private property rights and have at
time nationalized or expropriated the assets of private companies. As a result,
the risks described above, including the risks of nationalization or
expropriation of assets, may be heightened. In addition, unanticipated political
or social developments may affect the value of investments in these countries
and the availability to the BB&T International Equity Fund of additional
investments in emerging market countries. The small size and inexperience of the
securities markets in certain of these countries and the limited volume of
trading in securities in these countries may make investments in the countries
illiquid and more volatile than investments in Japan or most Western European
countries. There may be little financial or accounting information available
with respect to issuers located in certain emerging market countries, and it may
be difficult as a result to assess the value or prospects of an investment in
such issuers. The BB&T International Equity Fund intends to limit its investment
in countries with emerging economies or securities markets to 20% of its total
assets.
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In many instances, foreign debt securities may provide higher yields than
securities of domestic issuers which have similar maturities and quality. Under
certain market conditions these investments may be less liquid than the
securities of U.S. corporations and are certainly less liquid than securities
issued or guaranteed by the U.S. Government or its agencies or
instrumentalities. Finally, in the event of a default of any such foreign debt
obligations, it may be more difficult to obtain or to enforce a judgment against
the issuers of such securities.
If a security is denominated in foreign currency, the value of the security to a
Fund or an Underlying Fund will be affected by changes in currency exchange
rates and in exchange control regulations, and costs will be incurred in
connection with conversions between currencies. Currency risks generally
increase in lesser developed markets. Exchange rate movements can be large and
can endure for extended periods of time, affecting either favorably or
unfavorably the value of a Fund's or Underlying Fund's assets. The value of the
assets of a Fund or Underlying Fund as measured in U.S. dollars may be affected
favorably or unfavorably by changes in foreign currency exchange rates and
exchange control regulations.
A change in the value of any foreign currency against the U.S. dollar will
result in a corresponding change in the U.S. dollar value of securities
denominated in that currency. Such changes will also affect the income and
distributions to Shareholders of a Fund or an Underlying Fund investing in
foreign markets. In addition, although the a Fund or Underlying Fund will
receive income on foreign securities in such currencies, it will be required to
compute and distribute income in U.S. dollars. Therefore, if the exchange rate
for any such currency declines materially after income has been accrued and
translated into U.S. dollars, a Fund or Underlying Fund could be required to
liquidate portfolio securities to make required distributions. Similarly, if an
exchange rate declines between the time a Fund or Underlying Fund incurs
expenses in U.S. dollars and the time such expenses are paid, the amount of such
currency required to be converted into U.S. dollars in order to pay such
expenses in U.S. dollars will be greater.
For many foreign securities, U.S. dollar denominated American Depositary
Receipts ("ADRs"), which are traded in the United States on exchanges or
over-the-counter, are issued by domestic banks. ADRs represent the right to
receive securities of foreign issuers deposited in a domestic bank or a
correspondent bank. ADRs do not eliminate all the risk inherent in investing in
the securities of foreign issuers' stock. However, by investing in ADRs rather
than directly in foreign issuers' stock, a Fund or Underlying Fund can avoid
currency risks during the settlement period for either purchase or sales.
In general, there is a large, liquid market in the United States for many ADRs.
The information available for ADRs is subject to the accounting, auditing and
financial reporting standards of the domestic market or exchange on which they
are traded, which standards are more uniform and more exacting than those to
which many foreign issuers may be subject. Certain ADRs, typically those
denominated as unsponsored, require the holders thereof to bear most of the
costs of such facilities, while issuers of sponsored facilities normally pay
more of the costs thereof. The depository of an unsponsored facility frequently
is under no obligation to distribute shareholder communications received from
the issuer of the deposited securities or to pass through the voting rights to
facility holders with respect to the deposited securities, whereas the
depository of a sponsored facility typically distributes shareholder
communications and passes through the voting rights.
<PAGE>
The BB&T International Equity Fund may invest in both sponsored and unsponsored
ADRs, and the BB&T International Equity Fund may invest in European Depositary
Receipts ("EDRs"), Global Depositary Receipts ("GDRs") and other similar global
instruments. EDRs, which are sometimes referred to as Continental Depositary
Receipts, are receipts issued in Europe, typically by foreign banks and trust
companies, that evidence ownership of either foreign or domestic underlying
securities. GDRs are depositary receipts structured like global debt issues to
facilitate trading on an international basis. Unsponsored ADR, EDR and GDR
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, EDRs, and GDRs, and the
prices of unsponsored depositary receipts may be more volatile than if such
instruments were sponsored by the issuer.
Money Market Funds. Each of the Growth and Income Fund, the Regional Equity
Fund, the Equity Income Fund, the Select Equity Fund, and the Underlying Funds
(except for the BB&T U.S. Treasury Fund) may invest up to 5% of the value of its
total assets in the securities of any one money market fund (including shares of
certain affiliated money market funds pursuant to an order from the Securities
and Exchange Commission), provided that no more than 10% of such Fund's total
assets may be invested in the securities of money market funds in the aggregate.
In addition, the BB&T International Equity Fund may purchase shares of
investment companies investing primarily in foreign securities, including
so-called "country funds," which have portfolios consisting exclusively of
securities of issuers located in one country.
In order to avoid the imposition of additional fees as a result of investments
by the Growth and Income Fund, the Regional Equity Fund, the Equity Income Fund,
the Select Equity Fund, and the Underlying Funds (except for the BB&T U.S.
Treasury Fund) in shares of affiliated money market funds, BB&T, AmSouth, BISYS
Fund Services ("BISYS" or "Distributor"), and their affiliates will not retain
any portion of their usual service fees from the Funds that are attributable to
investments in shares of the affiliated money market funds. No sales charges,
contingent deferred sales charges, 12b-1 fees, or other underwriting or
distribution fees will be incurred in connection with their investments in the
affiliated money market funds. These Funds will vote their shares of each of the
affiliated money market funds in proportion to the vote by all other
shareholders of such fund. Moreover, no single Fund or Underlying Fund may own
more than 3% of the outstanding shares of a single affiliated money market fund.
Standard & Poor's Depository Receipts. The Growth and Income Fund, the BB&T
Growth and Income Fund, the BB&T Balanced Fund, and the BB&T 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"), such as the S&P 500. SPDRs
are not redeemable, but are exchange traded. SPDRs represent interests in an
investment company that is not actively managed, and instead holds securities 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. The Fund or an Underlying Fund
must limit investments in an SPDR to 5% of its total assets and 3% of the
outstanding voting securities of the SPDR issuer. Moreover, the Fund's or
Underlying Fund's investments in SPDRs, when aggregated with all other
investments in investment companies, may not exceed 10% of the total assets of
the Fund or the Underlying Fund.
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U.S. Government Obligations. The BB&T 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. The Funds and each of the other Underlying
Funds may invest in obligations issued or guaranteed by the U.S. Government, its
agencies and instrumentalities, including bills, notes and bonds issued by the
U.S. Treasury, as well as "stripped" U.S. Treasury obligations such as Treasury
Receipts issued by the U.S. Treasury representing either future interest or
principal payments. Stripped securities are issued at a discount to their "face
value," and may exhibit greater price volatility than ordinary debt securities
because of the manner in which their principal and interest are returned to
investors. The stripped Treasury obligations in which the Funds and Underlying
Funds may invest do not include Certificates of Accrual on Treasury Securities
("CATS") or Treasury Income Growth Receipts ("TIGRs").
Obligations of certain agencies and instrumentalities of the U.S. Government,
such as the Government National Mortgage Association ("GNMA"), are supported by
the full faith and credit of the U.S. Treasury; others, such as those of the
Federal National Mortgage Association ("FNMA"), are supported by the right of
the issuer to borrow from the Treasury; others, such as those of the Student
Loan Marketing Association ("SLMA"), 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 Bureau or the Federal Home Loan
Mortgage Corporation ("FHLMC"), 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. Each Fund or
Underlying Fund will invest in the obligations of such agencies or
instrumentalities only when BB&T, AmSouth, or a sub-adviser believes that the
credit risk with respect thereto is minimal.
The Growth and Income Fund, the BB&T Short-Intermediate Fund, BB&T Intermediate
Bond Fund, BB&T Growth and Income Fund, BB&T Balanced Fund, and BB&T 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.
Options Trading. The Growth and Income Fund, the BB&T Small Company Growth Fund,
and the BB&T International Equity Fund may purchase put and call options on
securities. The Growth and Income Fund and the BB&T International Equity Fund
also may purchase put and call options on foreign currencies, subject to its
applicable investment policies, for the purposes of hedging against market risks
related to its portfolio securities and adverse movements in exchange rates
between currencies, respectively. The Growth and Income Fund, the Equity Income
Fund, the Regional Equity Fund, the Select Equity Fund, and the BB&T
International Equity Fund may also engage in writing covered call options
(options on securities or currencies owned by the Fund or Underlying Fund). A
call option gives the purchaser the right to buy, and a writer has the
obligation to sell, the underlying security or foreign currency at the stated
exercise price at any time prior to the expiration of the option, regardless of
the market price or exchange rate of the security or foreign currency, as the
case may be. The premium paid to the writer is consideration for undertaking the
obligations under the option contract. A put option gives the purchaser the
right to sell the underlying security or foreign currency at the stated exercise
price at any time prior to the expiration date of the option, regardless of the
market price or exchange rate of the security or foreign currency, as the case
may be. Put and call options will be valued at the last sale price, or in the
absence of such a price, at the mean between bid and asked price.
<PAGE>
When a portfolio security or currency subject to a call option is sold, a Fund
or Underlying Fund, will effect a "closing purchase transaction"--the purchase
of a call option on the same security or currency with the same exercise price
and expiration date as the call option which the Fund or Underlying Fund
previously has written. If a Fund or Underlying Fund is unable to effect a
closing purchase transaction, it will not be able to sell the underlying
security or currency until the option expires or the Fund or Underlying Fund
delivers the underlying security or currency upon exercise. In addition, upon
the exercise of a call option by the holder thereof, a Fund or Underlying Fund
will forego the potential benefit represented by market appreciation over the
exercise price. Under normal conditions, it is not expected that a Fund or an
Underlying Fund will cause the underlying value of portfolio securities and/or
currencies subject to such options to exceed 25% of its total assets.
When a Fund or Underlying Fund writes an option, an amount equal to the net
premium (the premium less the commission) received by the Fund or Underlying
Fund is included in the liability section of its statement of assets and
liabilities as a deferred credit. The amount of the deferred credit will be
subsequently marked-to-market to reflect the current value of the option
written. The current value of the traded option is the last sale price or, in
the absence of a sale, the average of the closing bid and asked prices. If an
option expires on the stipulated expiration date, or if a Fund or Underlying
Fund enters into a closing purchase transaction, it will realize a gain (or a
loss if the cost of a closing purchase transaction exceeds the net premium
received when the option is sold) and the deferred credit related to such option
will be eliminated. If an option is exercised, the Fund or Underlying Fund may
deliver the underlying security in the open market. In either event, the
proceeds of the sale will be increased by the net premium originally received
and the Fund or Underlying Fund will realize a gain or loss.
The Regional Equity Fund, the Equity Income Fund and the Select Equity Fund may
write only covered call options. This means that these Funds will only write a
call option on a security which it already owns. Such options must be listed on
a national securities exchange and issued by the Options Clearing Corporation.
The purpose of writing covered call options is to generate additional premium
income for these Funds. This premium income will serve to enhance the Fund's
total return and will reduce the effect of any price decline of the security
involved in the option. Covered call options will generally be written on
securities which are not expected to make any major price moves in the near
future but which, over the long term, are deemed to be attractive investments
for the Fund. Under normal conditions, it is not expected that the Regional
Equity Fund or the Equity Income Fund will cause the underlying value of
portfolio securities and/or currencies subject to such options to exceed 25% of
its total assets.
<PAGE>
Once the decision to write a call option has been made, AmSouth, Rockhaven or
OakBrook, 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.
Closing transactions will be effected in order to realize a profit on an
outstanding call option, to prevent an underlying security from being called, or
to permit the sale of the underlying security. Furthermore, effecting a closing
transaction will permit a Fund to write another call option on the underlying
security with either a different exercise price or expiration date or both. If a
Fund desires to sell a particular security from its portfolio on which it has
written a call option, it will seek to effect a closing transaction prior to, or
concurrently with, the sale of the security. There is, of course, no assurance
that the Fund will be able to effect such closing transactions at a favorable
price. If a Fund cannot enter into such a transaction, it may be required to
hold a security that it might otherwise have sold, in which case it would
continue to be at market risk on the security. This could result in higher
transaction costs. A Fund will pay transaction costs in connection with the
writing of options to close out previously written options. Such transaction
costs are normally higher than those applicable to purchases and sales of
portfolio securities.
Call options written by the Regional Equity Fund and the Equity Income 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.
The Select Equity Fund may purchase put options from time to time. A put is a
right to sell a specified security (or securities) within a specified period of
time at a specified exercise price. Puts may be acquired by the Fund to
facilitate the liquidity of the portfolio assets. Puts may also be used to
facilitate the reinvestment of assets at a rate of return more favorable than
that of the underlying security. The Fund 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 the 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 accreted 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. The Fund will generally acquire puts only where the puts are available
without the payment of any direct or indirect consideration. However, if
necessary or advisable, the Fund may pay for puts either separately in cash or
by paying 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 Fund intends to enter into puts only with dealers, banks, and
broker-dealers which, in the opinion of OakBrook, present minimal credit risks.
<PAGE>
The BB&T International Equity Fund also may purchase index put and call options
and write covered index options. Index options (or options on securities
indices) are similar in many respects to options on securities except that an
index option gives the holder the right to receive, upon exercise, cash instead
of securities, if the closing level of the securities index upon which the
option is based is greater than, in the case of a call, or less than, in the
case of a put, the exercise price of the option.
Because index options are settled in cash, a call writer cannot determine the
amount of its settlement obligations in advance and, unlike call writing on
specific securities, cannot provide in advance for, or cover, its potential
settlement obligations by acquiring and holding the underlying securities. The
BB&T International Equity Fund will segregate assets or otherwise cover index
options that would require it to pay cash upon exercise.
When-Issued and Delayed-Delivery Securities. The Growth and Income Fund, the
Regional Equity Fund, the Equity Income Fund, the Select Equity Fund and the
Underlying Funds (except the BB&T U.S. Treasury Fund) may purchase securities on
a "when-issued" or "delayed-delivery" basis (i.e., for delivery beyond the
normal settlement date at a stated price and yield). In addition, these Funds
and the BB&T Small Company Growth Fund and BB&T International Equity Fund may
sell securities on a "forward commitment" basis. The BB&T International Equity
Fund also may purchase securities on a "forward commitment" basis. The Funds and
Underlying Funds will engage in when-issued and delayed-delivery transactions
only for the purpose of acquiring portfolio securities consistent with its
investment objective and policies, not for investment leverage. When-issued
securities involve a risk that the yield obtained in the transaction will be
less than that available in the market when delivery takes place. The Funds and
Underlying Funds will not pay for such securities or start earning interest on
them until they are received.
When a Fund or Underlying Fund agrees to purchase securities on a "when-issued"
or "delayed-delivery" basis, its custodian will set aside cash or liquid
securities equal to the amount of the commitment in a separate account.
Normally, the custodian will set aside securities to satisfy the purchase
commitment, and in such a case, a Fund or Underlying 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 its
commitment. It may be expected that a Fund or Underlying Fund investing in
securities on a when-issued or delayed delivery basis, net assets will fluctuate
to a greater degree when it sets aside securities to cover such purchase
commitments than when it sets aside cash. In addition, because a Fund or
Underlying Fund will set aside cash or liquid securities to satisfy its purchase
commitments in the manner described above, its liquidity and the ability of its
investment adviser to manage it might be affected in the event its commitments
to purchase "when-issued" or "delayed-delivery" securities ever exceeded 25% of
the value of its assets. Under normal market conditions, however, a Fund's or
Underlying Fund's commitment to purchase "when-issued" or "delayed-delivery"
securities will not exceed 25% of the value of each Fund or Underlying Fund's
total assets.
<PAGE>
When a Fund or Underlying Fund engages in "when-issued" or "delayed-delivery"
transactions, it relies on the seller to consummate the trade. Failure of the
seller to do so may result in a Fund or Underlying Fund incurring a loss or
missing the opportunity to obtain a price or yield considered to be
advantageous.
Mortgage-Related and Asset-Backed Securities. Investments in these and other
derivative securities will not be made for purposes of leverage or speculation,
but rather primarily for conventional investment or hedging purposes, liquidity,
flexibility and to capitalize on market inefficiencies. The Growth and Income
Fund, the Regional Equity Fund, the Equity Income Fund, the BB&T
Short-Intermediate Fund, the BB&T Intermediate Bond Fund, the BB&T Balanced
Fund, and the BB&T Small Company Growth Fund each may, consistent with its
investment objective and policies, invest in mortgage-related securities issued
or guaranteed by the U.S. Government, its agencies and instrumentalities. In
addition, each may invest in mortgage-related securities issued by
nongovernmental entities, provided, however, that to the extent a Fund or
Underlying Fund purchases mortgage-related securities from such issuers which
may, solely for purposes of the Investment Company Act of 1940, as amended
("1940 Act"), be deemed to be investment companies, the Fund or Underlying
Fund's investment in such securities will be subject to the limitations on its
investment in investment company securities.
Mortgage-related securities, for purposes of the Funds' Prospectuses and this
SAI, represent pools of mortgage loans assembled for sale to investors by
various governmental agencies such as GNMA and government-related organizations
such as FNMA and FHLMC, as well as by nongovernmental issuers such as commercial
banks, savings and loan institutions, mortgage bankers and private mortgage
insurance companies. Although certain mortgage-related securities are guaranteed
by a third party or otherwise similarly secured, the market value of the
security, which may fluctuate, is not so secured. If a Fund or Underlying Fund
purchases a mortgage-related security at a premium, that portion may be lost if
there is a decline in the market value of the security whether resulting from
changes in interest rates or prepayments in the underlying mortgage collateral.
As with other interest-bearing securities, the prices of such securities are
inversely affected by changes in interest rates. However, though the value of a
mortgage-related security may decline when interest rates rise, the converse is
not necessarily true, since in periods of declining interest rates the mortgages
underlying the securities are prone to prepayment, thereby shortening the
average life of the security and shortening the period of time over which income
at the higher rate is received. When interest rates are rising, though, the rate
of prepayment tends to decrease, thereby lengthening the period of time over
which income at the lower rate is received. For these and other reasons, a
mortgage-related security's average maturity may be shortened or lengthened as a
result of interest rate fluctuations and, therefore, it is not possible to
predict accurately the security's return. In addition, regular payments received
in respect of mortgage-related securities include both interest and principal.
No assurance can be given as to the return the Funds or Underlying Funds will
receive when these amounts are reinvested.
<PAGE>
There are a number of important differences among the agencies and
instrumentalities of the U.S. Government that issue mortgage related securities
and among the securities that they issue. Mortgage-related securities issued by
GNMA include GNMA Mortgage Pass-Through Certificates (also known as "Ginnie
Maes") which are guaranteed as to the timely payment of principal and interest
by GNMA and such guarantee is backed by the full faith and credit of the United
States. GNMA is a wholly-owned U.S. Government corporation within the Department
of Housing and Urban Development. GNMA certificates also are supported by the
authority of GNMA to borrow funds from the U.S. Treasury to make payments under
its guarantee. Mortgage-related securities issued by FNMA include FNMA
Guaranteed Mortgage Pass-Through Certificates (also known as "Fannie Maes")
which are solely the obligations of FNMA and are not backed by or entitled to
the full faith and credit of the United States. FNMA is a government-sponsored
organization owned entirely by private stockholders. Fannie Maes are guaranteed
as to the timely payment of the principal and interest by FNMA. Mortgage-related
securities issued by FHLMC include FHLMC Mortgage Participation Certificates
(also known as "Freddie Macs" or "Pcs"). FHLMC is a corporate instrumentality of
the United States, created pursuant to an Act of Congress, which is owned
entirely by Federal Home Loan Banks. Freddie Macs are not guaranteed by the
United States or by any Federal Home Loan Banks and do not constitute a debt or
obligation of the United States or of any Federal Home Loan Bank. Freddie Macs
entitle the holder to the timely payment of interest, which is guaranteed by
FHLMC. FHLMC guarantees either ultimate collection or the timely payment of all
principal payments on the underlying mortgage loans. When FHLMC does not
guarantee timely payment of principal, FHLMC may remit the amount due on account
of its guarantee of ultimate payment of principal at any time after default on
an underlying mortgage, but in no event later than one year after it becomes
payable.
The Growth and Income Fund, the Regional Equity Fund, the Select Equity Fund,
the Equity Income Fund, and each Underlying Fund (except the BB&T U.S. Treasury
Fund and the BB&T International Equity Fund) may invest in Collateralized
Mortgage Obligation ("CMOs"). CMOs may include stripped mortgage securities.
Such securities are derivative multi-class mortgage securities issued by
agencies or instrumentalities of the U.S. Government, or by private originators
of, or investors in, mortgage loans, including savings and loan associations,
mortgage banks, commercial banks, investment banks and special purpose
subsidiaries of the foregoing. Stripped mortgage securities are usually
structured with two classes that receive different proportions of the interest
and principal distributions on a pool of mortgage assets. A common type of
stripped mortgage security will have one class receiving all of the interest
from the mortgage assets (the interest-only or "IO" class), while the other
class will receive all of the principal (the principal-only or "PO" class). The
yield to maturity on an IO class is extremely sensitive to the rate of principal
payments (including prepayments) on the related underlying mortgage assets, and
a rapid rate of principal payments may have a material adverse effect on the
securities' yield to maturity. 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, a
Fund or Underlying Fund may fail to fully recoup its initial investment in these
securities even if the security is rated in the highest rating category.
<PAGE>
Like mortgages underlying mortgage-backed securities, automobile sales contracts
or credit card receivables underlying asset-backed securities are subject to
prepayment, which may reduce the overall return to certificate holders.
Nevertheless, principal prepayment rates tend not to vary much with interest
rates, and the short-term nature of the underlying car loans or other
receivables tends to dampen the impact of any change in the prepayment level.
Certificate holders may also experience delays in prepayment on the certificates
if the full amounts due on underlying sales contracts or receivables are not
realized because of unanticipated legal or administrative costs of enforcing the
contracts or because of depreciation or damage to the collateral (usually
automobiles) securing certain contracts, or other factors. In certain market
conditions, asset-backed securities may experience volatile fluctuations in
value and periods of illiquidity. If consistent with its investment objective
and policies, a Fund may invest in other asset-backed securities that may be
developed in the future.
Real Estate Investment Trusts. The Equity Income Fund, Regional Equity Fund, and
Select Equity may invest in real estate investment trusts. Real estate
investment trusts are sensitive to factors such as changes in real estate values
and property taxes, interest rates, cash flow of underlying real estate assets,
overbuilding, and the management skill and creditworthiness of the issuer. Real
estate may also be affected by tax and regulatory requirements, such as those
relating to the environment.
Restricted Securities. "Section 4(2) securities" are securities which are issued
in reliance on the "private placement" exemption from registration which is
afforded by Section 4(2) of the Securities Act of 1933 (the "1933 Act"). The
BB&T U.S. Treasury Fund will not purchase Section 4(2) securities which have not
been determined to be liquid in excess of 10% of its net assets. The Growth and
Income Fund, the Regional Equity Fund, the Equity Income Fund, the Select Equity
Fund and the Underlying BB&T Funds (other than the BB&T U.S. Treasury Fund) will
not purchase section 4(2) securities which have not been determined to be liquid
in excess of 15% of its net assets. Section 4(2) securities are restricted as to
disposition under the federal securities laws, and generally are sold to
institutional investors such as the Funds or Underlying Funds which agree that
they are purchasing the securities for investment and not with a view to public
distribution. Any resale must also generally be made in an exempt transaction.
Section 4(2) securities are normally resold to other institutional investors
through or with the assistance of the issuer or investment dealers who make a
market in such Section 4(2) securities, thus providing liquidity. BB&T, AmSouth,
Rockhaven, OakBrook and each sub-adviser to an Underlying BB&T Fund has been
delegated the day-to-day authority to determine whether a particular issue of
Section 4(2) securities, including those eligible for resale under Rule 144A
under the 1933 Act, should be treated as liquid. Rule 144A provides a
safe-harbor exemption from the registration requirements of the 1933 Act for
resales to "qualified institutional buyers" as defined in Rule 144A. With the
exception of registered broker-dealers, a qualified institutional buyer must
generally own and invest on a discretionary basis at least $100 million in
securities.
BB&T, AmSouth, Rockhaven, OakBrook or any other sub-adviser may deem Section
4(2) securities liquid if it believes that, based on the trading markets for
such security, such security can be disposed of within seven days in the
ordinary course of business at approximately the amount at which the Fund or
Underlying Fund has valued the security. In making such determination, the
following factors, among others, may be deemed relevant: (i) the credit quality
of the issuer; (ii) the frequency of trades and quotes for the security; (iii)
the number of dealers willing to purchase or sell the security and the number of
other potential purchasers; (iv) dealer undertakings to make a market in the
security; and (v) the nature of the security and the nature of market-place
trades.
<PAGE>
Treatment of Section 4(2) securities as liquid could have the effect of
decreasing the level of a Fund's or Underlying Fund's liquidity to the extent
that qualified institutional buyers become, for a time, uninterested in
purchasing these securities.
Lending of Portfolio Securities. In order to generate additional income the
Funds (except the Capital Manager Fund) and Underlying Funds may, from time to
time, lend portfolio securities to broker-dealers, banks or institutional
borrowers of securities. The Funds and Underlying Funds must receive 100%
collateral, in the form of cash or U.S. Government securities. This collateral
must be valued daily, and should the market value of the loaned securities
increase, the borrower must furnish additional collateral to the lender. During
the time portfolio securities are on loan, the borrower pays the lender any
dividends or interest paid on such securities. Loans are subject to termination
by the lender or the borrower at any time. While the Funds and Underlying Funds
do not have the right to vote securities on loan, each intends to terminate the
loan and regain the right to vote if that is considered important with respect
to the investment. In the event the borrower defaults on its obligation to a
Fund or Underlying Fund, it could experience delays in recovering its securities
and possible capital losses. The Funds and Underlying Funds will only enter into
loan arrangements with broker-dealers, banks or other institutions determined to
be creditworthy under guidelines established by the relevant Board of Trustees
that permit a Fund or the BB&T International Equity Fund to loan up to 33 1/3%
of the value of its total assets, and the remaining Underlying Funds to lend
only up to 30% of each such Underlying Fund's assets.
Convertible Securities. The Funds (other than the Capital Manager Fund) and many
of the Underlying Funds may invest in convertible securities. Convertible
securities are fixed income securities that may be exchanged or converted into a
predetermined number of the issuer's underlying common stock at the option of
the holder during a specified time period. Convertible securities may take the
form of convertible preferred stock, convertible bonds or debentures, units
consisting of "usable" bonds and warrants or a combination of the features of
several of these securities. The Equity Income Fund may invest in convertible
securities that are rated "BB" by S&P and "Ba" by Moody's, or lower, at the time
of investment, or if unrated, are of comparable quality. The other Funds and
Underlying Funds will invest in convertible securities that are rated "BBB" or
"Baa" or higher.
Securities rated "BB" or "Ba" or lower either have speculative characteristics
or are speculative with respect to capacity to pay interest and repay principal
in accordance with the terms of the obligations. There is no lower limit with
respect to rating categories for convertible securities in which the Fund may
invest. Corporate debt obligations are "investment grade" if they are rated
"BBB" or higher by S&P or "Baa" or higher by Moody's or, if unrated, are
determined to be of comparable quality. Debt obligations that are not determined
to be investment grade are high yield, high risk bonds, typically subject to
greater market fluctuations and greater risk of loss of income and principal due
to an issuer's default. To a greater extent than investment grade securities,
lower rated securities tend to reflect short-term corporate, economic and market
developments, as well as investor perceptions of the issuer's credit quality.
Because investments in lower rated securities involve greater investment risk,
achievement of the Equity Income Fund's investment objective may be more
dependent on Rockhaven's credit analysis than would be the case if the Fund were
investing in higher rated securities. High yield securities may be more
susceptible to real or perceived adverse economic and competitive industry
conditions than investment grade securities. The market prices of debt
securities also generally fluctuate with changes in interest rates so that the
Equity Income Fund's net asset value can be expected to decrease as long-term
interest rates rise and to increase as long-term rates fall. In addition, the
secondary trading market for high yield securities may be less liquid than the
market for higher grade securities. In addition, lower rated securities may be
more difficult to dispose of or to value than high-rated, lower-yielding
securities. Rockhaven attempts to reduce the risks described above through
diversification of the Equity Income Fund's portfolio and by credit analysis of
each issuer as well as by monitoring broad economic trends and corporate and
legislative developments.
<PAGE>
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 stream of income
with generally higher yields than common stocks, but lower than non-convertible
securities of similar quality.
A Fund will exchange or convert the convertible securities held in its portfolio
into shares of the underlying common stock in instances in which, in the opinion
of the adviser or sub-adviser, the investment characteristics of the underlying
common shares will assist the Fund in achieving its investment objective.
Otherwise, a Fund will hold or trade the convertible securities. In selecting
convertible securities for the Fund, the adviser or sub-adviser evaluates the
investment characteristics of the convertible security as a fixed income
instrument, and the investment potential of the underlying equity security for
capital appreciation. In evaluating these matters with respect to a particular
convertible security, the adviser or sub-adviser may consider numerous factors,
including the economic and political outlook, the value of the security relative
to other investment alternatives, trends in the determinants of the issuer's
profits, and the issuer's management capability and practices.
As with all fixed income securities, the market values of convertible securities
tend to increase when interest rates decline and, conversely, tend to decline
when interest rates increase.
<PAGE>
Medium-Grade Debt Securities. The Regional Equity Fund and the Equity Income
Fund each may invest up to 10% of its total assets in debt securities (other
than convertible securities, which are discussed above), which are within the
fourth highest rating group assigned by an NRSRO (e.g., including securities
rated BBB by S&P or Baa by Moody's ) or, if not rated, are determined to be of
comparable quality ("Medium-Grade Securities").
As with other fixed-income securities, Medium-Grade Securities are subject to
credit risk and market risk. Market risk relates to changes in a security's
value as a result of changes in interest rates. Credit risk relates to the
ability of the issuer to make payments of principal and interest. Medium-Grade
Securities are considered by Moody's to have speculative characteristics.
Medium-Grade Securities are generally subject to greater credit risk than
comparable higher-rated securities because issuers are more vulnerable to
economic downturns, higher interest rates or adverse issuer-specific
developments. In addition, the prices of Medium-Grade Securities are generally
subject to greater market risk and therefore react more sharply to changes in
interest rates. The value and liquidity of Medium-Grade Securities may be
diminished by adverse publicity and investor perceptions.
Because certain Medium-Grade Securities are traded only in markets where the
number of potential purchasers and sellers, if any, is limited, the ability of a
Fund to sell such securities at their fair market value either to meet
redemption requests or to respond to changes in the financial markets may be
limited.
Particular types of Medium-Grade Securities may present special concerns. The
prices of payment-in-kind or zero-coupon securities may react more strongly to
changes in interest rates than the prices of other Medium-Grade Securities. Some
Medium-Grade Securities in which a Fund may invest may be subject to redemption
or call provisions that may limit increases in market value that might otherwise
result from lower interest rates while increasing the risk that a Fund may be
required to reinvest redemption or call proceeds during a period of relatively
low interest rates.
The credit ratings issued by NRSROs are subject to various limitations. For
example, while such ratings evaluate credit risk, they ordinarily do not
evaluate the market risk of Medium-Grade Securities. In certain circumstances,
the ratings may not reflect in a timely fashion adverse developments affecting
an issuer. For these reasons, AmSouth, Rockhaven and OakBrook conduct their own
independent credit analysis of Medium-Grade Securities.
Should subsequent events cause the rating of a debt security purchased by a Fund
to fall below BBB or Baa, as the case may be, its adviser or sub-adviser will
consider such an event in determining whether the Fund should continue to hold
that security. In no event, however, would a Fund be required to liquidate any
such portfolio security where the Fund would suffer a loss on the sale of such
security.
<PAGE>
High Yield Securities. The Equity Income Fund may invest in high yield
convertible securities. High yield securities are securities that are rated
below investment grade by an NRSRO (e.g., "BB" or lower by S&P and "Ba" or lower
by Moody's). Other terms used to describe such securities include "lower rated
bonds," "non-investment grade bonds" and "junk bonds." Generally, lower rated
securities provide a higher yield than higher rated securities of similar
maturity, but are subject to a greater degree of risk with respect to the
ability of the issuer to meet its principal and interest obligations. Issuers of
high yield securities may not be as strong financially as those issuing higher
rated securities. The securities are regarded as predominantly speculative. The
market value of high yield securities may fluctuate more than the market value
of higher rated securities, since high yield securities tend to reflect
short-term corporate and market developments to a greater extent than higher
rated securities, which fluctuate primarily in response to the general level of
interest rates, assuming that there has been no change in the fundamental
interest rates and assuming that there has been no change in the fundamental
quality of such securities. The market prices of fixed income securities
generally fall when interest rates rise. Conversely, the market prices of fixed
income securities generally rise when interest rates fall.
Additional risks of high yield securities include limited liquidity and
secondary market support. As a result, the prices of high yield securities may
decline rapidly in the event that a significant number of holders decide to
sell. Changes in expectations regarding an individual issuer, an industry or
high yield securities generally could reduce market liquidity for such
securities and make their sale by the Equity Income Fund more difficult, at
least in the absence of price concessions. Reduced liquidity also could
adversely affect the Equity Income Fund's ability to accurately value high yield
securities. Issuers of high yield securities also are more vulnerable to real or
perceived economic changes (for instance, an economic downturn or prolonged
period of rising interest rates), political changes or adverse developments
specific to the issuer. Adverse economic, political or other developments may
impair the issuer's ability to service principal and interest obligations, to
meet projected business goals and to obtain additional financing, particularly
if the issuer is highly leveraged. In the event of a default, the Equity Income
Fund would experience a reduction of its income and could expect a decline in
the market value of the defaulted securities.
Repurchase Agreements. Securities held by the Growth and Income Fund, the
Regional Equity Fund, the Equity Income Fund, the Select Equity Fund and the
Underlying Funds may be subject to repurchase agreements. Under the terms of a
repurchase agreement, a Fund or Underlying Fund would acquire securities from
member banks of the Federal Deposit Insurance Corporation and registered
broker-dealers that BB&T, AmSouth, Rockhaven or OakBrook 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, which includes interest negotiated on the basis of current short-term
rates. The seller under a repurchase agreement will be required to maintain at
all times the value of collateral held pursuant to the agreement at not less
than the repurchase price (including accrued interest). If the seller were to
default on its repurchase obligation or become insolvent, a Fund or Underlying
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. Securities subject to repurchase agreements will be
held by the relevant Fund's or Underlying Fund's custodian or another qualified
custodian, as appropriate, or in the Federal Reserve/Treasury book-entry system.
<PAGE>
Reverse Repurchase Agreements and Dollar Roll Agreements. The Funds and
Underlying Funds may also enter into reverse repurchase agreements and dollar
roll agreements in accordance with applicable investment restrictions. Pursuant
to such reverse repurchase agreements, a Fund or Underlying Fund would sell
certain of its securities to financial institutions such as banks and
broker-dealers, and agree to repurchase them, or substantially similar
securities in the case of a dollar roll agreement, at a mutually agreed upon
date and price. A dollar roll agreement is analogous to a reverse repurchase
agreement, with a Fund or Underlying Fund selling mortgage-backed securities for
delivery in the current month and simultaneously contracting to repurchase
substantially similar (same type, coupon and maturity) securities on a specified
future date. At the time a Fund or Underlying Fund enters into a reverse
repurchase agreement or dollar roll agreement, it will place in a segregated
custodial account assets such as U.S. Government securities or other liquid
securities consistent with its investment restrictions having a value equal to
the repurchase price (including accrued interest), and will subsequently
continually monitor the account to ensure that such equivalent value is
maintained at all times. Reverse repurchase agreements and dollar roll
agreements involve the risk that the market value of securities to be purchased
by a Fund or Underlying Fund may decline below the price at which it is
obligated to repurchase the securities, or that the other party may default on
its obligation, so that a Fund or Underlying Fund is delayed or prevented from
completing the transaction.
Futures Contracts. The Growth and Income Fund, the Select Equity Fund, the BB&T
Small Company Growth Fund, and the BB&T International Equity Fund may enter into
contracts for the future delivery of securities or foreign currencies and
futures contracts based on a specific security, class of securities, foreign
currency or an index, purchase or sell options on any such futures contracts and
engage in related closing transactions. A futures contract on a securities index
is an agreement obligating either party to pay, and entitling the other party to
receive, while the contract is outstanding, cash payments based on the level of
a specified securities index. A Fund or Underlying Fund may engage in such
futures contracts in an effort to hedge against market risks and to manage its
cash position, but not for leveraging purposes. This investment technique is
designed primarily to hedge against anticipated future changes in market
conditions or foreign exchange rates which otherwise might adversely affect the
value of securities which a Fund or Underlying Fund holds or intends to
purchase. For example, when interest rates are expected to rise or market values
of portfolio securities are expected to fall, a Fund or an Underlying Fund can
seek through the sale of futures contracts to offset a decline in the value of
its portfolio securities. When interest rates are expected to fall or market
values are expected to rise, a Fund or Underlying Fund, through the purchase of
such contracts, can attempt to secure better rates or prices than might later be
available in the market when it effects anticipated purchases.
The acquisition of put and call options on futures contracts will, respectively,
give a Fund or an Underlying Fund the right (but not the obligation), for a
specified price, to sell or to purchase the underlying futures contract, upon
exercise of the option, at any time during the option period.
The value of a Fund's or Underlying Fund's contracts may equal or exceed 100% of
its total assets, although it will not purchase or sell a futures contract
unless immediately following such sale or purchase 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 the its net assets. Futures transactions will be
limited to the extent necessary to maintain the qualification of a Fund or
Underlying Fund as a regulated investment company.
<PAGE>
Futures transactions involve brokerage costs and require a Fund or an Underlying
Fund to segregate liquid assets, such as cash, U.S. Government securities or
other liquid securities to cover its obligation under such contracts. A Fund or
an Underlying Fund may lose the expected benefit of futures transactions if
interest rates, securities prices or foreign exchange rates move in an
unanticipated manner. Such unanticipated changes may also result in poorer
overall performance than if a Fund or Underlying Fund had not entered into any
futures transactions. In addition, the value of a Fund's or Underlying Fund's
futures positions may not prove to be perfectly or even highly correlated with
the value of its portfolio securities and foreign currencies, limiting the
Fund's or Underlying Fund's ability to hedge effectively against interest rate,
foreign exchange rate and/or market risk and giving rise to additional risks.
There is no assurance of liquidity in the secondary market for purposes of
closing out futures positions.
Foreign Currency Transactions. The value of the assets of the Equity Income
Fund, the Regional Equity Fund, the Select Equity Fund, and the BB&T
International Equity Fund as measured in U.S. dollars may be affected favorably
or unfavorably by changes in foreign currency exchange rates and exchange
control regulations, and such Funds (except the Select Equity Fund) and
Underlying Fund may incur costs in connection with conversions between various
currencies. The Funds and the BB&T International Equity Fund will conduct
foreign currency exchange transactions either on a spot (i.e., cash) basis at
the spot rate prevailing in the foreign currency exchange market, or through
forward contracts to purchase or sell foreign currencies. A forward foreign
currency exchange contract ("forward currency contract") involves an obligation
to purchase or sell a specific currency at a future date, which may be any fixed
number of days from the date of the contract agreed upon by the parties, at a
price set at the time of the contract. These forward currency contracts are
traded directly between currency traders (usually large commercial banks) and
their customers. The Funds and the BB&T International Equity Fund may enter into
forward currency contracts in order to hedge against adverse movements in
exchange rates between currencies.
By entering into a forward currency contract in U.S. dollars for the purchase or
sale of the amount of foreign currency involved in an underlying security
transaction, the Funds or the BB&T International Equity Fund is able to protect
itself against a possible loss between trade and settlement dates resulting from
an adverse change in the relationship between the U.S. dollar and such foreign
currency. However, this tends to limit potential gains which might result from a
positive change in such currency relationships. The Funds (except the Select
Equity Fund) and BB&T International Equity Fund may also hedge foreign currency
exchange rate risk by engaging in a currency financial futures and options
transactions, which are described below. The forecasting of short-term currency
market movements is extremely difficult and whether such a short-term heading
strategy will be successful is highly uncertain.
It is impossible to forecast with precision the market value of portfolio
securities at the expiration of a forward currency contract. Accordingly, it may
be necessary for a Fund or the BB&T International Equity Fund to purchase
additional currency on the spot market if the market value of the security is
less than the amount of foreign currency such Fund or Underlying Fund is
obligated to deliver when a decision is made to sell the security and make
delivery of the foreign currency in settlement of a forward contract.
Conversely, it may be necessary to sell on the spot market some of the foreign
currency received upon the sale of the portfolio security if its market value
exceeds the amount of foreign currency such Fund or Underlying Fund is obligated
to deliver.
<PAGE>
If a Fund or the BB&T International Equity Fund retains the portfolio security
and engages in an offsetting transaction, it will incur a gain or a loss to the
extent that there has been movement in forward currency contract prices. If a
Fund or the BB&T International Equity Fund engages in an offsetting transaction,
it may subsequently enter into a new forward currency contract to sell the
foreign currency. Although such contracts tend to minimize the risk of loss due
to a decline in the value of the hedged currency, they also tend to limit any
potential gain which might result should the value of such currency increase.
The Funds and BB&T International Equity Fund will have to convert their holdings
of foreign currencies into U.S. dollars from time to time. Although foreign
exchange dealers do not charge a fee for conversion, they do realize a profit
based on the difference (the "spread") between the prices at which they are
buying and selling various currencies.
The BB&T International Equity Fund does not intend to enter into such forward
currency contracts if it would have more than 10% of the value of its total
assets committed to such currency contracts on a regular or continuous basis.
This Underlying Fund also will not enter into such forward currency contracts or
maintain a net exposure in such contracts where it would be obligated to deliver
an amount of foreign currency in excess of the value of its securities or other
assets denominated in that currency. The BB&T International Equity Fund's
custodian bank segregates cash or liquid securities in an amount not less than
the value of the Underlying Fund's total assets committed to forward currency
contracts entered into for the purchase of a foreign security. If the value of
the securities segregated declines, additional cash or securities are added so
that the segregated amount is not less than the amount of the Underlying Fund's
commitments with respect to such contracts. The BB&T International Equity Fund
generally does not enter into a forward contract with a term longer than one
year.
Foreign Currency Options. A foreign currency option provides the Equity Income
Fund, the Regional Equity Fund, or the BB&T International Equity Fund, as the
option buyer, with the right to buy or sell a stated amount of foreign currency
at the exercise price at a specified date or during the option period. A call
option gives its owner the right, but not the obligation, to buy the currency,
while a put option gives its owner the right, but not the obligation, to sell
the currency. The option seller (writer) is obligated to fulfill the terms of
the option sold if it is exercised. However, either seller or buyer may close
its position during the option period in the secondary market for such options
any time prior to expiration.
A call rises in value if the underlying currency appreciates. Conversely, a put
rises in value if the underlying currency depreciates. While purchasing a
foreign currency option can protect a Fund or Underlying Fund against an adverse
movement in the value of a foreign currency, it does not limit the gain which
might result from a favorable movement in the value of such currency. For
example, if a Fund or Underlying Fund were holding securities denominated in an
appreciating foreign currency and had purchased a foreign currency put to hedge
against a decline in the value of the currency, it would not have to exercise
its put. Similarly, if a Fund or Underlying Fund has entered into a contract to
purchase a security denominated in a foreign currency and had purchased a
foreign currency call to hedge against a rise in the value of the currency but
instead the currency had depreciated in value between the date of purchase and
the settlement date, such Fund or Underlying Fund would not have to exercise its
call but could acquire in the spot market the amount of foreign currency needed
for settlement.
<PAGE>
Foreign Currency Futures Transactions. As part of its financial futures
transactions, the Equity Income Fund, the Regional Equity Fund, the BB&T Small
Company Growth Fund, and the BB&T International Equity Fund may use foreign
currency futures contracts and options on such futures contracts. Through the
purchase or sale of such contracts, a Fund or Underlying Fund may be able to
achieve many of the same objectives as through forward foreign currency exchange
contracts more effectively and possibly at a lower cost.
Unlike forward foreign currency exchange contracts, foreign currency futures
contracts and options on foreign currency futures contracts are standardized as
to amount and delivery period and may be traded on boards of trade and
commodities exchanges or directly with a dealer which makes a market in such
contracts and options. It is anticipated that such contracts may provide greater
liquidity and lower cost than forward foreign currency exchange contracts.
Regulatory Restrictions. As required by the Securities and Exchange Commission,
when purchasing or selling a futures contract or writing a put or call option or
entering into a forward foreign currency exchange purchase, a Fund or an
Underlying Fund will maintain in a segregated account cash or liquid securities
equal to the value of such contracts.
To the extent required to comply with Commodity Futures Trading Commission
Regulation 4.5 and thereby avoid being classified as a "commodity pool
operator," a Fund or an Underlying Fund will not enter into a futures contract
or purchase an option thereon if immediately thereafter the initial margin
deposits for futures contracts held by such Fund or Underlying Fund plus
premiums paid by it for open options on futures would exceed 5% of such Fund's
or Underlying Fund's total assets. Such Fund or Underlying Fund will not engage
in transactions in financial futures contracts or options thereon for
speculation, but only to attempt to hedge against changes in market conditions
affecting the values of securities which such Fund or Underlying Fund holds or
intends to purchase. When futures contracts or options thereon are purchased to
protect against a price increase on securities intended to be purchased later,
it is anticipated that at least 25% of such intended purchases will be
completed. When other futures contracts or options thereon are purchased, the
underlying value of such contracts will at all times not exceed the sum of: (1)
accrued profit on such contracts held by the broker; (2) cash or high quality
money market instruments set aside in an identifiable manner; and (3) cash
proceeds from investments due in 30 days.
INVESTMENT RESTRICTIONS
Each Fund's investment objective is fundamental and may not be changed without a
vote of the holders of a majority of the Fund's outstanding Shares. In addition,
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 "ADDITIONAL INFORMATION -- Vote of a Majority of the
Outstanding Shares" in this SAI).
<PAGE>
None of the Funds will:
1. Purchase any securities which would cause more than 25% 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;
(c) the Capital Manager Fund may invest more than 25% of its total assets in
investment companies, or portfolios thereof, that are Underlying Funds of such
Fund; and (d) utilities will be divided according to their services. For
example, gas, gas transmission, electric and gas, electric and telephone will
each be considered a separate industry;
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
the outstanding voting securities of the issuer, except that 25% or less of the
value of a Fund's total assets may be invested without regard to such
limitations. There is no limit to the percentage of assets that may be invested
in U.S. Treasury bills, notes, or other obligations issued or guaranteed by the
U.S. Government or its agencies or instrumentalities. This investment
restriction does not apply to the Select Equity Fund. In addition, there is no
limit to the percentage of assets that the Capital Manager Fund may invest in
any investment company;
3. Borrow money or issue senior securities, except that a Fund may
borrow from banks or brokers, in amounts up to 10% of the value of its total
assets at the time of such borrowing. A Fund will not purchase securities while
its borrowings exceed 5% of its total assets;
4. Make loans, except that a Fund may purchase or hold debt instruments
and lend portfolio securities (in an amount not to exceed one-third of its total
assets), in accordance with its investment objective and policies, make time
deposits with financial institutions and enter into repurchase agreements;
5. Underwrite the securities issued by other persons, except to the
extent that a Fund may be deemed to be an underwriter under certain securities
laws in the disposition of "restricted securities;"
6. Purchase or sell commodities or commodities contracts, except to the
extent disclosed in the current Prospectus of the Fund; and
7. Purchase or sell real estate (although investments in marketable
securities of companies engaged in such activities and securities secured by
real estate or interests therein, or in Underlying Funds investing in such
securities, are not prohibited by this restriction).
<PAGE>
The following additional investment restrictions are not fundamental policies
and therefore may be changed without the vote of a majority of the outstanding
Shares of a Fund. None of the Funds may:
1.Engage in any short sales (except for short sales "against the box");
2.Purchase securities of other investment companies, except (a) in
connection with a merger, consolidation, acquisition or reorganization, (b) to
the extent permitted by the 1940 Act or pursuant to any exemptions therefrom,
and (c) as consistent with the investment policies of the Capital Manager Fund;
3. Mortgage or hypothecate the Fund's assets in excess of one-third of
the Fund's total assets; and
4. Purchase or otherwise acquire any securities if, as a result, more
than 15% of the Fund's net assets would be invested in securities that are
illiquid.
If any percentage restriction described above is satisfied at the time of
purchase, a later increase or decrease in such percentage resulting from a
change in net asset value will not constitute a violation of such restriction.
However, should a change in net asset value or other external events cause a
Fund's investments in illiquid securities to exceed the limitation set forth in
such Fund's Prospectus, that Fund will act to cause the aggregate amount of
illiquid securities to come within such limit as soon as reasonably practicable.
In such an event, however, that Fund would not be required to liquidate any
portfolio securities where the Fund would suffer a loss on the sale of such
securities.
Due to the investment policies of the Capital Manager Fund, this Fund will
concentrate more than 25% of its total assets in the investment company
industry. However, no Underlying Fund in which such Fund invests will
concentrate more than 25% of its total assets in any one industry.
Portfolio Turnover
Changes may be made in a Fund's portfolio consistent with the investment
objective and policies of the Fund whenever such changes are believed to be in
the best interests of the Fund and its Shareholders. The portfolio turnover
rates for all of the Funds may vary greatly from year to year as well as within
a particular year, and may be affected by cash requirements for redemptions of
Shares and by requirements which enable the Funds to receive certain favorable
tax treatments. High portfolio turnover rates will generally result in higher
transaction costs to a Fund, including brokerage commissions.
The portfolio turnover rate of the Capital Manager Fund is expected to be low,
as such Fund will purchase or sell shares of the Underlying Funds, to (i)
accommodate purchases and sales of such Fund's Shares, and (ii) change the
percentage of its assets invested in each Underlying Fund in which it invests in
response to market conditions. The Growth and Income Fund, the Regional Equity
Fund, the Equity Income Fund and the Select Equity Fund will be managed without
regard to its portfolio turnover rate. It is anticipated that the annual
portfolio turnover rate for an Underlying Fund normally will not exceed the
amount stated in such Underlying Fund's Prospectus.
<PAGE>
The portfolio turnover rate for each of the 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 securities. The Securities and Exchange
Commission requires that the calculation exclude all securities whose remaining
maturities at the time of acquisition are one year or less.
NET ASSET VALUE
The net asset value of each Fund is determined and the Shares of each Fund are
priced as of the Valuation Times on each Business Day of the Trust (other than a
day on which there are insufficient changes in the value of a Fund's portfolio
securities to materially affect the Fund's net asset value or a day on which no
Shares of the Fund are tendered for redemption and no order to purchase any
Shares is received). A "Business Day" is a day on which the New York Stock
Exchange, Inc. ("NYSE") is open for trading. Currently, the NYSE is closed on
the following holidays: New Year's Day, Martin Luther King, Jr. Day, Presidents'
Day, Good Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving, and
Christmas.
Valuation of the Funds
Portfolio securities, the principal market for which is a securities exchange,
will be valued at the closing sales price on that exchange on the day of
computation, or, if there have been no sales during such day, at the latest bid
quotation. Portfolio securities, the principal market for which is not a
securities exchange, will be valued at their latest bid quotation in such
principal market. If no such bid price is available, then such securities will
be valued in good faith at their respective fair market values using methods
determined by or under the supervision of the Board of Trustees. Foreign
securities are valued based on quotations from the primary market in which they
are traded and are translated from the local currency into U.S. dollars using
current exchange rates. Shares of investment companies are valued on the basis
of their net asset values, subject to any applicable sales charge. Portfolio
securities with a remaining maturity of 60 days or less will be valued either at
amortized cost or original cost plus accrued interest, which approximates
current value.
All other assets and securities, including securities for which market
quotations are not readily available, will be valued at their fair market value
as determined in good faith under the general supervision of the Board of
Trustees.
ADDITIONAL PURCHASE AND REDEMPTION INFORMATION
The Shares of each Fund are sold on a continuous basis by the Distributor, and
the Distributor has agreed to use appropriate efforts to solicit all purchase
orders. The public offering price of Shares of the Funds is their net asset
value per Share.
The Trust may suspend the right of redemption or postpone the date of payment
for Shares during any period when (a) trading on the NYSE is restricted by
applicable rules and regulations of the Securities and Exchange Commission, (b)
the NYSE 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 Trust of
securities owned by it is not reasonably practical or (ii) it is not reasonably
practical for the Trust to determine the fair market value of its net assets.
<PAGE>
Shares may be redeemed without charge on any day that net asset value is
calculated. All redemption orders are effected at the net asset value per Share
next determined after receipt by the Distributor of a redemption request.
Payment for Shares redeemed normally will be made within seven days.
The Trust intends to pay cash for all Shares redeemed, but under abnormal
conditions which make payment in cash unwise, payment may be made wholly or
partly in portfolio securities at their then market value equal to the
redemption price. In such cases, a Shareholder may incur brokerage costs in
converting such securities to cash.
Variable Contract Owners do not deal directly with the Funds to purchase,
redeem, or exchange Shares, and Variable Contract Owners should refer to the
prospectus for the applicable Separate Account for information on the allocation
of premiums and on transfers of accumulated value among sub-accounts of the
pertinent Separate Account that invests in the Funds.
Each Fund reserves the right to discontinue offering Shares at any time. In the
event that a Fund ceases offering its Shares, any investments allocated to the
Fund will, subject to any necessary regulatory approvals, be invested in another
portfolio of the Trust deemed appropriate by the Trustees.
MANAGEMENT OF THE TRUST
Trustees and Officers
Overall responsibility for management of the Trust rests with its Board of
Trustees, who are elected by the Shareholders of the Trust. The Trustees elect
the officers of the Trust to supervise actively its day-to-day operations.
The names of the Trustees, their addresses, ages, and principal occupations
during the past five years are set forth below:
<TABLE>
<S> <C>
Name, Address, and Age Principal Occupation During Past 5 Years
- ---------------------- ----------------------------------------
James H. Woodward Chancellor, University of North Carolina at Charlotte.
University of North Carolina
at Charlotte
Charlotte, NC 28223
Age: 59
Michael Van Buskirk Chief Executive Officer, Ohio Bankers Association
37 West Broad Street (industry trade association).
Suite 1001
Columbus, OH 43215
Age: 52
Walter B. Grimm* Employee of BISYS Fund Services (6/92-present).
3435 Stelzer Road
Columbus, Oh 43219
Age: 52
* Mr. Grimm is an "interested person" of the Trust as that term is defined in
the 1940 Act.
<PAGE>
The Trust pays each Trustee who is not an employee of BISYS or its affiliates a
retainer fee at the rate of $500 per calendar quarter, reasonable out-of-pocket
expenses, $500 for each regular meeting of the Board of Trustees attended in
person, and $250 for each regular meeting of the Board of Trustees attended by
telephone. The Trust also pays each such Trustee $500 for each special meeting
of the Board of Trustees attended in person, and $250 for each special meeting
of the Board of Trustees attended by telephone. For the fiscal year ended
December 31, 1998, the Trust paid the following compensation to the Trustees of
the Trust:
Aggregate Compensation Total Compensation from
Name from Trust* Trust and Fund Complex**
James H. Woodward $4,000 $ 15,000
Michael Van Buskirk $4,000 $ 4,000
Walter B. Grimm $0 $ 0
</TABLE>
* The Trust does not accrue pension or retirement benefits as part of
Fund expenses, and Trustees of the Trust are not entitled to benefits
upon retirement from the Board of Trustees.
** The Fund Complex consisted of the Trust, the Tax-Free Trust of Oregon,
The BB&T Mutual Funds Group and AmSouth Mutual Funds.
<PAGE>
The officers of the Trust,
heir addresses, ages, and principal occupations
during the past five years are as follows (unless otherwise indicated, the
address of each officer is 3435 Stelzer Road, Columbus, OH 43219):
<TABLE>
<S> <C> <C>
Position(s) Held Principal Occupation
Name and Address With the Trust During Past 5 Years
- ---------------- ---------------- -------------------
Walter Grimm President and Chairman of the Employee of BISYS Fund Services
Age: 52 Board (6/92-present).
Frank Deutchki Vice President Employee of BISYS Fund Services
Age: 45 (4/96 - present); Vice President,
Audit Director at Mutual Funds
Services Company, a subsidiary
of United States Trust
Company of New York
(2/89 - 3/96).
Gregory Maddox Vice President and Assistant Employee of BISYS Fund Services
Columbia Square Secretary (4/91 - present).
Suite 500
1230 Columbia Street
San Diego, CA 92101
Age: 29
Charles L. Booth Vice President and Assistant Employee of BISYS Fund Services
Age: 39 Secretary (1988 - present).
Alaina Metz Secretary Employee of BISYS Fund Services
Age: 31 (6/95 - present); Supervisor,
Mutual Fund Legal Department,
Alliance Capital Management (5/89
- 6/95).
Gary Tenkman Treasurer Employee of BISYS Fund Services
Age: 28 (4/98 - present); Audit Manager
Ernst & Young LLP (1990 - 4/98).
Nimish Bhatt Principal Financial and Employee of BISYS Fund Services
Age: 35 Accounting Officer and Comptroller (7/96 - present); Assistant Vice
President, Evergreen Funds/First
Union Bank (1995 to 7/96);
Senior Tax Consultant,
Price Waterhouse, LLP (1990 - 12/94).
</TABLE>
<PAGE>
The officers of the Trust receive no compensation directly from the Trust for
performing the duties of their offices. BISYS Fund Services Ohio, Inc. receives
fees from the Trust for providing certain administration, fund accounting and
transfer agency services.
As of April 1, 1999, the Trustees and officers of the Trust, as a group, owned
Variable Contracts that entitled them to give voting instructions with respect
to less than one percent of the Shares of any Fund of the Trust.
Investment Advisers
Subject to the general supervision of the Trust's Board of Trustees and in
accordance with the Funds' investment objectives and restrictions, investment
advisory services are provided to the Growth and Income Fund and the Capital
Manager Fund by BB&T, 434 Fayetteville Street Mall, Raleigh, NC 27601, pursuant
to an Investment Advisory Agreement dated June 1, 1997 (the "BB&T Investment
Advisory Agreement").
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.
Subject to the general supervision of the Trust's Board of Trustees and in
accordance with the Funds' investment objectives and restrictions, investment
advisory services are provided to the Regional Equity Fund, the Equity Income
Fund, and the Select Equity Fund by AmSouth, 1901 Sixth Avenue North,
Birmingham, AL 35203, pursuant to an Investment Advisory Agreement dated
September 16, 1997 (the "AmSouth Investment Advisory Agreement"). AmSouth is the
principal bank affiliate of AmSouth Bancorporation, one of the largest banking
institutions headquartered in the mid-south region.
Under the Investment Advisory Agreements, BB&T and AmSouth (the "Investment
Advisers") have agreed to provide, either directly or through one or more
sub-advisers, investment advisory services for each of the Funds as described in
the Prospectus. For the services provided and expenses assumed pursuant to the
BB&T Investment Advisory Agreement, each of the following Funds pays BB&T a fee,
computed daily and paid monthly, at the following annual rates, calculated as a
percentage of the average daily net assets of such Fund: 0.74% for the Growth
and Income Fund, and 0.25% for the Capital Manager Fund. For the period from
June 3, 1997 (commencement of operations) through December 31, 1997, the Growth
and Income Fund incurred investment advisory fees equal to $65,023, of which
$33,638 was waived or reimbursed by BB&T. For the fiscal year ended December 31,
1998, the Growth and Income Fund incurred investment advisory fees equal to
$285,972, of which $73,716 was waived or reimbursed by BB&T. For the services
provided and expenses assumed pursuant to the AmSouth Investment Advisory
Agreement, each of the Regional Equity Fund and the Equity Income Fund pays
AmSouth a fee, computed daily and paid monthly, at the annual rate of 0.60%,
calculated as a percentage of the average daily net assets of such Fund. For the
period from October 23, 1997 (commencement of operations) through December 31,
1997, the Equity Income Fund incurred investment advisory fees equal to $1,234,
of which $1,234 was waived or reimbursed by AmSouth. For the fiscal year ended
December 31, 1998, the Equity Income Fund incurred investment advisory fees
equal to $85,510, of which $32,185 was waived or reimbursed by AmSouth.
<PAGE>
Unless sooner terminated, each Investment Advisory Agreement continues in effect
as to a particular Fund for an initial term of two years, and thereafter for
successive one-year periods if such continuance is approved at least annually by
the Board of Trustees or by vote of a majority of the outstanding Shares of such
Fund and a majority of the Trustees who are not parties to the Investment
Advisory Agreement or interested persons (as defined in the 1940 Act) of any
party to the Investment Advisory Agreement by votes cast in person at a meeting
called for such purpose. Each Investment Advisory Agreement is terminable as to
a particular Fund at any time on 60 days' written notice without penalty by the
Trustees, by vote of a majority of the outstanding Shares of that Fund, or by
the Investment Adviser. Each Investment Advisory Agreement also terminates
automatically in the event of any assignment, as defined in the 1940 Act.
Each Investment Advisory Agreement provides that the Investment Adviser shall
not be liable for any error of judgment or mistake of law or for any loss
suffered by the Trust in connection with the performance of its duties, except a
loss resulting from a breach of fiduciary duty with respect to the receipt of
compensation for services or a loss resulting from willful misfeasance, bad
faith, or gross negligence on the part of the Investment Adviser or any
sub-advisers in the performance of their duties, or from reckless disregard of
their duties and obligations thereunder.
From time to time, advertisements, supplemental sales literature, and
information furnished to present or prospective Shareholders of the Funds may
include descriptions of an Investment Adviser including, but not limited to, (i)
descriptions of the Investment Adviser's operations; (ii) descriptions of
certain personnel and their functions; and (iii) statistics and rankings related
to the Investment Adviser's operations.
Investment Sub-Advisers
Subject to the general supervision of the Trust's Board of Trustees and in
accordance with the Fund's investment objective and restrictions, investment
sub-advisory services are provided to the Equity Income Fund by Rockhaven, 100
First Avenue, Suite 1050, Pittsburgh, PA 15222, pursuant to a sub-advisory
agreement with AmSouth dated September 16, 1997. Rockhaven is 50% owned by
AmSouth and 50% owned by Mr. Christopher H. Wiles. Subject to the general
supervision of the Trust's Board of Trustees and in accordance with the Fund's
investment objective and restrictions, investment sub-advisory services are
provided to the Select Equity Fund by OakBrook, 701 Warrenville Road, Suite 135,
Lisle, IL 60532, pursuant to a sub-advisory agreement with OakBrook dated May 1,
1999. OakBrook is 50% owned by AmSouth and 50% owned by Neil Wright, Janna
Sampson and Peter Jankovskis. Rockhaven and OakBrook are referred to herein as
"Sub-Advisers", and each agreement between AmSouth and a Sub-Adviser may be
referred to as a "Sub-Advisory Agreement".
<PAGE>
Under the Sub-Advisory Agreement with Rockhaven, Rockhaven has agreed to provide
investment advisory services for the Equity Income Fund as described in the
Prospectus describing that Fund. For its services and expenses incurred under
the Sub-Advisory Agreement, Rockhaven is entitled to a fee payable by AmSouth.
The fee is computed daily and paid monthly at an annual rate of 0.36% of the
Fund's average daily net assets or such lower fee as may be agreed upon in
writing by AmSouth and Rockhaven, provided that if AmSouth waives a portion of
its investment advisory fee, the Sub-Adviser has agreed that its sub-advisory
fee shall not exceed 60% of AmSouth's net investment advisory fee. For the
period from October 23, 1997 (commencement of operations) through December 31,
1997, no sub-advisory fees were paid by AmSouth to Rockhaven. For the fiscal
year ended December 31, 1998, $21,326.61 in sub-advisory fees were paid by
AmSouth to Rockhaven.
Under the Sub-Advisory Agreement with OakBrook, OakBrook has agreed to provide
investment advisory services for the Select Equity Fund as described in the
Prospectus describing that Fund. For its services and expenses incurred under
the Sub-Advisory Agreement, OakBrook is entitled to a fee payable by AmSouth.
The fee is computed daily and paid monthly at an annual rate of 0.56% of the
Fund's average daily net assets or such lower fee as may be agreed upon in
writing by AmSouth and OakBrook, provided that if AmSouth waives some or all of
its investment advisory fee, OakBrook shall waive its fee so that it shall
receive no more than seventy percent (70%) of the net investment advisory fee
paid to AmSouth, subject to the requirement that OakBrook receive an investment
advisory fee at an annual rate no lower than the following rates (as a
percentage of the average daily net assets of the Select Equity Fund) for the
indicated levels of assets under management: up to $10 million -.476%; $10-50
million - .42%; and over $50 million - .28%.
Unless sooner terminated, a Sub-Advisory Agreement shall continue with respect
to a Fund for an initial term of two years, and thereafter for successive
one-year periods if such continuance is approved at least annually by the Board
of Trustees of the Trust or by vote of the holders of a majority of the
outstanding voting Shares of the Fund and a majority of the Trustees who are not
parties to the Sub-Advisory Agreement or interested persons (as defined in the
1940 Act) of any party to the Sub-Advisory Agreement by vote cast in person at a
meeting called for such purpose. A Sub-Advisory Agreement may be terminated with
respect to a Fund by the Trust at any time without the payment of any penalty by
the Board of Trustees of the Trust, by vote of the holders of a majority of the
outstanding voting securities of the Fund, or by the Investment Adviser or
Sub-Adviser on 60 days' written notice. A Sub-Advisory Agreement will also
immediately terminate in the event of its assignment, as defined in the 1940
Act.
<PAGE>
Each Sub-Advisory Agreement provides that the Sub-Adviser shall not be liable
for any error of judgment or mistake of law or for any loss suffered by the
Investment Adviser, the Trust or the Fund in connection with the performance of
its duties, except that the Sub-Adviser shall be liable to the Investment
Adviser for a loss resulting from a breach of fiduciary duty with respect to the
receipt of compensation for services or a loss resulting from willful
misfeasance, bad faith or gross negligence on the part of the Sub-Adviser in the
performance of its duties or from reckless disregard by it of its obligations or
duties thereunder. From time to time, advertisements, supplemental sales
literature and information furnished to present or prospective Variable Contract
Owners may include descriptions of a Sub-Adviser including, but not limited to,
(i) descriptions of a Sub-Adviser's operations; (ii) descriptions of certain
personnel and their functions; and (iii) statistics and rankings relating to a
Sub-Adviser's operations.
Portfolio Transactions
The Investment Advisers and the Sub-Advisers determine, subject to the general
supervision of the Board of Trustees 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 or dealers are to be eligible to execute such
Fund's portfolio transactions.
Purchases and sales of portfolio securities which are debt securities usually
are principal transactions in which portfolio securities are normally purchased
directly from the issuer or from an underwriter or market maker for the
securities. Purchases from underwriters of portfolio securities generally
include a commission or concession paid by the issuer to the underwriter, and
purchases from dealers serving as market makers may include the spread between
the bid and asked price. Transactions on stock exchanges involve the payment of
negotiated brokerage commissions. Transactions in the over-the-counter market
are generally principal transactions with dealers. With respect to the
over-the-counter market, the Trust, where possible, will deal directly with
dealers who make a market in the securities involved except in those
circumstances where better price and execution are available elsewhere.
Allocation of transactions, including their frequency, to various brokers and
dealers is determined by each Investment Adviser or Sub-Adviser in its best
judgment and in a manner deemed fair and reasonable to Shareholders. In
selecting a broker or dealer, each Investment Adviser or Sub-Adviser evaluates a
wide range of criteria, including the commission rate or dealer mark-up,
execution capability, the broker's/dealer's positioning and distribution
capabilities, back office efficiency, ability to handle difficult trades,
financial stability, reputation, prior performance, and, in the case of
brokerage commissions, research. The primary consideration is the broker's
ability to provide prompt execution of orders in an effective manner at the most
favorable price for the security. Subject to this consideration, brokers and
dealers who provide supplemental investment research to an Investment Adviser or
Sub-Adviser may receive orders for transactions on behalf of the Trust. Research
may include brokers' analyses of specific securities, performance and technical
statistics, and information databases. It may also include maintenance research,
which is the information that keeps an Investment Adviser or Sub-Adviser
informed concerning overall economic, market, political and legal trends. Under
some circumstances, an Investment Adviser's or Sub-Adviser's evaluation of
research and other broker selection criteria may result in one or a few brokers
executing a substantial percentage of a Fund's trades. This might occur, for
example, where a broker can provide best execution at a cost that is reasonable
in relation to its services and the broker offers unique or superior research
facilities, special knowledge or expertise in a Fund's relevant markets, or
access to proprietary information about companies that are a majority of a
Fund's investments.
<PAGE>
Research information so received is in addition to and not in lieu of services
required to be performed by each Investment Adviser or Sub-Adviser and does not
reduce the fees payable to an Investment Adviser or Sub-Adviser by the Trust.
Such information may be useful to an Investment Adviser or Sub-Adviser in
serving both the Trust and other clients and, conversely, supplemental
information obtained by the placement of business of other clients may be useful
in carrying out its obligations to the Trust. While each Investment Adviser or
Sub-Adviser generally seeks competitive commissions, the Trust may not
necessarily pay the lowest commission available on each brokerage transaction
for reasons discussed above.
Investment decisions for each Fund are made independently from those for the
other Funds or any other portfolio, investment company or account managed by
BB&T, AmSouth, Rockhaven, or OakBrook. Any such other portfolio, investment
company or account may also invest in the same securities as the Trust. When a
purchase or sale of the same security is made at substantially the same time on
behalf of a Fund and another Fund, portfolio, investment company or account, the
transaction will be averaged as to price and available investments will be
allocated as to amount in a manner which the Investment Adviser or Sub-Adviser
believes to be equitable to the Fund(s) and such other portfolio, investment
company or account. In some instances, this investment procedure may adversely
affect the price paid or received by a Fund or the size of the position obtained
by a Fund. To the extent permitted by law, the Investment Adviser or Sub-Adviser
may aggregate the securities to be sold or purchased for a Fund with those to be
sold or purchased for the other Funds or for other portfolio, investment
companies or accounts in order to obtain best execution. In making investment
recommendations for the Trust, an Investment Adviser or Sub-Adviser will not
inquire or take into consideration whether an issuer of securities proposed for
purchase or sale by the Trust is a customer of the Investment Adviser, the
Sub-Adviser or BISYS, their parents or their subsidiaries or affiliates and, in
dealing with its customers, BB&T, AmSouth, Rockhaven, OakBrook, their parents,
subsidiaries, and affiliates will not inquire or take into consideration whether
securities of such customers are held by the Trust.
For the period from June 3, 1997 (commencement of operations) through December
31, 1997, and for the fiscal year ended December 31, 1998, the Growth and Income
Fund paid aggregate brokerage commissions equal to $34,811 and $26,447.50,
respectively. For the period from October 23, 1997 (commencement of operations)
through December 31, 1997, and for the fiscal year ended December 31, 1998, the
Equity Income Fund paid aggregate brokerage commissions equal to $2,520 and
$60,004.58, respectively.
<PAGE>
Glass-Steagall Act
In 1971, the United States Supreme Court held that the Federal statute commonly
referred to as the "Glass-Steagall Act" prohibits a national bank from operating
a mutual fund for the collective investment of managing agency accounts.
Subsequently, the Board of Governors of the Federal Reserve System (the "Board")
issued a regulation and interpretation to the effect that the Glass-Steagall Act
and such decision: (a) forbid a bank holding company registered under the
Federal Bank Holding Company Act of 1956 (the "Holding Company Act") or any
non-bank affiliate thereof from sponsoring, organizing, or controlling a
registered, open-end investment company continuously engaged in the issuance of
its shares, but (b) do not prohibit such a holding company or affiliate from
acting as investment adviser, transfer agent, and custodian to such an
investment company. In 1981, the United States Supreme Court determined 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
nonbank affiliates to act as investment advisers to registered closed-end
investment companies. The Supreme Court also stated that if a national bank
complied with the restrictions imposed by the Board in its regulation and
interpretation authorizing bank holding companies and their nonbank affiliates
to act as investment advisers to investment companies, a national bank
performing investment advisory services for an investment company would not
violate the Glass-Steagall Act.
The Investment Advisers and the Sub-Advisers believe that they possess the legal
authority to perform the services for the Funds contemplated by the
Prospectuses, this SAI, the Investment Advisory Agreements and the Sub-Advisory
Agreements without violation of applicable statutes and regulations. 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 an Investment Adviser or a Sub-Adviser from continuing to serve as
investment adviser to the Funds or could restrict the services which it is
permitted to perform for the Funds. In addition, such changes, decisions or
interpretations could prevent an Investment Adviser's or Sub-Adviser's
affiliates from performing Variable Contract Owner servicing activities or from
receiving compensation therefor or could restrict the types of services such
entities are permitted to provide and the amount of compensation they are
permitted to receive for such services. Depending upon the nature of any changes
in the services which could be provided by the Investment Advisers or the
Sub-Advisers, the Board of Trustees would review the Trust's relationship with
the Investment Advisers or the Sub-Advisers and consider taking all action
necessary in the circumstances, and it is probable that the Board of Trustees
would either recommend to Shareholders the selection of another qualified
advisor or, if that course of action appeared impractical, that the Funds be
liquidated.
Administrator
BISYS Fund Services Ohio, Inc. ("BISYS Ohio" or "Administrator"), 3435 Stelzer
Road, Columbus, Ohio 43219-3035, serves as general manager and administrator to
the Trust pursuant to a Management and Administration Agreement dated March 1,
1999 (the "Administration Agreement"). Prior to that date, BISYS served as
general manager and administrator to the Trust. The Administrator assists in
supervising all operations of each Fund (other than those performed by BB&T and
AmSouth under the Investment Advisory Agreements, by Rockhaven and OakBrook
under the Sub-Advisory Agreements, by BISYS Ohio as fund accountant and dividend
disbursing agent, and by the Trust's custodians. The Administrator provides
financial services to institutional clients.
<PAGE>
Under the Administration Agreement, the Administrator has agreed to maintain
office facilities for the Trust; furnish statistical and research data, clerical
and certain bookkeeping services and stationery and office supplies; prepare the
periodic reports to the Securities and Exchange Commission on Form N-SAR or any
replacement forms therefor; compile data for, prepare for execution by the Funds
and file certain federal and state tax returns and required tax filings; prepare
compliance filings pursuant to state laws with the advice of the Trust's
counsel; keep and maintain the financial accounts and records of the Funds,
including calculation of daily expense accruals; and generally assist in all
aspects of the Trust's operations other than those performed by the Investment
Advisers under the Investment Advisory Agreements, by the Sub-Advisers under the
Sub-Advisory Agreements, by the fund accountant and dividend disbursing agent,
and by the Trust's custodians. Under the Administration Agreement, the
Administrator may delegate all or any part of its responsibilities thereunder.
The Administrator receives a fee from each Fund for its services as
Administrator and expenses assumed pursuant to the Administration Agreement,
calculated daily and paid periodically, equal to the lesser of (a) a fee
calculated at the annual rate of 0.20% of each Fund's average daily net assets,
or (b) such other fee as may from time to time be agreed upon by the Trust and
the Administrator. The Administrator may voluntarily reduce all or a portion of
its fee with respect to any Fund in order to increase the net income of one or
more of the Funds available for distribution as dividends. For the period from
June 3, 1997 (commencement of operations) through December 31, 1997, the Growth
and Income Fund incurred administration fees equal to $17,514, of which $13,138
was waived or reimbursed by BISYS. For the period from October 23, 1997
(commencement of operations) through December 31, 1997, the Equity Income Fund
incurred administration fees equal to $411, of which $411 was waived or
reimbursed by BISYS. For the fiscal year ended December 31, 1998, the Growth and
income Fund and the Equity Income Fund respectively incurred administration fees
equal to $77,290 and $55,246, of which $28,503 and $22,164, respectively, was
waived or reimbursed by BISYS.
The Administration Agreement is terminable with respect to a particular Fund
upon mutual agreement of the parties to the Administration Agreement, upon
notice given at least 60 days prior to the expiration of the Agreement's
then-current term, and for cause (as defined in the Administration Agreement) by
the party alleging cause, on no less than 60 days' written notice by the Board
of Trustees or by the Administrator.
The Administration Agreement provides that the Administrator shall not be liable
for any error of judgment or mistake of law or any loss suffered by the Trust in
connection with the matters to which the Administration Agreement relates,
except a loss resulting from willful misfeasance, bad faith, or gross negligence
in the performance of its duties, or from the reckless disregard by the
Administrator of its obligations and duties thereunder.
Expenses
Each Investment Adviser, Sub-Adviser and the Administrator bears all expenses in
connection with the performance of its services other than the cost of
securities (including brokerage commissions) purchased for the Funds. The Funds
will bear the following expenses relating to their operations: taxes, interest,
fees of the Trustees of the Trust, Securities and Exchange Commission fees,
outside auditing and legal expenses, advisory and administration fees, fees and
out-of-pocket expenses of the custodians and fund accountant, certain insurance
premiums, costs of maintenance of the Trust's existence, costs of Shareholders'
reports and meetings, and any extraordinary expenses incurred in the Funds'
operations. Any expense reimbursements will be estimated daily and reconciled
and paid on a monthly basis. Fees imposed upon customer accounts for cash
management services are not included within Trust expenses for purposes of any
such expense limitation.
<PAGE>
Distributor
BISYS serves as distributor to the Trust pursuant to the Distribution Agreement
dated June 1, 1997 (the "Distribution Agreement"). As distributor, BISYS acts as
agent for the Funds in the distribution of their Shares and, in such capacity,
advertises and pays the cost of advertising, office space and personnel involved
in such activities. BISYS serves as distributor without remuneration from the
Funds. Unless otherwise terminated, the Distribution Agreement will remain in
effect for an initial term of two years, and thereafter continues for successive
one-year periods if approved at least annually (i) by the Board of Trustees or
by the vote of a majority of the outstanding Shares of the Trust, and (ii) by
the vote of a majority of the Trustees who are not parties to the Distribution
Agreement or interested persons (as defined in the 1940 Act) of any party to the
Distribution Agreement, cast in person at a meeting called for the purpose of
voting on such approval. The Distribution Agreement may be terminated in the
event of any assignment, as defined in the 1940 Act.
Custodians, Transfer Agent and Fund Accounting Services
Fifth Third Bank, 38 Fountain Square Plaza, Cincinnati, Ohio 45263, serves as
custodian to the Trust with respect to the Growth and Income Fund and the
Capital Manager Fund pursuant to a Custody Agreement dated as of May 21, 1997.
AmSouth serves as custodian to the Trust with respect to the Regional Equity
Fund, the Equity Income Fund and the Select Equity Fund pursuant to a Custody
Agreement dated as of September 16, 1997. Each custodian's responsibilities
include safeguarding and controlling the Funds' cash and securities, handling
the receipt and delivery of securities, and collecting interest and dividends on
such Funds' investments.
BISYS Ohio serves as transfer agent and dividend disbursing agent for all Funds
of the Trust pursuant to an agreement dated as of March 1, 1999. Under this
agreement, BISYS Ohio performs the following services, among others: maintenance
of Shareholder records for each of the Trust's Shareholders of record;
processing Shareholder purchase and redemption orders; processing transfers and
exchanges of Shares on the Shareholder files and records; processing dividend
payments and reinvestments; and assistance in the mailing of Shareholder reports
and proxy solicitation materials.
In addition, BISYS Ohio provides certain fund accounting services to the Trust
pursuant to a Fund Accounting Agreement dated March 1, 1999. Under the Fund
Accounting Agreement, BISYS Ohio maintains the accounting books and records for
the Funds, including journals containing an itemized daily record of all
purchases and sales of portfolio securities, all receipts and disbursements of
cash and all other debits and credits, general and auxiliary ledgers reflecting
all asset, liability, reserve, capital, income and expense accounts, including
interest accrued and interest received, and other required separate ledger
accounts; maintains a monthly trial balance of all ledger accounts; performs
certain accounting services for the Funds, including calculation of the daily
net asset value per Share, calculation of the dividend and capital gain
distributions, if any, and of yield, reconciliation of cash movements with
custodians, affirmation to custodians of portfolio trades and cash settlements,
verification and reconciliation with custodians of daily trade activity;
provides certain reports; obtains dealer quotations, prices from a pricing
service or matrix prices on all portfolio securities in order to mark the
portfolio to the market; and prepares an interim balance sheet, statement of
income and expense, and statement of changes in net assets for the Funds.
<PAGE>
BISYS Ohio receives an annual fee of $14 per Variable Contract Owner account,
subject to certain per-Fund base fees, for its services as transfer agent and,
for its services as fund accountant, BISYS Ohio receives a fee, computed daily
and paid periodically, at an annual rate equal to the greater of 0.03% of each
Fund's average daily net assets or $30,000.
Auditors
The firm of PricewaterhouseCoopers LLP, 100 East Broad Street, Columbus, Ohio
43215, serves as independent auditors for the Trust. Its services comprise
auditing the Trust's financial statements and advising the Trust as to certain
accounting and tax matters.
Legal Counsel
Dechert Price & Rhoads, 1775 Eye Street, N.W., Washington, D.C. 20006, is
counsel to the Trust and has passed upon the legality of the Shares offered
hereby.
ADDITIONAL INFORMATION
Description of Shares
The Trust is a Massachusetts business trust that was organized on July 20, 1994.
The Trust's Declaration of Trust was filed with the Secretary of State of the
Commonwealth of Massachusetts on the same date. The Declaration of Trust, as
amended and restated, authorizes the Board of Trustees to issue an unlimited
number of Shares, which are units of beneficial interest, without par value. The
Trust currently has five series of Shares which represent interests in each
series of the Trust. The Trust's Declaration of Trust authorizes the Board of
Trustees to divide or redivide any unissued Shares of the Trust into one or more
additional series or classes by setting or changing in any one or more respects
their respective preferences, conversion or other rights, voting power,
restrictions, limitations as to dividends, qualifications, and terms and
conditions of redemption.
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 SAI, the Trust's
Shares will be fully paid and non-assessable by the Trust. In the event of a
liquidation or dissolution of the Trust, Shareholders of a Fund are entitled to
receive the assets available for distribution belonging to that Fund, and a
proportionate distribution, based upon the relative asset values of the
respective series, of any general assets not belonging to any particular series
which are available for distribution.
<PAGE>
Each Share represents an equal proportionate interest in the Fund with other
Shares of the Fund, and is entitled to such dividends and distributions out of
the income earned on the assets belonging to the Fund as are declared at the
discretion of the Trustees. Shares are without par value. Shareholders are
entitled to one vote for each dollar of value invested and a proportionate
fractional vote for any fraction of a dollar invested. Shareholders will vote in
the aggregate and not by portfolio except as otherwise expressly required by
law.
An annual or special meeting of Shareholders to conduct necessary business is
not required by the Trust's Declaration of Trust, the 1940 Act or other
authority except, under certain circumstances, to elect Trustees, amend the
Declaration of Trust, approve an investment advisory agreement and to satisfy
certain other requirements. To the extent that such a meeting is not required,
the Trust may elect not to have an annual or special meeting.
The Trust will call a special meeting of Shareholders for purposes of
considering the removal of one or more Trustees upon written request therefor
from Shareholders holding not less than 10% of the outstanding votes of the
Trust. At such a meeting, a quorum of Shareholders (constituting a majority of
votes attributable to all outstanding Shares of the Trust), by majority vote,
has the power to remove one or more Trustees. In accordance with current laws,
it is anticipated that an insurance company issuing a variable contract that
participates in the Fund will request voting instructions from variable contract
owners and will vote shares or other voting interests in the separate account in
proportion of the voting instructions received.
Rule 18f-2 under the 1940 Act provides that any matter required to be submitted
to the holders of the outstanding voting securities of an investment company
such as the Trust shall not be deemed to have been effectively acted upon unless
approved by the holders of a majority of the outstanding Shares of each Fund
affected by the matter. For purposes of determining whether the approval of a
majority of the outstanding Shares of a Fund will be required in connection with
a matter, a Fund will be deemed to be affected by a matter unless it is clear
that the interests of each Fund in the matter are identical, or that the matter
does not affect any interest of the Fund. Under Rule 18f-2, the approval of an
investment advisory agreement or any change in investment policy submitted to
Shareholders would be effectively acted upon with respect to a series only if
approved by a majority of the outstanding Shares of such Fund. However, Rule
18f-2 also provides that the ratification of independent public accountants, the
approval of principal underwriting contracts, and the election of Trustees may
be effectively acted upon by Shareholders of the Trust voting without regard to
Fund.
Vote of a Majority of the Outstanding Shares
As used in the Funds' Prospectuses and the SAI, "vote of a majority of the
outstanding Shares of the Trust or the Fund" means the affirmative vote, at an
annual or special meeting of Shareholders duly called, of the lesser of (a) 67%
or more of the votes of Shareholders of the Trust or the Fund present at such
meeting at which the holders of more than 50% of the votes attributable to the
Shareholders of record of the Trust or the Fund are represented in person or by
proxy, or (b) the holders of more than 50% of the outstanding votes of
Shareholders of the Trust or the Fund.
<PAGE>
Principal Shareholders
As of March 13, 1999, Hartford Life Insurance Company Separate Account Two, 200
Hopmeadow Street, Simsbury, Connecticut 06070 owned 49.0253% and Wilbranch, P.O.
Box 2887, Wilson, North Carolina 27894 owned 50.9747% of the outstanding Shares
of the Growth and Income Fund, and thus may be deemed to be able to control the
outcome of any matter submitted to a vote of the Shareholders of that Fund. As
of the same date, Hartford Life Insurance Company Separate Account Two owned
100% of the outstanding Shares of the Equity Income Fund, and thus may be deemed
to be able to control the outcome of any matter submitted to a vote of the
Shareholders of that Fund.
Shareholder and Trustee Liability
Under Massachusetts law, holders of units of interest in a business trust may,
under certain circumstances, be held personally liable as partners for the
obligations of the trust. However, the Trust's Declaration of Trust provides
that Shareholders shall not be subject to any personal liability for the
obligations of the Trust. The Declaration of Trust provides for indemnification
out of the trust property of any Shareholder held personally liable solely by
reason of his or her being or having been a Shareholder. The Declaration of
Trust also provides that the Trust shall, upon request, reimburse any
Shareholder for all legal and other expenses reasonably incurred in the defense
of any claim made against the Shareholder for any act or obligation of the
Trust, and shall satisfy any judgment thereon. Thus, the risk of a Shareholder
incurring financial loss on account of Shareholder liability is limited to
circumstances in which the Trust itself would be unable to meet its obligations.
The Declaration of Trust states further that no Trustee, officer, or agent of
the Trust shall be personally liable in connection with the administration or
preservation of the assets of the Trust or the conduct of the Trust's business;
nor shall any Trustee, officer, or agent be personally liable to any person for
any action or failure to act except for his own bad faith, willful misfeasance,
gross negligence, or reckless disregard of his duties. The Declaration of Trust
also provides that all persons having any claim against the Trustees or the
Trust shall look solely to the assets of the Trust for payment.
Additional Tax Information
The following discussion summarizes certain U.S. federal tax considerations
incidental to an investment in a Fund. Each Fund intends to qualify annually and
to elect to be treated as a regulated investment company under the Internal
Revenue Code of 1986 , as amended (the "Code"). If a Fund so qualifies, it
generally will not be subject to federal income taxes to the extent that it
distributes on a timely basis its investment company taxable income and its net
capital gains.
<PAGE>
To qualify as a regulated investment company, each Fund generally must, among
other things: (i) derive in each taxable year at least 90% of its gross income
from dividends, interest, payments with respect to securities loans, and gains
from the sale or other disposition of stock, securities or foreign currencies,
or other income derived with respect to its business in such stock, securities
or currencies; (ii) diversify its holdings so that, at the end of each quarter
of the taxable year (a) at least 50% of the market value of the Fund's assets is
represented by cash, U.S. Government securities, the securities of other
regulated investment companies and other securities, with such other securities
of any one issuer limited for the purposes of this calculation to an amount not
greater than 5% of the value of the Fund's total assets and 10% of the
outstanding voting securities of such issuer, and (b) not more than 25% of the
value of its total assets is invested in the securities of any one issuer (other
than U.S. Government securities or the securities of other regulated investment
companies); and (iii) distribute at least 90% of its investment company taxable
income (which includes, among other items, dividends, interest, and net
short-term capital gains in excess of any net long-term capital losses) each
taxable year.
As a regulated investment company, a Fund generally will not be subject to U.S.
federal income tax on its investment company taxable income and net capital
gains (any net long-term capital gains in excess of the sum of net short-term
capital losses and capital loss carryovers from prior years), if any, that it
distributes to Shareholders. Each Fund intends to distribute to its
Shareholders, at least annually, substantially all of its investment company
taxable income and any net capital gains. In addition, amounts not distributed
by a Fund on a timely basis in accordance with a calendar year distribution
requirement may be subject to a nondeductible 4% excise tax. To avoid the tax, a
Fund may be required to distribute (or be deemed to have distributed) during
each calendar year, (i) at least 98% of its ordinary income (not taking into
account any capital gains or losses) for the calendar year, (ii) at least 98% of
its capital gains in excess of its capital losses for the twelve month period
ending on October 31 of the calendar year (adjusted for certain ordinary
losses), and (iii) all ordinary income and capital gains for previous years that
were not distributed during such years. To avoid application of the excise tax,
each Fund intends to make its distributions in accordance with the calendar year
distribution requirement. A distribution will be treated as paid on December 31
of the calendar year if it is declared by a Fund during October, November, or
December of that year to Shareholders of record on a date in such a month and
paid by the Fund during January of the following calendar year. Such
distributions will be taxable to Shareholders (such as the Separate Accounts)
for the calendar year in which the distributions are declared, rather than the
calendar year in which the distributions are actually received.
The Treasury Department announced that it would issue future regulations or
rulings addressing the circumstances in which a variable contract owner's
control of the investments of the separate account may cause the contract owner,
rather than the insurance company, to be treated as the owner of the assets held
by the separate account. If the contract owner is considered the owner of the
securities underlying the separate account, income and gains produced by those
securities would be included currently in the contract owner's gross income. It
is not known what standards will be set forth in the regulations or rulings.
In the event that rules or regulations are adopted, there can be no assurance
that the Funds will be able to operate as currently described, or that the Trust
will not have to change a Fund's investment objective or investment policies.
While each Fund's investment objective is fundamental and may be changed only by
a vote of a majority of its outstanding Shares, the investment policies of a
Fund may be modified as necessary to prevent any such prospective rules and
regulations from causing Variable Contract Owners to be considered the owners of
the Shares of a Fund.
<PAGE>
If a Fund invests in shares of a foreign investment company, the Fund may be
subject to U.S. federal income tax on a portion of an "excess distribution"
from, or of the gain from the sale of part or all of the shares in, such
company. In addition, an interest charge may be imposed with respect to deferred
taxes arising from such distributions or gains. The Fund may, however, be able
to elect alternative tax treatment for such investments that would avoid this
unfavorable result.
Under the Code, gains or losses attributable to fluctuations in exchange rates
which occur between the time a Fund accrues income or other receivables or
accrues expenses or other liabilities denominated in a foreign currency and the
time that Fund actually collects such receivables or pays such liabilities
generally are treated as ordinary income or ordinary loss. Similarly, on
disposition of debt securities denominated in a foreign currency and on
disposition of certain futures contracts, forward contracts, and options, gains
or losses attributable to fluctuations in the value of foreign currency between
the date of acquisition of the security or contract and the date of disposition
also are treated as ordinary gain or loss. These gains or losses, referred to
under the Code as "Section 988" gains or losses, may increase or decrease the
amount of a Fund's investment company taxable income to be distributed to its
Shareholders as ordinary income.
Distributions
Distributions of any investment company taxable income (which includes among
other items, dividends, interest, and any net realized short-term capital gains
in excess of net realized long-term capital losses) are treated as ordinary
income for tax purposes in the hands of a Shareholder (such as a Separate
Account). Net capital gains (the excess of any net long-term capital gains over
net short term capital losses) will, to the extent distributed, be treated as
long-term capital gains in the hands of a Shareholder regardless of the length
of time the Shareholder may have held the Shares.
Hedging Transactions
The diversification requirements applicable to a Fund's assets may limit the
extent to which a Fund will be able to engage in transactions in options,
futures contracts, or forward contracts.
Other Taxes
Distributions may also be subject to additional state, foreign and local taxes,
depending on each Shareholder's situation. Shareholders (such as Separate
Accounts) are advised to consult their own tax advisers with respect to the
particular tax consequences to them of an investment in a Fund.
<PAGE>
Performance Information
Each Fund may, from time to time, include its yield or total return in
advertisements or reports to Shareholders or prospective investors. Performance
information for the Funds will not be advertised or included in sales literature
unless accompanied by comparable performance information for a separate account
to which the Funds offer their Shares.
Yields of the Funds are computed by analyzing net investment income per Share
for a recent 30-day period and dividing that amount by a Share's maximum
offering price (reduced by any undeclared earned income expected to be paid
shortly as a dividend) on the last trading day of that period. Net investment
income will reflect amortization of any market value premium or discount of
fixed income securities (except for obligations backed by mortgages or other
assets) and may include recognition of a pro rata portion of the stated dividend
rate of dividend paying portfolio securities. The yield of each Fund will vary
from time to time depending upon market conditions, the composition of the
Fund's portfolio and operating expenses of the Trust allocated to the Fund.
Yield should also be considered relative to changes in the value of a Fund's
Shares and to the relative risks associated with the investment objective and
policies of each of the Funds. For the 30-day period ended December 31, 1998,
the yield for each operational Fund was as follows: 1.16% for the Growth and
Income Fund; and 1.01% for the Equity Income Fund.
At any time in the future, yields may be higher or lower than past yields and
there can be no assurance that any historical results will continue.
Standardized quotations of average annual total return for Fund Shares will be
expressed in terms of the average annual compounded rate of return for a
hypothetical investment in Shares over periods of 1, 5 and 10 years or up to the
life of the Fund), calculated pursuant to the following formula: P(1 + T)n = ERV
(where P = a hypothetical initial payment of $1,000, T = the average annual
total return, n = the number of years, and ERV = the ending redeemable value of
a hypothetical $1,000 payment made at the beginning of the period). All total
return figures reflect the deduction of expenses (on an annual basis), and
assume that all dividends and distributions on Shares are reinvested when paid.
For the period from its commencement of operations (indicated in parentheses)
through December 31, 1998 and for the fiscal year ending on such date, average
annual total return for each operational Fund was as follows: 21.51% and 13.36%,
respectively, for the Growth and Income Fund (June 3, 1997); and 12.67% and
12.36%, respectively, for the Equity Income Fund (October 23, 1997).
Performance information for the Funds may be compared in reports and promotional
literature to the performance of other mutual funds with comparable investment
objectives and policies through various mutual fund or market indices such as
those prepared by Dow Jones & Co., Inc., S&P, Shearson Lehman Brothers, Inc.,
the Russell 2000 Index, the Consumer Price Index, and to data prepared by Lipper
Analytical Services, Inc., a widely recognized independent service which
monitors the performance of mutual funds, or Morningstar, Inc. Comparisons may
also be made to indices or data published in Money Magazine, Forbes, Barron's,
The Wall Street Journal, The Bond Buyer's Weekly 20-Bond Index, The Bond Buyer's
Index, The Bond Buyer, The New York Times, Business Week, Pensions and
Investments, and U.S.A. Today. In addition to performance information, general
information about these Funds that appears in a publication such as those
mentioned above may be included in advertisements and in reports to Variable
Contract Owners.
<PAGE>
Each Fund may also compute aggregate total return for specified periods. The
aggregate total return is determined by dividing the net asset value of this
account at the end of the specified period by the value of the initial
investment and is expressed as a percentage. Calculation of aggregate total
return assumes reinvestment of all income dividends and capital gain
distributions during the period.
The Funds also may quote annual, average annual and annualized total return and
aggregate total return performance data for various periods other than those
noted above. Such data will be computed as described above, except that the
rates of return calculated will not be average annual rates, but rather, actual
annual, annualized or aggregate rates of return.
Quotations of yield or total return for the Funds will not take into account
charges and deductions against a Separate Account to which the Funds' Shares are
sold or charges and deductions against the Variable Contracts. The Funds' yield
and total return should not be compared with mutual funds that sell their shares
directly to the public since the figures provided do not reflect charges against
the Separate Accounts or the Variable Contracts. Performance information for any
Fund reflects only the performance of a hypothetical investment in the Fund
during the particular time period in which the calculations are based.
Performance information should be considered in light of the Funds' investment
objectives and policies, characteristics and quality of the portfolios and the
market conditions during the given time period, and should not be considered as
a representation of what may be achieved in the future.
Miscellaneous
Individual Trustees are elected by the Shareholders and, subject to removal by
the vote of two-thirds of the Board of Trustees, serve for a term lasting until
the next meeting of Shareholders at which Trustees are elected. Such meetings
are not required to be held at any specific intervals. Individual Trustees may
be removed by vote of the Shareholders voting not less than a majority of the
Shares then outstanding, cast in person or by proxy at any meeting called for
that purpose, or by a written declaration signed by Shareholders voting not less
than two-thirds of the Shares then outstanding. In accordance with current laws,
it is anticipated that an insurance company issuing a Variable Contract that
participates in the Funds will request voting instructions from variable
contract owners and will vote shares or other voting interests in the Separate
Account in proportion of the voting instructions received.
The Trust is registered with the Securities and Exchange Commission as a
management investment company. Such registration does not involve supervision by
the Securities and Exchange Commission of the management or policies of the
Trust.
The Prospectuses and this SAI 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 and this SAI 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 and this SAI.
<PAGE>
FINANCIAL STATEMENTS
Financial statements for the Trust as of December 31, 1998 for its fiscal year
then ended, including notes thereto and the reports of PricewaterhouseCoopers
LLP thereon dated February 11, 1999, are incorporated by reference from the
Trust's 1998 Annual Reports. A copy of the Reports delivered with this SAI
should be retained for future reference.
<PAGE>
APPENDIX
DESCRIPTION OF BOND RATINGS
Description of Moody's bond ratings:
Excerpts from Moody's description of its bond ratings are listed as
follows: Aaa - judged to be the best quality and they carry the smallest degree
of investment risk; Aa - judged to be of high quality by all standards -
together with the Aaa group, they comprise what are generally known as
high-grade bonds; A - possess many favorable investment attributes and are to be
considered as "upper medium grade obligations"; Baa - considered to be 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; Ba - judged to have speculative
elements, their future cannot be considered as well assured; B - generally lack
characteristics of the desirable investment; Caa - are of poor standing - such
issues may be in default or there may be present elements of danger with respect
to principal or interest; Ca - speculative in a high degree, often in default; C
- - lowest rated class of bonds, regarded as having extremely poor prospects.
Moody's also supplies numerical indicators 1, 2 and 3 to rating
categories. The modifier 1 indicates that the security is in the higher end of
its rating category; the modifier 2 indicates a mid-range ranking; and modifier
3 indicates a ranking toward the lower end of the category.
Description of S&P's bond ratings:
Excerpts from S&P's description of its bond ratings are listed as
follows: AAA - highest grade obligations, in which capacity to pay interest and
repay principal is extremely strong; AA - has a very strong capacity to pay
interest and repay principal, and differs from AAA issues only in a small
degree; A - has a strong capacity to pay interest and repay principal, although
they are somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions than debt in higher rated categories; BBB
- - 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. This group is the lowest which qualifies for commercial
bank investment. BB, B, CCC, CC, C - predominantly speculative with respect to
capacity to pay interest and repay principal in accordance with terms of the
obligations; BB indicates the highest grade and C the lowest within the
speculative rating categories. D interest or principal payments are in default.
<PAGE>
S&P applies indicators "+," no character, and "-" to its rating
categories. The indicators show relative standing within the major rating
categories.
Description of Moody's ratings of short-term municipal obligations:
Moody's ratings for state and municipal short-term obligations will be
designated Moody's Investment Grade or MIG. Such ratings recognize the
differences between short-term credit and long-term risk. Short-term ratings on
issues with demand features (variable rate demand obligations) are
differentiated by the use of the VMIG symbol to reflect such characteristics as
payment upon periodic demand rather than fixed maturity dates and payments
relying on external liquidity. Ratings categories for securities in these groups
are as follows: MIG 1/VMIG 1 - 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 - denotes high
quality, margins of protection are ample although not as large as in the
preceding group; MIG 3/VMIG 3 - denotes high quality, all security elements are
accounted for but there is lacking the undeniable strength of the preceding
grades; MIG 4/VMIG 4 - denotes adequate quality, protection commonly regarded as
required of an investment security is present, but there is specific risk; SQ -
denotes speculative quality, instruments in this category lack margins of
protection.
Description of Moody's commercial paper ratings:
Excerpts from Moody's commercial paper ratings are listed as follows:
Prime - 1 - issuers (or supporting institutions) have a superior ability for
repayment of senior short-term promissory obligations; Prime - 2 - issuers (or
supporting institutions) have a strong ability for repayment of senior
short-term promissory obligations; Prime - 3 - issuers (or supporting
institutions) have an acceptable ability for repayment of senior short-term
promissory obligations; Not Prime - issuers do not fall within any of the Prime
categories.
Description of S&P's ratings for corporate and municipal bonds:
Investment grade ratings: AAA - the highest rating assigned by S&P,
capacity to pay interest and repay principal is extremely strong; AA - has a
very strong capacity to pay interest and repay principal and differs from the
highest rated issues only in a small degree; A - has strong capacity to pay
interest and repay principal although it is somewhat more susceptible to the
adverse effects of changes in circumstances and economic conditions than debt in
higher rated categories; BBB - 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.
<PAGE>
Speculative grade ratings: BB, B, CCC, CC, C - debt rated in these
categories is regarded as having predominantly speculative characteristics with
respect to capacity to pay interest and repay principal - while such debt will
likely have some quality and protective characteristics, these are outweighed by
large uncertainties or major risk exposures to adverse conditions; CI - reserved
for income bonds on which no interest is being paid; D -in default, and payment
of interest and/or repayment of principal is in arrears. Plus (+) or Minus (-) -
the ratings from "AA" to "CCC" may be modified by the addition of a plus or
minus sign to show relative standing within the major rating categories.
Description of S&P's rating for municipal notes and short-term municipal demand
obligations:
Rating categories are as follows: SP-1 - has a very strong or strong
capacity to pay principal and interest - those issues determined to possess
overwhelming safety characteristics will be given a plus (+) designation; SP-2 -
has a satisfactory capacity to pay principal and interest; SP-3 - issues
carrying this designation have a speculative capacity to pay principal and
interest.
Description of S&P's ratings for short-term corporate demand obligations and
commercial paper:
An S&P commercial paper rating is a current assessment of the
likelihood of timely repayment of debt having an original maturity of no more
than 365 days. Excerpts from S&P's description of its commercial paper ratings
are listed as follows: A-1 - the degree of safety regarding timely payment is
strong - those issues determined to possess extremely strong safety
characteristics will be denoted with a plus (+) designation; A-2 capacity for
timely payment is satisfactory - however, the relative degree of safety is not
as high as for issues designated "A-1;" A-3 - has adequate capacity for timely
payment - however, is more vulnerable to the adverse effects of changes in
circumstances than obligations carrying the higher designations; B - regarded as
having only speculative capacity for timely payment; C - a doubtful capacity for
payment; D - in payment default - the "D" rating category is used when interest
payments or principal payments are not made on the date due, even if the
applicable grace period has not expired, unless S&P believes that such payments
will be made during such grace period.
