Exhibit 17(ii)
[BB&T FUNDS LOGO]
SUPPLEMENT DATED OCTOBER 3, 2006
TO THE
INSTITUTIONAL SHARES PROSPECTUS
DATED FEBRUARY 1, 2006,
AS AMENDED MAY 30, 2006
THIS SUPPLEMENT PROVIDES THE FOLLOWING AMENDED AND SUPPLEMENTAL INFORMATION
AND SUPERSEDES ANY INFORMATION TO THE CONTRARY IN THE INSTITUTIONAL SHARES
PROSPECTUS DATED FEBRUARY 1, 2006, AS AMENDED MAY 30, 2006:
CHANGE IN PRINCIPAL RISKS
Effective immediately, the "Principal Investment Risks" section of the
Large Cap Fund (formerly the Large Cap Value Fund), on page 6 of the prospectus,
is replaced in its entirety with the following:
PRINCIPAL INVESTMENT
RISKS Your investment in the Fund may be subject to
the following principal risks:
MARKET RISK: The possibility that the Fund's
stock holdings will decline in price because of
a broad stock market decline. Markets generally
move in cycles, with periods of rising prices
followed by periods of falling prices. The
value of your investment will tend to increase
or decrease in response to these movements.
INVESTMENT STYLE RISK: The possibility that
the market segment on which this Fund
focuses -- large cap stocks -- will
underperform other kinds of investments or
market averages.
The Fund may trade securities actively, which
could increase its transaction costs (thereby
lowering its performance) and may increase the
amount of taxes that you pay. If the Fund
invests in securities with additional risks,
its share price volatility accordingly could be
greater and its performance lower. For more
information about these risks, please see
Additional Investment Strategies and Risks on
page 107.
SHAREHOLDERS SHOULD RETAIN THIS SUPPLEMENT
WITH THE PROSPECTUS FOR FUTURE REFERENCE.
BBT-SP-I3 1006
[BB&T FUNDS LOGO]
SUPPLEMENT DATED JULY 7, 2006
TO THE
INSTITUTIONAL SHARES PROSPECTUS
DATED FEBRUARY 1, 2006
THIS SUPPLEMENT PROVIDES THE FOLLOWING AMENDED AND SUPPLEMENTAL INFORMATION
AND SUPERSEDES ANY INFORMATION TO THE CONTRARY IN THE INSTITUTIONAL SHARES
PROSPECTUS DATED FEBRUARY 1, 2006:
CHANGE IN INVESTMENT STRATEGIES
Effective 60 days from the date of this supplement, the principal
investment strategy of the BB&T Large Cap Fund will be amended to define large
capitalization companies, for purposes of the Fund's investment policy, as those
companies within the capitalization range of the S&P 500(R) Index. Accordingly,
the first paragraph under the "Principal Investment Strategies" section on page
6 of the prospectus will be replaced in its entirety with the following:
PRINCIPAL INVESTMENT STRATEGIES
To pursue this goal, the Fund invests primarily in domestically traded U.S.
common stocks of large U.S. companies and U.S. traded equity stocks of
foreign companies whose capitalization is within the range of those
companies in the S&P 500(R) Index.
In addition, the section entitled "Large Cap Fund" on page 83 of the
prospectus will be replaced in its entirety with the following:
LARGE CAP FUND - Under normal circumstances, the Fund will invest at least
80% of its net assets plus borrowings in the securities of large companies.
This policy will not be changed without 60 days' advance notice to
shareholders. Large companies are those companies with market
capitalizations within the range of those companies in the S&P 500(R)
Index. These stocks, which may include common stock, preferred stock,
warrants, or debt instruments that are convertible to common stock.
CHANGE IN REDEMPTION FEE POLICY
Effective July 24, 2006, the BB&T Funds will no longer assess redemption
fees. Accordingly, all references to the payment of a redemption fee should be
disregarded. In addition, the section entitled "Redemption Fees" on page 103 of
the prospectus is hereby deleted in its entirety.
The "Redemption Fee" row of each Fund's fee table will be revised to read
as follows:
<Table>
Redemption Fee(2) None
</Table>
The section entitled "Exchanging Your Shares" on page 105 of the prospectus
is replaced in its entirety with the following:
EXCHANGING YOUR SHARES
You can exchange your shares in one Fund for shares of the same class of
another BB&T Fund, usually without paying additional sales charges (see
"Notes" below). You must meet the minimum investment requirements for the
Fund into which you are exchanging. Exchanges from one Fund to another are
taxable. Institutional Shares may also be exchanged for Class A Shares of
the same Fund if you cease to be eligible to purchase Institutional Shares.
Institutional Shares of each Fund may not be exchanged for Class B Shares
or Class C Shares. No transaction fees are currently charged for exchanges.
Furthermore, the exchange of Institutional Shares for Class A Shares will
require payment of the sales charge unless the sales charge is waived.
Please consult the Class A, Class B, and Class C Shares prospectus for more
information.
The first three paragraphs under the section entitled "Market Timing" on
page 105 of the prospectus are replaced in their entirety with the following:
MARKET TIMING
Excessive short-term trading or other abusive trading practices may disrupt
portfolio management strategies and hurt Fund performance. Such practices
may dilute the value of Fund shares, interfere with the efficient
management of a Fund's investments, and increase brokerage and
administrative costs. To prevent disruption in the management of the Fund
due to market timing strategies, we have adopted certain policies and
procedures. We reserve the right to close any account in which we have
identified a pattern of excessive or abusive trading. We cannot guarantee
that we will detect every market timer due to the limitations inherent in
our technological systems.
SHAREHOLDERS SHOULD RETAIN THIS SUPPLEMENT
WITH THE PROSPECTUS FOR FUTURE REFERENCE.
BBT-SP-12 0706
2
(BB&T FUNDS LOGO)
SENSIBLE INVESTING FOR GENERATIONS(R)
PROSPECTUS AND PRIVACY POLICY
STOCK FUNDS
LARGE CAP FUND
LARGE CAP GROWTH FUND
MID CAP VALUE FUND
MID CAP GROWTH FUND
SMALL CAP FUND
INTERNATIONAL EQUITY FUND
SPECIAL OPPORTUNITIES EQUITY FUND
EQUITY INCOME FUND
BOND FUNDS
TAXABLE BOND FUNDS
SHORT U.S. GOVERNMENT FUND
INTERMEDIATE U.S. GOVERNMENT FUND
TOTAL RETURN BOND FUND
TAX-FREE BOND FUNDS
KENTUCKY INTERMEDIATE TAX-FREE FUND
MARYLAND INTERMEDIATE TAX-FREE FUND
NORTH CAROLINA INTERMEDIATE TAX-FREE FUND
SOUTH CAROLINA INTERMEDIATE TAX-FREE FUND
VIRGINIA INTERMEDIATE TAX-FREE FUND
WEST VIRGINIA INTERMEDIATE TAX-FREE FUND
MONEY MARKET FUNDS
PRIME MONEY MARKET FUND
U.S. TREASURY MONEY MARKET FUND
FUNDS OF FUNDS
CAPITAL MANAGER CONSERVATIVE GROWTH FUND
CAPITAL MANAGER MODERATE GROWTH FUND
CAPITAL MANAGER GROWTH FUND
CAPITAL MANAGER EQUITY FUND
INSTITUTIONAL SHARES
FEBRUARY 1, 2006
AS AMENDED MAY 30, 2006
QUESTIONS?
Call 1-800-228-1872
or your investment representative.
Not Part of the Prospectus
BB&T FUNDS
NOTICE OF PRIVACY POLICY & PRACTICES
BB&T Funds recognizes and respects the privacy expectations of our customers.(1)
We provide this notice to you so that you will know what kinds of information we
collect about our customers and the circumstances in which that information may
be disclosed to third parties who are not affiliated with the BB&T Funds.
COLLECTION OF CUSTOMER INFORMATION
We collect nonpublic personal information about our customers from the following
sources:
- Account Applications and other forms, which may include a customer's name,
address, social security number, and information about a customer's
investment goals and risk tolerance;
- Account History, including information about the transactions and balances
in a customer's accounts; and
- Correspondence, written, telephonic or electronic between a customer and
the BB&T Funds or service providers to the BB&T Funds.
DISCLOSURE OF CUSTOMER INFORMATION
We may disclose all of the consumer information outlined above to third parties
who are not affiliated with the BB&T Funds:
- as permitted by law -- for example with service providers who maintain or
service shareholder accounts for the BB&T Funds or to a shareholder's
broker or agent;
- to perform marketing services on our behalf or pursuant to a joint
marketing agreement with another financial institution.
SECURITY OF CUSTOMER INFORMATION
We require service providers to the BB&T Funds:
- to maintain policies and procedures designed to assure only appropriate
access to, and use of information about customers of the BB&T Funds; and
- to maintain physical, electronic and procedural safeguards that comply with
federal standards to guard nonpublic personal information of customers of
the BB&T Funds.
We will adhere to the policies and practices described in this notice regardless
of whether you are a current or former customer of the BB&T Funds.
----------
(1) For purposes of this notice, the terms "customer" or "customers" includes
both individual shareholders of the BB&T Funds and individuals who provide
nonpublic personal information to the BB&T Funds, but do not invest in BB&T
Funds shares.
Not Part of the Prospectus
(BB&T FUNDS LOGO)
SENSIBLE INVESTING FOR GENERATIONS(R)
PROSPECTUS
STOCK FUNDS
LARGE CAP FUND
LARGE CAP GROWTH FUND
MID CAP VALUE FUND
MID CAP GROWTH FUND
SMALL CAP FUND
INTERNATIONAL EQUITY FUND
SPECIAL OPPORTUNITIES EQUITY FUND
EQUITY INCOME FUND
BOND FUNDS
TAXABLE BOND FUNDS
SHORT U.S. GOVERNMENT FUND
INTERMEDIATE U.S. GOVERNMENT FUND
TOTAL RETURN BOND FUND
TAX-FREE BOND FUNDS
KENTUCKY INTERMEDIATE TAX-FREE FUND
MARYLAND INTERMEDIATE TAX-FREE FUND
NORTH CAROLINA INTERMEDIATE TAX-FREE FUND
SOUTH CAROLINA INTERMEDIATE TAX-FREE FUND
VIRGINIA INTERMEDIATE TAX-FREE FUND
WEST VIRGINIA INTERMEDIATE TAX-FREE FUND
MONEY MARKET FUNDS
PRIME MONEY MARKET FUND
U.S. TREASURY MONEY MARKET FUND
FUNDS OF FUNDS
CAPITAL MANAGER CONSERVATIVE GROWTH FUND
CAPITAL MANAGER MODERATE GROWTH FUND
CAPITAL MANAGER GROWTH FUND
CAPITAL MANAGER EQUITY FUND
INSTITUTIONAL SHARES
FEBRUARY 1, 2006
AS AMENDED MAY 30, 2006
QUESTIONS?
Call 1-800-228-1872
or your investment representative.
The Securities and Exchange Commission has not approved the shares described in
this prospectus or determined whether this prospectus is accurate or complete.
Anyone who tells you otherwise is committing a crime.
BB&T FUNDS TABLE OF CONTENTS
RISK/RETURN SUMMARY AND FUND EXPENSES
Carefully review this 4 Overview
important section, which 5 STOCK FUNDS
summarizes each Fund's 6 Large Cap Fund
investments, risks, past 9 Large Cap Growth Fund
performance, and fees. 12 Mid Cap Value Fund
15 Mid Cap Growth Fund
18 Small Cap Fund
21 International Equity Fund
24 Special Opportunities Equity Fund
27 Equity Income Fund
30 BOND FUNDS
31 Short U.S. Government Fund
34 Intermediate U.S. Government Fund
37 Total Return Bond Fund
41 Kentucky Intermediate Tax-Free Fund
44 Maryland Intermediate Tax-Free Fund
47 North Carolina Intermediate Tax-Free Fund
50 South Carolina Intermediate Tax-Free Fund
53 Virginia Intermediate Tax-Free Fund
56 West Virginia Intermediate Tax-Free Fund
59 MONEY MARKET FUNDS
60 Prime Money Market Fund
63 U.S. Treasury Money Market Fund
66 FUNDS OF FUNDS
67 Capital Manager Conservative Growth Fund
71 Capital Manager Moderate Growth Fund
75 Capital Manager Growth Fund
79 Capital Manager Equity Fund
ADDITIONAL INVESTMENT STRATEGIES AND RISKS
Review this section for 83 STOCK FUNDS
information on investment 83 Large Cap Fund
strategies and their risks. 83 Large Cap Growth Fund
83 Mid Cap Value Fund
83 Mid Cap Growth Fund
83 Small Cap Fund
83 International Equity Fund
83 Special Opportunities Equity Fund
83 Equity Income Fund
84 BOND FUNDS
84 Short U.S. Government Fund
84 Intermediate U.S. Government Fund
84 Total Return Bond Fund
84 Kentucky Intermediate Tax-Free Fund
84 Maryland Intermediate Tax-Free Fund
84 North Carolina Intermediate Tax-Free Fund
84 South Carolina Intermediate Tax-Free Fund
85 Virginia Intermediate Tax-Free Fund
85 West Virginia Intermediate Tax-Free Fund
85 MONEY MARKET FUNDS
85 Prime Money Market Fund
86 FUNDS OF FUNDS
87 Investment Practices
91 Investment Risks
2
BB&T FUNDS TABLE OF CONTENTS
FUND MANAGEMENT
Review this section for 94 The Investment Adviser
details on the people and 95 The Investment Sub-Advisers
organizations who oversee the 96 Portfolio Managers
Funds. 98 The Distributor and Administrator
SHAREHOLDER INFORMATION
Review this section for 99 Choosing a Share Class
details on how shares are 100 Pricing of Fund Shares
valued, how to purchase, sell 101 Purchasing and Adding to Your Shares
and exchange shares, related 102 Selling Your Shares
charges and payments of 103 General Policies on Selling Shares
dividends and distributions 105 Exchanging Your Shares
107 Dividends, Distributions and Taxes
108 Additional Information about the Funds
OTHER INFORMATION ABOUT THE FUNDS
111 Financial Highlights
3
RISK/RETURN SUMMARY AND FUND EXPENSES OVERVIEW
THE FUNDS BB&T Funds is a mutual fund family that offers
different classes of shares in separate
investment portfolios ("Funds"). The Funds have
individual investment goals and strategies.
This prospectus gives you important information
about the Institutional Shares of the Stock
Funds, the Bond Funds, the Money Market Funds
and the Funds of Funds that you should know
before investing. Each Fund also offers three
additional classes of shares called Class A
Shares, Class B Shares, and Class C Shares
which are offered in a separate prospectus.
Please read this prospectus and keep it for
future reference.
Each of the Funds in this prospectus is a
mutual fund. A mutual fund pools shareholders'
money and, using professional investment
managers, invests it in securities like stocks
and bonds. Before you look at specific Funds,
you should know a few general basics about
investing in mutual funds.
The value of your investment in a Fund is based
on the market prices of the securities the Fund
holds. These prices change daily due to
economic and other events that affect
securities markets generally, as well as those
that affect particular companies or government
units. These price movements, sometimes called
volatility, will vary depending on the types of
securities a Fund owns and the markets where
these securities trade.
LIKE OTHER INVESTMENTS, YOU COULD LOSE MONEY ON
YOUR INVESTMENT IN A FUND. YOUR INVESTMENT IN A
FUND IS NOT A DEPOSIT OR AN OBLIGATION OF
BRANCH BANKING AND TRUST COMPANY, BB&T
CORPORATION, THEIR AFFILIATES, OR ANY BANK. IT
IS NOT INSURED BY THE FDIC OR ANY GOVERNMENT
AGENCY.
Each Fund has its own investment goal and
strategies for reaching that goal. However, it
cannot be guaranteed that a Fund will achieve
its goal. Before investing, make sure that the
Fund's goal matches your own.
The portfolio manager invests each Fund's
assets in a manner designed to help the Fund
achieve its goal. A portfolio manager's
judgments about the economy, stock markets and
companies, as well as a manager's selection of
investments, may cause a Fund to underperform
other funds with similar objectives.
4
RISK/RETURN SUMMARY AND FUND EXPENSES OVERVIEW
STOCK FUNDS
These Funds seek long-term capital
appreciation, and in some cases current income,
and invest primarily in equity and
equity-related securities, principally common
stocks.
WHO MAY WANT TO INVEST Consider investing in these Funds if you are:
- seeking a long-term goal such as
retirement
- looking to add a growth component to
your portfolio
- willing to accept the risks of
investing in the stock markets
These Funds may not be appropriate if you are:
- pursuing a short-term goal or
investing emergency reserves
- uncomfortable with an investment that
will fluctuate in value
5
LARGE CAP FUND
RISK/RETURN SUMMARY AND FUND EXPENSES (FORMERLY THE LARGE CAP VALUE FUND)
RISK/RETURN SUMMARY
INVESTMENT OBJECTIVE The Fund seeks capital growth, current income
or both, primarily through investment in
stocks.
PRINCIPAL To pursue this goal, the Fund invests primarily
INVESTMENT STRATEGIES in domestically traded U.S. common stocks of
large U.S. companies and U.S. traded equity
stocks of foreign companies whose
capitalization is within the range of those
companies in the Russell 1000(R) Value Index.
In managing the Fund, the portfolio manager
selects those stocks that he believes are
undervalued and have a favorable outlook. In
choosing individual stocks, the portfolio
manager uses quantitative and qualitative
processes to examine intrinsic value and the
fundamental outlook of a particular issuer.
The Fund may also invest in certain other
equity securities in addition to those
described above. For a more complete
description of the various securities in which
the Fund may invest, please see Additional
Investment Strategies and Risks on page 83 or
consult the SAI.
PRINCIPAL Your investment in the Fund may be subject to
INVESTMENT RISKS the following principal risks:
MARKET RISK: The possibility that the Fund's
stock holdings will decline in price because of
a broad stock market decline. Markets generally
move in cycles, with periods of rising prices
followed by periods of falling prices. The
value of your investment will tend to increase
or decrease in response to these movements.
INVESTMENT STYLE RISK: The possibility that the
market segment on which this Fund focuses --
value stocks -- will underperform other kinds
of investments or market averages.
The Fund may trade securities actively, which
could increase its transaction costs (thereby
lowering its performance) and may increase the
amount of taxes that you pay. If the Fund
invests in securities with additional risks,
its share price volatility accordingly could be
greater and its performance lower. For more
information about these risks, please see
Additional Investment Strategies and Risks on
page 83.
6
LARGE CAP FUND
RISK/RETURN SUMMARY AND FUND EXPENSES (FORMERLY THE LARGE CAP VALUE FUND)
The chart and table on this page show how the Large Cap Fund has performed and
how its performance has varied from year to year. The bar chart gives some
indication of risk by showing changes in the Fund's yearly performance to
demonstrate that the Fund's value varied at different times. The table below it
compares the Fund's performance over time to those of the Russell 1000(R) Value
Index and the S&P 500(R) Index. The Russell 1000(R) Value Index is a widely
recognized, unmanaged index of common stocks that measures the performance of
those Russell 1000(R) companies with lower price-to-book ratios and lower
forecasted growth values. The S&P 500(R) Index is a widely recognized, unmanaged
index of common stocks. Of course, past performance does not indicate how the
Fund will perform in the future.
PERFORMANCE BAR CHART AND TABLE
YEAR-BY-YEAR TOTAL RETURNS AS OF 12/31
FOR INSTITUTIONAL SHARES(1)
"Performance Bar Chart and Table"
The performance information shown above is based on a calendar year.
Best quarter: 16.92% 12/31/98
Worst quarter: -19.68% 9/30/02
AVERAGE ANNUAL TOTAL RETURNS
(for the periods ended December 31, 2005)(1)
SINCE
INCEPTION
1 YEAR 5 YEARS 10 YEARS (10/09/92)
------ ------- -------- ----------
INSTITUTIONAL SHARES(2)
RETURN BEFORE TAXES 7.71% 3.98% 8.80% 10.19%
RETURN AFTER TAXES ON DISTRIBUTIONS 6.25% 3.24% 7.38% 8.72%
RETURN AFTER TAXES ON DISTRIBUTIONS AND SALE OF
FUND SHARES 6.97% 3.20% 7.11% 8.35%
RUSSELL 1000(R) VALUE INDEX(3) 7.05% 5.28% 10.94% 12.55%(4)
(reflects no deductions for fees, expenses, or taxes)
S&P 500(R) INDEX
(reflects no deductions for fees, expenses, or taxes) 4.91% 0.54% 9.08% 11.02%(5)
(1) Both charts assume reinvestment of dividends and distributions.
(2) After-tax returns are calculated using the historical highest individual
federal marginal income tax rates and do not reflect the impact of state
and local taxes. Actual after-tax returns depend on an investor's tax
situation and may differ from those shown. The after tax returns shown are
not relevant to investors who hold their Fund shares through tax-deferred
arrangements such as 401(k) plans or individual retirement accounts.
(3) The benchmark index for the Fund has changed from the Russell 1000(R) Value
Index to the S&P 500(R) Index in order to provide a better comparison for
the Fund's investment policies.
(4) Since 9/30/92.
(5) Since 10/9/92.
7
LARGE CAP FUND
RISK/RETURN SUMMARY AND FUND EXPENSES (FORMERLY THE LARGE CAP VALUE FUND)
As an investor in the Large Cap Fund, you will pay the following fees and
expenses when you buy and hold shares. Shareholder transaction fees are paid
from your account. Annual Fund operating expenses are paid out of Fund assets,
and are reflected in the share price.
FEES AND EXPENSES
SHAREHOLDER TRANSACTION EXPENSES INSTITUTIONAL
(FEES PAID BY YOU DIRECTLY)(1) SHARES
-------------------------------- -------------
Maximum Sales Charge (load) on Purchases None
Maximum Deferred Sales Charge (load) None
Redemption Fee (on shares sold within 7
calendar days of purchase)(2) 2.00%
ANNUAL FUND OPERATING EXPENSES INSTITUTIONAL
(FEES PAID FROM FUND ASSETS) SHARES
-------------------------------- -------------
Management Fee(3) 0.74%
Distribution and Service
(12b-1) Fee 0.00%
Other Expenses 0.21%
Total Fund Operating Expenses 0.95%
Fee Waiver or Expense
Reimbursement(3) -0.04%
Net Fund Operating Expenses(3) 0.91%
(1) Participating banks or other financial institutions may charge their
customers account fees for automatic investment, exchanges and other cash
management services provided in connection with investment in the Funds.
(2) A wire transfer fee of $7.00 may be deducted from the amount of your
redemption, regardless of the date of purchase, if you request a wire
transfer. This fee is currently being waived.
(3) The Fund's Adviser has contractually agreed to limit the management fees
paid by the Fund to 0.70% for the period from February 1, 2006 through
January 31, 2007.
Use the table at right to compare fees and expenses with those of other funds.
It illustrates the amount of fees and expenses you would pay, assuming the
following:
- $ 10,000 investment
- 5% annual return
- redemption at the end of each period
- no changes in the Fund's operating expenses
Because this example is hypothetical and for comparison only, your actual costs
will be different.
EXPENSE EXAMPLE
1 3 5 10
LARGE CAP FUND YEAR YEARS YEARS YEARS
-------------- ----- ----- ----- ------
INSTITUTIONAL SHARES $93 $299 $522 $1,163
8
LARGE CAP GROWTH FUND
RISK/RETURN SUMMARY AND FUND EXPENSES (FORMERLY THE LARGE COMPANY GROWTH FUND)
RISK/RETURN SUMMARY
INVESTMENT OBJECTIVE The Fund seeks long-term capital appreciation
by investing primarily in a diversified
portfolio of equity and equity-related
securities of large capitalization growth
companies.
PRINCIPAL INVESTMENT To pursue this goal, the Fund invests primarily
STRATEGIES in common stocks, as well as American
Depositary Receipts ("ADRs"), of large
capitalization companies that the portfolio
manager believes have attractive potential for
growth. Large capitalization companies are
those companies whose market capitalization is
within the range of those companies in the
Russell 1000(R) Growth Index.
In managing the Fund's portfolio, the manager
uses a variety of economic projections,
quantitative techniques, and earnings
projections in formulating individual stock
purchase and sale decisions. In choosing
individual stocks, the portfolio manager
primarily uses a fundamental investment process
to identify companies with a history of above
average growth or companies that are expected
to enter periods of above average growth. Some
of the criteria that the manager uses to select
these companies are return on equity, price and
earnings momentum, earnings surprise, the
company's management and the company's position
within its industry.
The Fund may also invest in certain other
equity securities in addition to those
described above. For a more complete
description of the various securities in which
the Fund may invest, please see Additional
Investment Strategies and Risks on page 83 or
consult the SAI.
PRINCIPAL INVESTMENT RISKS Your investment in the Fund may be subject to
the following principal risks:
MARKET RISK: The possibility that the Fund's
stock holdings will decline in price because of
a broad stock market decline. Markets generally
move in cycles, with periods of rising prices
followed by periods of falling prices. The
value of your investment will tend to increase
or decrease in response to these movements.
INVESTMENT STYLE RISK: The possibility that the
market segment on which this Fund focuses --
large cap growth stocks -- will underperform
other kinds of investments or market averages.
The Fund may trade securities actively, which
could increase its transaction costs (thereby
lowering its performance) and may increase the
amount of taxes that you pay. If the Fund
invests in securities with additional risks,
its share price volatility accordingly could be
greater and its performance lower. For more
information about these risks, please see
Additional Investment Strategies and Risks on
page 83.
9
LARGE CAP GROWTH FUND
RISK/RETURN SUMMARY AND FUND EXPENSES (FORMERLY THE LARGE COMPANY GROWTH FUND)
The chart and table on this page show how the Large Cap Growth Fund has
performed and how its performance has varied from year to year. The bar chart
gives some indication of risk by showing changes in the Fund's yearly
performance to demonstrate that the Fund's value varied at different times. The
table below it compares the Fund's performance over time to that of the Russell
1000(R) Growth Index, a widely recognized, unmanaged index comprised of 1000 of
the largest capitalized U.S. domiciled companies with higher price-to-book
ratios and higher forecasted growth values whose common stock is traded in the
U.S. on the NYSE, American Stock Exchange and NASDAQ. Of course, past
performance does not indicate how the Fund will perform in the future.
PERFORMANCE BAR CHART AND TABLE
YEAR-BY-YEAR TOTAL RETURNS AS OF 12/31
FOR INSTITUTIONAL SHARES(1)
"Performance Bar Chart and Table"
The performance information shown above is based on a calendar year.
Best quarter: 29.82% 12/31/99
Worst quarter: -21.55% 3/31/01
AVERAGE ANNUAL TOTAL RETURNS
(for the periods ended December 31, 2005)(1)
SINCE INCEPTION
1 YEAR 5 YEARS (10/03/97)
------ ------- ---------------
INSTITUTIONAL SHARES(2)
RETURN BEFORE TAXES 2.08% -4.86% 1.43%
RETURN AFTER TAXES ON DISTRIBUTIONS 1.98% -4.88% 0.91%
RETURN AFTER TAXES ON DISTRIBUTIONS AND SALE OF FUND SHARES 1.48% -4.07% 1.13%
RUSSELL 1000(R) GROWTH INDEX
(reflects no deductions for fees, expenses, or taxes) 5.26% -3.58% 2.36%(3)
(1) Both charts assume reinvestment of dividends and distributions.
(2) After-tax returns are calculated using the historical highest individual
federal marginal income tax rates and do not reflect the impact of state
and local taxes. Actual after-tax returns depend on an investor's tax
situation and may differ from those shown. The after-tax returns shown are
not relevant to investors who hold their Fund shares through tax-deferred
arrangements such as 401(k) plans or individual retirement accounts.
(3) Since 9/30/97.
10
LARGE CAP GROWTH FUND
RISK/RETURN SUMMARY AND FUND EXPENSES (FORMERLY THE LARGE COMPANY GROWTH FUND)
As an investor in the Large Cap Growth Fund, you will pay the following fees and
expenses when you buy and hold shares. Shareholder transaction fees are paid
from your account. Annual Fund operating expenses are paid out of Fund assets
and are reflected in the share price.
FEES AND EXPENSES
SHAREHOLDER TRANSACTION EXPENSES INSTITUTIONAL
(FEES PAID BY YOU DIRECTLY)(1) SHARES
-------------------------------- -------------
Maximum Sales Charge (load)
on Purchases None
Maximum Deferred Sales Charge
(load) None
Redemption Fee (on shares sold
within 7 calendar days of
purchase)(2) 2.00%
ANNUAL FUND OPERATING EXPENSES INSTITUTIONAL
(FEES PAID FROM FUND ASSETS) SHARES
-------------------------------- -------------
Management Fee(3) 0.74%
Distribution and Service
(12b-1) Fee 0.00%
Other Expenses 0.21%
Total Fund Operating Expenses 0.95%
Fee Waiver or Expense
Reimbursement(3) -0.04%
Net Fund Operating Expenses(3) 0.91%
(1) Participating banks or other financial institutions may charge their
customers account fees for automatic investment, exchanges and other cash
management services provided in connection with investment in the Funds.
(2) A wire transfer fee of $7.00 may be deducted from the amount of your
redemption, regardless of the date of purchase, if you request a wire
transfer. This fee is currently being waived.
(3) The Fund's Adviser has contractually agreed to limit the management fees
paid by the Fund to 0.70% for the period from February 1, 2006 through
January 31, 2007.
Use the table at right to compare fees and expenses with those of other funds.
It illustrates the amount of fees and expenses you would pay, assuming the
following:
- $ 10,000 investment
- 5% annual return
- redemption at the end of each period
- no changes in the Fund's operating expenses
Because this example is hypothetical and for comparison only, your actual costs
will be different.
EXPENSE EXAMPLE
LARGE CAP 1 3 5 10
GROWTH FUND YEAR YEARS YEARS YEARS
----------- ---- ----- ----- -----
INSTITUTIONAL SHARES $93 $299 $522 1,163
11
RISK/RETURN SUMMARY AND FUND EXPENSES MID CAP VALUE FUND
RISK/RETURN SUMMARY
INVESTMENT OBJECTIVE The Fund seeks long-term growth of capital by
investing the Fund's assets primarily in equity
securities of companies that are considered to
be undervalued.
PRINCIPAL INVESTMENT The Fund seeks to meet its objective by
STRATEGIES investing, normally, in domestically traded
U.S. equity securities of middle capitalization
companies. The Fund considers a company to be a
mid-capitalization company if its has a market
capitalization, at the time of purchase, within
the range of the largest and smallest
capitalized companies within the Russell
Midcap(R) Value Index.
In managing the Fund, the portfolio managers
attempt to diversify across different economic
sectors selecting those stocks that they
believe are undervalued. In choosing individual
stocks, the portfolio managers utilize both a
quantitative and qualitative approach to
examine the fundamental characteristics of a
particular company. Quantitative analysis
focuses on businesses with strong cash flow, a
competitive advantage, balance sheet strength,
and above average profitability. Qualitatively,
portfolio managers look for quality management
with characteristics of insider ownership, fair
incentive compensation and a long-term history
of skilled capital allocation decisions. The
team also gathers information from industry
analysts and competitors.
The Fund may also invest in certain other
equity securities in addition to those
described above. For a more complete
description of the various securities in which
the Fund may invest, please see Additional
Investment Strategies and Risks on page 83 or
consult the SAI.
PRINCIPAL INVESTMENT RISKS Your investment in the Fund may be subject to
the following principal risks:
MARKET RISK: The possibility that the Fund's
stock holdings will decline in price because of
a broad stock market decline. Markets generally
move in cycles, with periods of rising prices
followed by periods of falling prices. The
value of your investment will tend to increase
or decrease in response to these movements.
INVESTMENT STYLE RISK: The possibility that the
market segment on which this Fund focuses --
mid cap value stocks -- will underperform other
kinds of investments or market averages.
The Fund may trade securities actively, which
could increase its transaction costs (thereby
lowering its performance) and may increase the
amount of taxes that you pay. If the Fund
invests in securities with additional risks,
its share price volatility accordingly could be
greater and its performance lower. For more
information about these risks, please see
Additional Investment Strategies and Risks on
page 83.
12
RISK/RETURN SUMMARY AND FUND EXPENSES MID CAP VALUE FUND
The chart and table on this page show how the Mid Cap Value Fund has performed
and how its performance has varied from year to year. The bar chart gives some
indication of risk by showing changes in the Fund's yearly performance to
demonstrate that the Fund's value varied at different times. The table below it
compares the Fund's performance over time to that of the Russell Midcap Value
Index, a widely recognized, unmanaged index of generally mid-sized companies
that measures the performance of those securities in the Russell 1000(R) Index
with lower price-to-book ratios and lower forecasted growth values. Of course,
past performance does not indicate how the Fund will perform in the future.
PERFORMANCE BAR CHART AND TABLE
YEAR-BY-YEAR TOTAL RETURNS AS OF 12/31
FOR INSTITUTIONAL SHARES(1, 2)
"Performance Bar Chart and Table"
The performance information shown above is based on a calendar year.
Best quarter: 16.24% 6/30/03
Worst quarter: -16.21% 9/30/02
AVERAGE ANNUAL TOTAL RETURNS
(for the periods ended December 31, 2005)(1, 2)
SINCE INCEPTION
1 YEAR 5 YEARS (8/1/96)
------ ------- ---------------
INSTITUTIONAL SHARES(3)
RETURN BEFORE TAXES 11.44% 9.45% 11.69%
RETURN AFTER TAXES ON DISTRIBUTIONS 4.10% 7.25% 9.34%
RETURN AFTER TAXES ON DISTRIBUTIONS AND SALE OF FUND SHARES 14.70% 7.72% 9.23%
RUSSELL MIDCAP VALUE INDEX
(reflects no deductions for fees, expenses, or taxes) 12.65% 12.21% 14.26%(4)
(1) Both charts assume reinvestment of dividends and distributions.
(2) Performance data includes the performance of the OVB Equity Income
Portfolio for the period prior to its consolidation with the BB&T Mid Cap
Value Fund on July 23, 2001.
(3) After-tax returns are calculated using historical highest individual
federal marginal income tax rates and do not reflect the impact of state
and local taxes. Actual after-tax returns depend on an investor's tax
situation and may differ from those shown. The after-tax returns shown are
not relevant to investors who hold their Fund shares through tax-deferred
arrangements such as 401(k) plans or individual retirement accounts.
(4) Since 7/31/96.
13
RISK/RETURN SUMMARY AND FUND EXPENSES MID CAP VALUE FUND
As an investor in the Mid Cap Value Fund, you will pay the following fees and
expenses when you buy and hold shares. Shareholder transaction fees are paid
from your account. Annual Fund operating expenses are paid out of Fund assets
and are reflected in the share price.
FEES AND EXPENSES
SHAREHOLDER TRANSACTION EXPENSES INSTITUTIONAL
(FEES PAID BY YOU DIRECTLY)(1) SHARES
-------------------------------- -------------
Maximum Sales Charge (load)
on Purchases None
Maximum Deferred Sales Charge
(load) None
Redemption Fee (on shares sold
within 7 calendar days of
purchase)(2) 2.00%
ANNUAL FUND OPERATING EXPENSES INSTITUTIONAL
(FEES PAID FROM FUND ASSETS) SHARES
-------------------------------- -------------
Management Fee(3) 0.74%
Distribution and Service
(12b-1) Fee 0.00%
Other Expenses 0.21%
Total Fund Operating Expenses 0.95%
Fee Waiver or Expense
Reimbursement(3) -0.04%
Net Fund Operating Expenses(3) 0.91%
(1) Participating banks or other financial institutions may charge their
customers account fees for automatic investment, exchanges and other cash
management services provided in connection with investment in the Funds.
(2) A wire transfer fee of $7.00 may be deducted from the amount of your
redemption, regardless of the date of purchase, if you request a wire
transfer. This fee is currently being waived.
(3) The Fund's Adviser has contractually agreed to limit the management fees
paid by the Fund to 0.70% for the period from February 1, 2006 through
January 31, 2007.
Use the table at right to compare fees and expenses with those of other Funds.
It illustrates the amount of fees and expenses you would pay, assuming the
following:
- $10,000 investment
- 5% annual return
- redemption at the end of each period
- no changes in the Fund's operating expenses
Because this example is hypothetical and for comparison only, your actual costs
will be different.
EXPENSE EXAMPLE
1 3 5 10
MID CAP VALUE FUND YEAR YEARS YEARS YEARS
------------------ ---- ----- ----- ------
INSTITUTIONAL SHARES $93 $299 $522 $1,163
14
RISK/RETURN SUMMARY AND FUND EXPENSES MID CAP GROWTH FUND
RISK/RETURN SUMMARY
INVESTMENT OBJECTIVE The Fund seeks long-term growth of capital.
PRINCIPAL To pursue this goal, the Fund invests primarily
INVESTMENT STRATEGIES in common stocks of U.S. companies, as well as
American Depositary Receipts ("ADRs"), with
market capitalizations within the range of
those companies in the Russell Midcap(R) Growth
Index that have an established record of growth
and continue to present significant growth
potential. In selecting investments for the
Fund, the portfolio manager will consider
growth factors such as a company's new
products, changes in management, and business
restructurings. The portfolio manager will also
search for companies that have established
records of earnings and sales growth over a
period of at least two years that it believes
are poised to meet or exceed these figures
going forward. These companies generally will
have lower amounts of long-term debt
(representing less than 40% of the company's
capitalization); have attractive price/earnings
ratios in relation to a company's 3 to 5-year
earnings per share growth rate; and have stock
prices which have outperformed the Russell
Midcap Growth Index over the previous six
months. The portfolio manager will attempt to
avoid overweighting the Fund's position on any
major market sector (technology, health care,
consumer discretionary, energy, and
industrials) beyond 150% of the weighting that
sector has in the Russell Midcap(R) Growth
Index.
The portfolio manager may sell a stock if a
company fails to meet earnings or revenue
expectations or becomes overvalued (i.e., high
price/earnings ratio relative to its earnings
growth). The portfolio manager may also sell a
stock to change the Fund's weighting in a
particular company, industry or sector, or if
better opportunities are available. Due to its
investment strategy, the Fund may buy and sell
securities frequently. This may result in
higher transaction costs and additional capital
gains tax liabilities.
The Fund may also invest in certain other
equity securities in addition to those
described above. For a more complete
description of the various securities in which
the Fund may invest, please see Additional
Investment Strategies and Risks on page 83 or
consult the SAI.
PRINCIPAL Your investment in the Fund may be subject to
INVESTMENT RISKS the following principal risks:
MARKET RISK: The possibility that the Fund's
stock holdings will decline in price because of
a broad stock market decline. Markets generally
move in cycles, with periods of rising prices
followed by periods of falling prices. The
value of your investment will tend to increase
or decrease in response to these movements.
INVESTMENT STYLE RISK: The possibility that the
market segment on which this Fund focuses --
mid cap growth stocks -- will underperform
other kinds of investments or market averages.
The Fund may trade securities actively, which
could increase its transaction costs (thereby
lowering its performance) and may increase the
amount of taxes that you pay. If the Fund
invests in securities with additional risks,
its share price volatility accordingly could be
greater and its performance lower. For more
information about these risks, please see
Additional Investment Strategies and Risks on
page 83.
15
RISK/RETURN SUMMARY AND FUND EXPENSES MID CAP GROWTH FUND
The chart and table on this page show how the Mid Cap Growth Fund has performed
and how its performance has varied from year to year. The bar chart gives some
indication of risk by showing changes in the Fund's yearly performance to
demonstrate that the Fund's value varied at different times. The table below it
compares the Fund's performance over time to that of the Russell Midcap(R)
Growth Index, a recognized, unmanaged index of common stocks of mid-sized
companies with higher price-to-book ratios and high forecasted growth values. Of
course, past performance does not indicate how the Fund will perform in the
future.
PERFORMANCE BAR CHART AND TABLE
YEAR-BY-YEAR TOTAL RETURNS AS OF 12/31
FOR INSTITUTIONAL SHARES (1, 2)
"Performance Bar Chart and Table"
The performance information shown above is based on a calendar year.
Best quarter: 34.18% 12/31/99
Worst quarter: -20.15% 12/31/00
AVERAGE ANNUAL TOTAL RETURNS
(for the periods ended December 31, 2005)(1, 2)
SINCE
INCEPTION
1 YEAR 5 YEARS 10 YEARS (12/1/93)
------ ------- -------- ---------
INSTITUTIONAL SHARES(3)
RETURN BEFORE TAXES 14.31% 1.87% 10.15% 10.72%
RETURN AFTER TAXES ON DISTRIBUTIONS 12.58% 1.30% 6.78% 7.84%
RETURN AFTER TAXES ON DISTRIBUTIONS AND
SALE OF FUND SHARES 11.38% 1.48% 6.80% 7.70%
RUSSELL MIDCAP(R) GROWTH INDEX
(reflects no deductions for fees,
expenses, or taxes) 12.10% 1.38% 9.27% 10.41%(4)
(1) Both charts assume reinvestment of dividends and distributions.
(2) Performance data includes the performance of the OVB Capital Appreciation
Portfolio for the period prior to its consolidation with the BB&T Mid Cap
Growth Fund, formerly known as the BB&T Capital Appreciation Fund, on July
23, 2001.
(3) After-tax returns are calculated using historical highest individual
federal marginal income tax rates and do not reflect the impact of state
and local taxes. Actual after-tax returns depend on an investor's tax
situation and may differ from those shown. The after-tax returns shown are
not relevant to investors who hold their Fund shares through tax-deferred
arrangements such as 401(k) plans or individual retirement accounts.
(4) Since 11/30/93.
16
RISK/RETURN SUMMARY AND FUND EXPENSES MID CAP GROWTH FUND
As an investor in the Mid Cap Growth Fund, you will pay the following fees and
expenses when you buy and hold shares. Shareholder transaction fees are paid
from your account. Annual Fund operating expenses are paid out of Fund assets
and are reflected in the share price.
FEES AND EXPENSES
SHAREHOLDER TRANSACTION EXPENSES INSTITUTIONAL
(FEES PAID BY YOU DIRECTLY)(1) SHARES
-------------------------------- -------------
Maximum Sales Charge (load)
on Purchases None
Maximum Deferred Sales Charge
(load) None
Redemption Fee (on shares sold
within 7 calendar days of
purchase)(2) 2.00%
ANNUAL FUND OPERATING EXPENSES INSTITUTIONAL
(FEES PAID FROM FUND ASSETS) SHARES
-------------------------------- -------------
Management Fee(3) 0.74%
Distribution and Service
(12b-1) Fee 0.00%
Other Expenses 0.22%
Total Fund Operating Expenses 0.96%
Fee Waiver or Expense
Reimbursement(3) -0.04%
Net Fund Operating Expenses(3) 0.92%
(1) Participating banks or other financial institutions may charge their
customers account fees for automatic investment, exchanges and other cash
management services provided in connection with investment in the Funds.
(2) A wire transfer fee of $7.00 may be deducted from the amount of your
redemption, regardless of the date of purchase, if you request a wire
transfer. This fee is currently being waived.
(3) The Fund's Adviser has contractually agreed to limit the management fees
paid by the Fund to 0.70% for the period from February 1, 2006 through
January 31, 2007.
Use the table at right to compare fees and expenses with those of other Funds.
It illustrates the amount of fees and expenses you would pay, assuming the
following:
- $10,000 investment
- 5% annual return
- redemption at the end of each period
- no changes in the Fund's operating expenses
Because this example is hypothetical and for comparison only, your actual costs
will be different.
EXPENSE EXAMPLE
1 3 5 10
MID CAP GROWTH FUND YEAR YEARS YEARS YEARS
-------------------- ---- ----- ----- ------
INSTITUTIONAL SHARES $94 $302 $527 $1,174
17
SMALL CAP FUND
RISK/RETURN SUMMARY AND FUND EXPENSES (FORMERLY THE SMALL COMPANY VALUE FUND)
RISK/RETURN SUMMARY
INVESTMENT OBJECTIVE The Fund seeks long-term capital appreciation
by investing primarily in a diversified
portfolio of equity and equity-related
securities of small capitalization companies.
PRINCIPAL To pursue this goal, the Fund invests primarily
INVESTMENT STRATEGIES in common stocks of U.S. small capitalization
companies whose capitalization is less than $3
billion and which the portfolio manager
believes are under valued and have a favorable
outlook.
In managing the Fund's portfolio, the portfolio
manager initially screens from the universe of
companies with market capitalization under $3
billion. The portfolio manager then attempts to
diversify across different economic sectors
selecting those stocks that he believes have a
favorable outlook. In choosing individual
stocks the portfolio manager uses a
quantitative process to examine the financial
and valuation characteristics of a particular
issuer.
The Fund may also invest in certain other
equity securities in addition to those
described above. For a more complete
description of the various securities in which
the Fund may invest, please see Additional
Investment Strategies and Risk on page 83 or
consult the SAI.
PRINCIPAL Your investment in the Fund may be subject to
INVESTMENT RISKS the following principal risks:
MARKET RISK: The possibility that the Fund's
stock holdings will decline in price because of
a broad stock market decline. Markets generally
move in cycles, with periods of rising prices
followed by periods of falling prices. The
value of your investment will tend to increase
or decrease in response to these movements.
SMALL COMPANY RISK: Investing in smaller,
lesser-known companies involves greater risk
than investing in those that are more
established. A small company's financial
well-being may, for example, depend heavily on
just a few products or services. In addition,
investors may have limited flexibility to buy
or sell small company stocks, which tend to
trade less frequently than those of larger
firms.
INVESTMENT STYLE RISK: The possibility that the
market segment on which this Fund focuses --
small company stocks -- will underperform other
kinds of investments or market averages.
The Fund may trade securities actively, which
could increase its transaction costs (thereby
lowering its performance) and may increase the
amount of taxes that you pay. If the Fund
invests in securities with additional risks,
its share price volatility accordingly could be
greater and its performance lower. For more
information about these risks, please see
Additional Investment Strategies and Risks on
page 83.
18
SMALL CAP FUND
RISK/RETURN SUMMARY AND FUND EXPENSES (FORMERLY THE SMALL COMPANY VALUE FUND)
The chart and table on this page show how the Small Cap Fund has performed and
how its performance has varied from year to year. The bar chart gives some
indication of risk by showing changes in the Fund's yearly performance to
demonstrate that the Fund's value varied at different times. The table below it
compares the Fund's performance over time to that of the Russell 2000 Index, a
widely recognized, unmanaged index of common stocks that measures the
performance of small to mid-sized companies. Of course, past performance does
not indicate how the Fund will perform in the future.
PERFORMANCE BAR CHART AND TABLE
YEAR-BY-YEAR TOTAL RETURNS AS OF 12/31
FOR INSTITUTIONAL SHARES(1)
"Performance Bar Chart and Table"
The performance information shown above is based on a calendar year.
Best quarter: 10.50% 12/31/04
Worst quarter: -0.69% 3/31/05
AVERAGE ANNUAL TOTAL RETURNS
(for the periods ended December 31, 2005)(1)
SINCE
INCEPTION
1 YEAR (5/19/03)
------ ---------
INSTITUTIONAL SHARES(2)
RETURN BEFORE TAXES 9.60% 23.64%
RETURN AFTER TAXES ON DISTRIBUTIONS 7.16% 22.12%
RETURN AFTER TAXES ON DISTRIBUTIONS AND
SALE OF FUND SHARES 9.31% 20.33%
RUSSELL 2000 INDEX(4)
(reflects no deductions for fees, expenses, or taxes) 4.55% 21.79%
RUSSELL 2000 VALUE INDEX(4)
(reflects no deductions for fees, expenses, or taxes) 4.71% 23.74%
(1) Both charts assume reinvestment of dividends and distributions.
(2) After-tax returns are calculated using the historical highest individual
federal marginal income tax rates and do not reflect the impact of state
and local taxes. Actual after-tax returns depend on an investor's tax
situation and may differ from those shown. The after tax returns shown are
not relevant to investors who hold their Fund shares through tax deferred
arrangements such as 401(k) plans or individual retirement accounts.
(3) Since 5/22/03.
(4) The benchmark index for the Fund has changed from the Russell 2000 Value
Index to the Russell 2000 Index in order to provide a better comparison for
the Fund's investment policies.
19
SMALL CAP FUND
RISK/RETURN SUMMARY AND FUND EXPENSES (FORMERLY THE SMALL COMPANY VALUE FUND)
As an investor in the Small Cap Fund, you will pay the following fees and
expenses when you buy and hold shares. Shareholder transaction fees are paid
from your account. Annual Fund operating expenses are paid out of Fund assets
and are reflected in the share price.
FEES AND EXPENSES
SHAREHOLDER TRANSACTION EXPENSES INSTITUTIONAL
(FEES PAID BY YOU DIRECTLY)(1) SHARES
-------------------------------- -------------
Maximum Sales Charge (load)
on Purchases None
Maximum Deferred Sales Charge
(load) None
Redemption Fee (on shares sold
within 7 calendar days of
purchase)(2) 2.00%
ANNUAL FUND OPERATING EXPENSES INSTITUTIONAL
(FEES PAID FROM FUND ASSETS) SHARES
-------------------------------- -------------
Management Fee(3) 1.00%
Distribution and Service
(12b-1) Fee 0.00%
Other Expenses 0.22%
Total Fund Operating Expenses 1.22%
Fee Waiver or Expense
Reimbursement(3) -0.20%
Net Fund Operating Expenses(3) 1.02%
(1) Participating banks or other financial institutions may charge their
customers account fees for automatic investment, exchanges and other cash
management services provided in connection with investment in the Funds.
(2) A wire transfer fee of $7.00 may be deducted from the amount of your
redemption, regardless of the date of purchase, if you request a wire
transfer. This fee is currently being waived.
(3) The Fund's Adviser has contractually agreed to limit the management fees
paid by the Fund to 0.80% for the period from February 1, 2006 through
January 31, 2007.
Use the table at right to compare fees and expenses with those of other funds.
It illustrates the amount of fees and expenses you would pay, assuming the
following:
- $10,000 investment
- 5% annual return
- redemption at the end of each period
- no changes in the fund's operating expenses
Because this example is hypothetical and for comparison only, your actual costs
will be different.
EXPENSE EXAMPLE
1 3 5 10
SMALL CAP FUND YEAR YEARS YEARS YEARS
-------------- ---- ----- ----- ------
INSTITUTIONAL SHARES $104 $367 $651 $1,460
20
RISK/RETURN SUMMARY AND FUND EXPENSES INTERNATIONAL EQUITY FUND
RISK/RETURN SUMMARY
INVESTMENT OBJECTIVE The Fund seeks long-term capital appreciation
through investment primarily in equity
securities of foreign issuers.
PRINCIPAL To pursue this goal, the Fund invests primarily
INVESTMENT STRATEGIES in stocks of foreign issuers located in
countries throughout the world. The Fund may
also invest its assets in stocks of companies
that are listed or operate in emerging
economies. The Fund primarily buys common stock
but also can invest in preferred stock and
securities convertible into common and
preferred stock.
The portfolio manager uses a disciplined
intrinsic or fundamental value approach that
seeks to take advantage of anomalies in markets
often created by human over-reactions to both
good and bad news. The portfolio manager, on
behalf of the Fund, intends to diversify
broadly among countries, but reserves the right
to invest a substantial portion of the Fund's
assets in one or more countries if economic and
business conditions warrant such investments.
For each security under analysis, a fundamental
value is estimated, based upon detailed
country, industry and company analysis,
including visits to the company, its
competitors and suppliers. This fundamental
value estimate is a function of the present
value of the estimated future cash flows. The
resulting fundamental value estimate is then
compared to the company's current market price
to ascertain whether a valuation anomaly
exists. A stock with a market price below the
estimated intrinsic or fundamental value would
be considered a candidate for inclusion in the
Fund's portfolio. This comparison between price
and intrinsic or fundamental value allows
comparisons across industries and countries.
The Fund generally will sell a stock when it
reaches a target price, which is when the
portfolio manager believes it is fully valued
or when, in the portfolio manager's opinion,
conditions change such that the risk of
continuing to hold the stock is unacceptable
when compared to the growth potential.
The Fund may also invest in certain other
equity securities in addition to those
described above. For a more complete
description of the various securities in which
the Fund may invest, please see Additional
Investment Strategies and Risks on page 83 or
consult the SAI.
PRINCIPAL Your investment in the Fund may be subject to
INVESTMENT RISKS the following principal risks:
MARKET RISK: The possibility that the Fund's
stock holdings will decline in price because of
a broad stock market decline. Markets generally
move in cycles, with periods of rising prices
followed by periods of falling prices. The
value of your investment will tend to increase
or decrease in response to these movements.
INVESTMENT STYLE RISK: The possibility that the
market segment on which this Fund focuses --
foreign value stocks -- will underperform other
kinds of investments or market averages.
FOREIGN INVESTMENT RISK: Foreign securities
involve risks not typically associated with
investing in U.S. securities. Foreign
securities may be adversely affected by myriad
factors, including currency restrictions and
social, economic or political instability.
With respect to foreign currency risk, the
portfolio manager may enter into forward
currency exchange contracts for a number of
purposes, including to more closely align the
Fund's foreign currency exposure with that of
the Morgan Stanley Capital International EAFE
Index. This strategy may result in losses.
The Fund may trade securities actively, which
could increase its transaction costs (thereby
lowering its performance) and may increase the
amount of taxes that you pay. If the Fund
invests in securities with additional risks,
its share price volatility accordingly could be
greater and its performance lower. For more
information about these risks, please see
Additional Investment Strategies and Risks on
page 83.
21
RISK/RETURN SUMMARY AND FUND EXPENSES INTERNATIONAL EQUITY FUND
The chart and table on this page show how the International Equity Fund has
performed and how its performance has varied from year to year. The bar chart
gives some indication of risk by showing changes in the Fund's yearly
performance to demonstrate that the Fund's value varied at different times. The
table below it compares the Fund's performance over time to that of the Morgan
Stanley Capital International Europe, Australasia and Far East ("EAFE") Index, a
widely recognized, unmanaged index generally representative of the performance
of stock markets in those regions. Prior to April 25, 2003, the Fund had a
different sub-adviser and would not necessarily have achieved the performance
results shown on in the chart and table on this page under its current
investment management arrangements. Of course, past performance does not
indicate how the Fund will perform in the future.
PERFORMANCE BAR CHART AND TABLE
YEAR-BY-YEAR TOTAL RETURNS AS OF 12/31
FOR INSTITUTIONAL SHARES(1)
"Performance Bar Chart and Table"
The performance information shown above is based on a calendar year.
Best quarter: 24.79% 12/31/99
Worst quarter: -19.67% 9/30/02
AVERAGE ANNUAL TOTAL RETURNS
(for the periods ended
December 31, 2005)(1)
SINCE INCEPTION
1 YEAR 5 YEARS (1/2/97)
------ ------- ---------------
INSTITUTIONAL SHARES(2)
RETURN BEFORE TAXES 9.88% 0.52% 3.63%
RETURN AFTER TAXES ON DISTRIBUTIONS 9.65% 0.39% 2.70%
RETURN AFTER TAXES ON DISTRIBUTIONS AND SALE OF FUND SHARES 6.68% 0.39% 2.69%
MORGAN STANLEY CAPITAL INTERNATIONAL EAFE INDEX
(reflects no deductions for fees, expenses, or taxes) 14.02% 4.94% 6.16%(3)
(1) Both charts assume reinvestment of dividends and distributions.
(2) After-tax returns are calculated using historical highest individual
federal marginal income tax rates and do not reflect the impact of state
and local taxes. Actual after-tax returns depend on an investor's tax
situation and may differ from those shown. The after-tax returns shown are
not relevant to investors who hold their Fund shares through tax-deferred
arrangements such as 401(k) plans or individual retirement accounts.
(3) Since 12/31/96.
22
RISK/RETURN SUMMARY AND FUND EXPENSES INTERNATIONAL EQUITY FUND
As an investor in the International Equity Fund, you will pay the following fees
and expenses when you buy and hold shares. Shareholder transaction fees are paid
from your account. Annual Fund operating expenses are paid out of Fund assets
and are reflected in the share price.
FEES AND EXPENSES
SHAREHOLDER TRANSACTION EXPENSES INSTITUTIONAL
(FEES PAID BY YOU DIRECTLY)(1) SHARES
-------------------------------- -------------
Maximum Sales Charge (load) on Purchases None
Maximum Deferred Sales Charge (load) None
Redemption Fee (on shares sold within 7 calendar days of
purchase)(2) 2.00%
ANNUAL FUND OPERATING EXPENSES INSTITUTIONAL
(FEES PAID FROM FUND ASSETS) SHARES
------------------------------ -------------
Management Fee(3) 1.00%
Distribution and Service (12b-1) Fee 0.00%
Other Expenses 0.29%
Total Fund Operating Expenses 1.29%
Fee Waiver or Expense -0.10%
Reimbursement(3) 1.19%
Net Fund Operating Expenses(3)
(1) Participating banks or other financial institutions may charge their
customers account fees for automatic investment, exchanges and other cash
management services provided in connection with investment in the Funds.
(2) A wire transfer fee of $7.00 may be deducted from the amount of your
redemption, regardless of the date of purchase, if you request a wire
transfer. This fee is currently being waived.
(3) The Fund's Adviser has contractually agreed to limit the management fees
paid by the Fund to 0.90% for the period from February 1, 2006 through
January 31, 2007.
Use the table at right to compare fees and expenses with those of other funds.
It illustrates the amount of fees and expenses you would pay, assuming the
following:
- $ 10,000 investment
- 5% annual return
- redemption at the end of each period
- no changes in the Fund's operating expenses
Because this example is hypothetical and for comparison only, your actual costs
will be different.
EXPENSE EXAMPLE
1 3 5 10
INTERNATIONAL EQUITY FUND YEAR YEARS YEARS YEARS
------------------------- ---- ----- ----- ------
INSTITUTIONAL SHARES $121 $399 $698 $1,548
23
RISK/RETURN SUMMARY AND FUND EXPENSES SPECIAL OPPORTUNITIES EQUITY FUND
RISK/RETURN SUMMARY
INVESTMENT OBJECTIVE The Fund seeks long-term capital appreciation.
PRINCIPAL To pursue this goal, the Fund invests primarily
INVESTMENT STRATEGIES in domestically traded common stocks of small-,
mid- and large-capitalization companies and, to
a lesser extent, American Depositary Receipts
("ADRs"). The Fund uses a multi-style approach,
meaning that it not only invests across
different capitalization levels but may target
both value- and growth-oriented companies. The
portfolio manager looks for companies
experiencing above-average revenue and profit
growth as well as out-of-favor stocks that may
be depressed due to what the portfolio manager
believes to be temporary economic
circumstances. In choosing individual stocks,
the portfolio manager then uses a quantitative
process to examine the value, growth and
momentum characteristics of a particular
issuer.
The Fund may also invest in certain other
equity securities in addition to those
described above. For a more complete
description of the various securities in which
the Fund may invest, please see Additional
Investment Strategies and Risks on page 83 or
consult the Statement of Additional Information
("SAI").
PRINCIPAL Your investment in the Fund may be subject to
INVESTMENT RISKS the following principal risks:
MARKET RISK: The possibility that the Fund's
stock holdings will decline in price because of
a broad stock market decline. Markets generally
move in cycles, with periods of rising prices
followed by periods of falling prices. The
value of your investment will tend to increase
or decrease in response to these movements.
INVESTMENT STYLE RISK: The possibility that the
market segment on which this Fund is primarily
invested in, whether growth or value; large-,
mid- or small-cap; could underperform other
kinds of investments or market averages that
include style-focused investments.
MANAGEMENT RISK: The possibility that a
strategy used by the Fund's portfolio manager
may fail to produce the intended result.
SMALL COMPANY RISK: Investing in smaller,
lesser-known companies involves greater risk
than investing in those that are more
established. A small company's financial well-
being may, for example, depend heavily on just
a few products or services. In addition,
investors may have limited flexibility to buy
or sell small company stocks, which tend to
trade less frequently than those of larger
firms.
The Fund may trade securities actively, which
could increase its transaction costs (thereby
lowering its performance) and may increase the
amount of taxes that you pay. If the Fund
invests in securities with additional risks,
its share price volatility accordingly could be
greater and its performance lower. For more
information about these risks, please see
Additional Investment Strategies and Risks on
page 83.
24
RISK/RETURN SUMMARY AND FUND EXPENSES SPECIAL OPPORTUNITIES EQUITY FUND
The chart and table on this page show how the Special Opportunities Equity Fund
has performed and how its performance has varied from year to year. The bar
chart gives some indication of risk by showing changes in the Fund's yearly
performance to demonstrate that the Fund's value varied at different times. The
table below it compares the Fund's performance over time to that of the S&P 500
Index, a widely recognized, unmanaged index of common stocks. Of course, past
performance does not indicate how the Fund will perform in the future.
PERFORMANCE BAR CHART AND TABLE
YEAR-BY-YEAR TOTAL RETURNS AS OF 12/31
FOR INSTITUTIONAL SHARES(1)
"Performance Bar Chart and Table"
The performance information shown above is based on a calendar year.
Best quarter: 14.15% 12/31/04
Worst quarter: -1.22% 12/31/05
AVERAGE ANNUAL TOTAL RETURNS
(for the periods ended
December 31, 2005)(1)
SINCE INCEPTION
1 YEAR (6/2/03)
------ ---------------
INSTITUTIONAL SHARES(2)
RETURN BEFORE TAXES 4.10% 19.09%
RETURN AFTER TAXES ON DISTRIBUTIONS 3.13% 18.46%
RETURN AFTER TAXES ON DISTRIBUTIONS AND SALE OF FUNDS SHARES 3.54% 16.34%
S&P 500 INDEX
(reflects no deductions for fees, expenses or taxes) 4.91% 12.53%(3)
(1) Both charts assume reinvestment of dividends and distributions.
(2) After-tax returns are calculated using the historical highest individual
federal marginal income tax rates and do not reflect the impact of state
and local taxes. Actual after-tax returns depend on an investor's tax
situation and may differ from those shown. The after tax returns shown are
not relevant to investors who hold their Fund shares through tax deferred
arrangements such as 401(k) plans or individual retirement accounts.
(3) Since 5/31/03.
25
RISK/RETURN SUMMARY AND FUND EXPENSES SPECIAL OPPORTUNITIES EQUITY FUND
As an investor in the Special Opportunities Equity Fund, you will pay the
following fees and expenses when you buy and hold shares. Shareholder
transaction fees are paid from your account. Annual Fund operating expenses are
paid out of Fund assets and are reflected in the share price.
FEES AND EXPENSES
SHAREHOLDER TRANSACTION EXPENSES INSTITUTIONAL
(FEES PAID BY YOU DIRECTLY)(1) SHARES
-------------------------------- -------------
Maximum Sales Charge (load) on Purchases None
Maximum Deferred Sales Charge (load) None
Redemption Fee (on shares sold within 7 calendar days of
purchase)(2) 2.00%
ANNUAL FUND OPERATING EXPENSES INSTITUTIONAL
(FEES PAID FROM FUND ASSETS) SHARES
------------------------------ -------------
Management Fee 0.80%
Distribution and Service (12b-1) Fee 0.00%
Other Expenses 0.24%
Total Fund Operating Expenses 1.04%
(1) Participating banks or other financial institutions may charge their
customers account fees for automatic investment, exchanges and other cash
management services provided in connection with investment in the Funds.
(2) A wire transfer fee of $7.00 may be deducted from the amount of your
redemption, regardless of the date of purchase, if you request a wire
transfer. This fee is currently being waived.
Use the table at right to compare fees and expenses with those of other funds.
It illustrates the amount of fees and expenses you would pay, assuming the
following:
- $10,000 investment
- 5% annual return
- redemption at the end of each period
- no changes in the Fund's operating expenses
Because this example is hypothetical and for comparison only, your actual costs
will be different.
EXPENSE EXAMPLE
SPECIAL OPPORTUNITIES 1 3 5 10
EQUITY FUND YEAR YEARS YEARS YEARS
--------------------- ---- ----- ----- ------
INSTITUTIONAL SHARES $106 $331 $574 $1,271
26
RISK/RETURN SUMMARY AND FUND EXPENSES EQUITY INCOME FUND
RISK/RETURN SUMMARY
INVESTMENT OBJECTIVE The Fund seeks capital growth and current
income.
PRINCIPAL To pursue this goal, the Fund invests primarily
INVESTMENT STRATEGIES in dividend-paying equity securities, in
particular common stocks of companies with a
history of increasing dividend rates, and
convertible debt securities and convertible
preferred stock, which are convertible into
common stock, with favorable long-term
fundamental characteristics. As part of its
investment strategy, the Fund may invest in
convertible securities that offer above average
current yield with participation in underlying
equity performance. Because yield is a primary
consideration in selecting securities, the Fund
may purchase stocks of companies that are out
of favor in the financial community and
therefore, are selling below what the portfolio
manager believes to be their long-term
investment value.
The Fund may also invest in certain other
equity and debt securities in addition to those
described above. For a more complete
description of the various securities in which
the Fund may invest, please see Additional
Investment Strategies and Risks on page 83 or
consult the Statement of Additional Information
("SAI").
PRINCIPAL Your investment in the Fund may be subject to
INVESTMENT RISKS the following principal risks:
MARKET RISK: The possibility that the Fund's
stock holdings will decline in price because of
a broad stock market decline. Markets generally
move in cycles, with periods of rising prices
followed by periods of falling prices. The
value of your investment will tend to increase
or decrease in response to these movements.
INTEREST RATE RISK: The possibility that the
value of the Fund's investments will decline
due to an increase in interest rates. Interest
rate risk is generally high for longer-term
bonds and low for shorter-term bonds.
CREDIT RISK: The possibility that an issuer
cannot make timely interest and principal
payments on its debt securities such as bonds.
The lower a security's rating, the greater its
credit risk.
INCOME RISK: The possibility that the Fund's
income will decline due to a decrease in
interest rates. Income risk is generally high
for shorter-term bonds and low for longer-term
bonds.
INVESTMENT STYLE RISK: The possibility that the
market segment on which this Fund focuses -
income-producing equities - will underperform
other kinds of investments or market averages.
The Fund may trade securities actively, which
could increase its transaction costs (thereby
lowering its performance) and may increase the
amount of taxes that you pay. If the Fund
invests in securities with additional risks,
its share price volatility accordingly could be
greater and its performance lower. For more
information about these risks, please see
Additional Investment Strategies and Risks on
page 83.
27
RISK/RETURN SUMMARY AND FUND EXPENSES EQUITY INCOME FUND
The chart and table on this page show how the Equity Income Fund has performed
and how its performance has varied from year to year. The bar chart gives some
indication of risk by showing changes in the Fund's yearly performance to
demonstrate that the Fund's value varied at different times. The table below it
compares the Fund's performance over time to that of the S&P 500 Index, a widely
recognized, unmanaged index of common stocks. Of course, past performance does
not indicate how the Fund will perform in the future.
PERFORMANCE BAR CHART AND TABLE
YEAR-BY-YEAR TOTAL RETURNS AS OF 12/31
FOR INSTITUTIONAL SHARES(1)
"Performance Bar Chart and Table"
The performance information shown above is based on a calendar year.
Best quarter: 4.07% 6/30/05
Worst quarter: 1.26% 3/31/05
AVERAGE ANNUAL TOTAL RETURNS
(for the periods ended
December 31, 2005)(1)
SINCE INCEPTION
1 YEAR (6/30/04)
------ ---------------
INSTITUTIONAL SHARES(2)
RETURN BEFORE TAXES 11.01% 17.37%
RETURN AFTER TAXES ON DISTRIBUTIONS 9.83% 16.38%
RETURN AFTER TAXES ON DISTRIBUTIONS AND SALE OF FUND SHARES 7.74% 14.50%
S&P 500 INDEX
(reflects no deductions for fees, expenses, or taxes) 4.91% 8.14%
(1) Both charts assume reinvestment of dividends and distributions.
(2) After-tax returns are calculated using the historical highest individual
federal marginal income tax rates and do not reflect the impact of state
and local taxes. Actual after-tax returns depend on an investor's tax
situation and may differ from those shown. The after tax returns shown are
not relevant to investors who hold their Fund shares through tax deferred
arrangements such as 401(k) plans or individual retirement accounts.
28
RISK/RETURN SUMMARY AND FUND EXPENSES EQUITY INCOME FUND
As an investor in the Equity Income Fund, you will pay the following fees and
expenses when you buy and hold shares. Shareholder transaction fees are paid
from your account. Annual Fund operating expenses are paid out of Fund assets
and are reflected in the share price.
FEES AND EXPENSES
SHAREHOLDER TRANSACTION EXPENSES INSTITUTIONAL
(FEES PAID BY YOU DIRECTLY)(1) SHARES
------------------------------ -------------
Maximum Sales Charge (load) on Purchases None
Maximum Deferred Sales Charge (load) None
Redemption Fee (on shares sold within
7 calendar days of purchase)(2) 2.00%
ANNUAL FUND OPERATING EXPENSES INSTITUTIONAL
(FEES PAID FROM FUND ASSETS) SHARES
------------------------------ -------------
Management Fee 0.70%
Distribution and Service (12b-1) Fee 0.00%
Other Expenses 0.34%
Total Annual Fund Operating Expenses(3) 1.04%
(1) Participating banks or other financial institutions may charge their
customers account fees for automatic investment, exchanges and other cash
management services provided in connection with investment in the Funds.
(2) A wire transfer fee of $7.00 may be deducted from the amount of your
redemption if you request a wire transfer. This fee is currently being
waived.
Use the table at right to compare fees and expenses with those of other funds.
It illustrates the amount of fees and expenses you would pay, assuming the
following:
- $ 10,000 investment
- 5% annual return
- redemption at the end of each period
- no changes in the Fund's operating expenses
Because this example is hypothetical and for comparison only, your actual costs
will be different.
EXPENSE EXAMPLE
EQUITY INCOME FUND 1 YEAR 3 YEARS 5 YEARS 10 YEARS
------------------ ------ ------- ------- --------
INSTITUTIONAL SHARES $106 $331 $574 $1,271
29
RISK/RETURN SUMMARY AND FUND EXPENSES OVERVIEW
BOND FUNDS
TAXABLE BOND FUNDS The Short U.S. Government Fund, the
Intermediate U.S. Government Fund and the Total
Return Bond Fund seek current income consistent
with the preservation of capital and invest
primarily in fixed income securities such as
U.S. government securities or corporate, bank
and commercial obligations.
WHO MAY WANT TO INVEST Consider investing in these Funds if you are:
- looking to add a monthly income
component to your portfolio
- willing to accept the risks of price
and dividend fluctuations
These Funds may not be appropriate if you are:
- investing emergency reserves
- uncomfortable with an investment that
will fluctuate in value
TAX-FREE BOND FUNDS The Kentucky Intermediate Tax-Free Fund, the
Maryland Intermediate Tax-Free Fund, the North
Carolina Intermediate Tax-Free Fund, the South
Carolina Intermediate Tax-Free Fund, the
Virginia Intermediate Tax-Free Fund, and the
West Virginia Intermediate Tax-Free Fund seek
tax-exempt income and invest primarily in
municipal securities which are exempt from
federal and Kentucky, Maryland, North Carolina,
South Carolina, Virginia, or West Virginia
income taxes, respectively.
WHO MAY WANT TO INVEST Consider investing in these Funds if you are:
- looking to add a monthly income
component to your portfolio
- seeking monthly federal and Kentucky,
Maryland, North Carolina, South
Carolina, Virginia, or West Virginia
tax-exempt dividends
- willing to accept the risks of price
and dividend fluctuations
These Funds may not be appropriate if you are:
- investing through a tax-exempt
retirement plan
- uncomfortable with an investment that
will fluctuate in value
- investing emergency reserves
30
RISK/RETURN SUMMARY AND FUND EXPENSES SHORT U.S. GOVERNMENT FUND
RISK/RETURN SUMMARY
INVESTMENT OBJECTIVE The Fund seeks current income consistent with
the preservation of capital.
PRINCIPAL To pursue this goal, the Fund invests primarily
INVESTMENT STRATEGIES in securities issued or guaranteed by the U.S.
Government or its agencies or instrumentalities
("U.S. Government Securities"), some of which
may be subject to repurchase agreements, or in
"high grade" (rated at the time of purchase in
one of the three highest rating categories by
an NRSRO or are determined by the portfolio
manager to be of comparable quality)
collateralized mortgage obligations ("CMOs").
The Fund may also invest in short-term
obligations, commercial bonds and the shares of
other investment companies. The duration of the
Fund will be from 1.0 to 3.5 years.
In managing the portfolio, the portfolio
manager uses a "top down" investment management
approach focusing on allocation among sectors,
interest rate risk, credit risk, and individual
securities selection. The portfolio manager
sets and continually adjusts a target for the
interest rate sensitivity of the Fund's
holdings based upon expectations about interest
rates and other economic factors. The portfolio
manager then selects individual securities
consistent with the target by looking for the
best relative values within particular sectors.
The Fund may also invest in certain other debt
securities. For a more complete description of
the various securities in which the Fund may
invest, please see Additional Investment
Strategies and Risks on page 83 or consult the
SAI.
PRINCIPAL Your investment in the Fund may be subject to
INVESTMENT RISKS the following principal risks:
INTEREST RATE RISK: The possibility that the
value of the Fund's investments will decline
due to an increase in interest rates. Interest
rate risk is generally high for longer-term
bonds and low for shorter-term bonds.
INCOME RISK: The possibility that the Fund's
income will decline due to a decrease in
interest rates. Income risk is generally high
for shorter-term bonds and low for longer-term
bonds.
PREPAYMENT/CALL RISK: If a significant number
of the mortgages underlying a mortgage-backed
bond are refinanced, the bond may be "prepaid."
Call risk is the possibility that, during
periods of declining interest rates, a bond
issuer will "call" -- or repay --
higher-yielding bonds before their stated
maturity date. In both cases, investors receive
their principal back and are typically forced
to reinvest it in bonds that pay lower interest
rates. Rapid changes in prepayment and call
rates can cause bond prices and yields to be
volatile.
ESTIMATED MATURITY RISK: The possibility that
an underlying mortgage holder will exercise its
right to pay principal on an obligation (such
as mortgage-related securities) later than
expected. This may happen when there is a rise
in interest rates. These events may lengthen
the duration (i.e. interest rate sensitivity)
and potentially reduce the value of these
securities.
CREDIT RISK: The possibility that an issuer
cannot make timely interest and principal
payments on its debt securities, such as bonds.
The lower a security's rating, the greater its
credit risk.
U.S. GOVERNMENT AGENCY SECURITIES: The Fund
invests in securities issued or guaranteed by
the U.S. government securities (such as Fannie
Mae or Ginnie Mae securities). Although U.S.
government securities issued directly by the
U.S. government are guaranteed by the U.S.
Treasury, other U.S. government securities
issued by an agency or instrumentality of the
U.S. government may not be. No assurance can be
given that the U.S. government would provide
financial support to its agencies and
instrumentalities if not required to do so by
law.
The Fund may trade securities actively, which
could increase its transaction costs (thereby
lowering its performance) and may increase the
amount of taxes that you pay. If the Fund
invests in securities with additional risks,
its share price volatility accordingly could be
greater and its performance lower. For more
information about these risks, please see
Additional Investment Strategies and Risks on
page 83.
31
RISK/RETURN SUMMARY AND FUND EXPENSES SHORT U.S. GOVERNMENT FUND
The chart and table on this page show how the Short U.S. Government Fund has
performed and how its performance has varied from year to year. The bar chart
gives some indication of risk by showing changes in the Fund's yearly
performance to demonstrate that the Fund's value varied at different times. The
table below it compares the Fund's performance over time to that of the Merrill
Lynch 1-5 Year U.S. Treasuries/Agencies Index, a widely recognized, unmanaged
index of U.S. government and agency bonds that have a minimum size of $150
million. Of course, past performance does not indicate how the Fund will perform
in the future.
Performance Bar Chart and Table
YEAR-BY-YEAR TOTAL RETURNS AS OF 12/31
FOR INSTITUTIONAL SHARES(1)
"Performance Bar Chart and Table"
The performance information shown above is based on a calendar year.
Best quarter: 3.79% 9/30/98
Worst quarter: -1.32% 6/30/04
AVERAGE ANNUAL TOTAL RETURNS
(for the periods ended
December 31, 2005)(1)
SINCE INCEPTION
1 YEAR 5 YEARS 10 YEARS (11/30/92)
------ ------- -------- ---------------
INSTITUTIONAL SHARES(2)
RETURN BEFORE TAXES 1.43% 3.23% 4.22% 4.62%
RETURN AFTER TAXES ON DISTRIBUTIONS 0.23% 1.76% 2.34% 2.64%
RETURN AFTER TAXES ON DISTRIBUTIONS AND SALE OF FUND SHARES 0.92% 1.87% 2.43% 2.70%
MERRILL LYNCH 1-5 YEAR U.S. TREASURIES/AGENCIES INDEX(3)
(reflects no deductions for fees, expenses, or taxes) 1.45% 4.17% 5.11% 5.41%
MERRILL LYNCH 1-5 YEAR U.S. TREASURY INDEX(3)
(reflects no deductions for fees, expenses, or taxes) 1.39% 4.07% 5.04% 5.36%
(1) Both charts assume reinvestment of dividends and distributions. For current
performance information including the Fund's 30-day yield, call
1-800-228-1872.
(2) After-tax returns are calculated using historical highest individual
federal marginal income tax rates and do not reflect the impact of state
and local taxes. Actual after-tax returns depend on an investor's tax
situation and may differ from those shown. The after-tax returns shown are
not relevant to investors who hold their Fund shares through tax-deferred
arrangements such as 401(k) plans or individual retirement accounts.
(3) The Fund has changed its standardized benchmark from the Merrill Lynch 1-5
Year U.S. Treasury Index to the Merrill Lynch 1-5 Year Treasuries/Agencies
Index in order to better represent the Fund's investment policies for
comparison purposes.
32
RISK/RETURN SUMMARY AND FUND EXPENSES SHORT U.S. GOVERNMENT FUND
As an investor in the Short U.S. Government Fund, you will pay the following
fees and expenses when you buy and hold shares. Shareholder transaction fees are
paid from your account. Annual Fund operating expenses are paid out of Fund
assets and are reflected in the share price.
FEES AND EXPENSES
SHAREHOLDER TRANSACTION EXPENSES INSTITUTIONAL
(FEES PAID BY YOU DIRECTLY)(1) SHARES
-------------------------------- -------------
Maximum Sales Charge (load)
on Purchases None
Maximum Deferred Sales Charge
(load) None
Redemption Fee (on shares sold
within 7 calendar days of
purchase)(2) 2.00%
ANNUAL FUND OPERATING EXPENSES INSTITUTIONAL
(FEES PAID FROM FUND ASSETS) SHARES
------------------------------ -------------
Management Fee(3) 0.60%
Distribution and Service
(12b-1) Fee 0.00%
Other Expenses 0.20%
Total Fund Operating Expenses 0.80%
Fee Waiver or Expense
Reimbursement(3) -0.15%
Net Fund Operating Expenses(3) 0.65%
(1) Participating banks or other financial institutions may charge their
customers account fees for automatic investment, exchanges and other cash
management services provided in connection with investment in the Funds.
(2) A wire transfer fee of $7.00 may be deducted from the amount of your
redemption, regardless of the date of purchase, if you request a wire
transfer. This fee is currently being waived.
(3) The Fund's Adviser has contractually agreed to limit the management fees
paid by the Fund to 0.45% for the period from February 1, 2006 through
January 31, 2007.
Use the table at right to compare fees and expenses with those of other funds.
It illustrates the amount of fees and expenses you would pay, assuming the
following:
- $10,000 investment
- 5% annual return
- redemption at the end of each period
- no changes in the Fund's operating expenses
Because this example is hypothetical and for comparison only, your actual costs
will be different.
EXPENSE EXAMPLE
SHORT U.S.
GOVERNMENT FUND 1 YEAR 3 YEARS 5 YEARS 10 YEARS
--------------- ------ ------- ------- --------
INSTITUTIONAL SHARES $66 $240 $429 $976
33
RISK/RETURN SUMMARY AND FUND EXPENSES INTERMEDIATE U.S. GOVERNMENT FUND
RISK/RETURN SUMMARY
INVESTMENT OBJECTIVE The Fund seeks current income consistent with
the preservation of capital.
PRINCIPAL To pursue this goal, the Fund invests primarily
INVESTMENT STRATEGIES in securities issued or guaranteed by the U.S.
Government or its agencies or instrumentalities
("U.S. Government Securities"), some of which
may be subject to repurchase agreements, or in
"high grade" (rated at the time of purchase in
one of the three highest rating categories by
an NRSRO or are determined by the portfolio
manager to be of comparable quality)
collateralized mortgage obligations ("CMOs").
The Fund may also invest in short-term
obligations, commercial bonds and the shares of
other investment companies. The duration range
of the Fund will be from 3.0 to 7.0 years.
In managing the portfolio, the portfolio
manager uses a "top down" investment management
approach focusing on allocation among sectors,
interest rate risk, credit risk, and individual
securities selection. The portfolio manager
sets and continually adjusts a target for the
interest rate sensitivity of the Fund's
holdings based upon expectations about interest
rates and other economic factors. The portfolio
manager then selects individual securities
consistent with the target by looking for the
best relative values within particular sectors.
The Fund may also invest in certain other debt
securities in addition to those described
above. For a more complete description of the
various securities in which the Fund may
invest, please see Additional Investment
Strategies and Risks on page 83 or consult the
SAI.
PRINCIPAL Your investment in the Fund may be subject to
INVESTMENT RISKS the following principal risks:
INTEREST RATE RISK: The possibility that the
value of the Fund's investments will decline
due to an increase in interest rates. Interest
rate risk is generally high for longer-term
bonds and low for shorter-term bonds.
INCOME RISK: The possibility that the Fund's
income will decline due to a decrease in
interest rates. Income risk is generally high
for shorter-term bonds and low for longer-term
bonds.
PREPAYMENT/CALL RISK: If a significant number
of the mortgages underlying a mortgage-backed
bond are refinanced, the bond may be "prepaid."
Call risk is the possibility that, during
periods of declining interest rates, a bond
issuer will "call" -- or repay --
higher-yielding bonds before their stated
maturity date. In both cases, investors receive
their principal back and are typically forced
to reinvest it in bonds that pay lower interest
rates. Rapid changes in prepayment and call
rates can cause bond prices and yields to be
volatile.
ESTIMATED MATURITY RISK: The possibility that
an underlying mortgage holder will exercise its
right to pay principal on an obligation (such
as mortgage-related securities) later than
expected. This may happen when there is a rise
in interest rates. These events may lengthen
the duration (i.e. interest rate sensitivity)
and potentially reduce the value of these
securities.
CREDIT RISK: The possibility that an issuer
cannot make timely interest and principal
payments on its debt securities such as bonds.
The lower a security's rating the greater its
credit risk.
U.S. GOVERNMENT AGENCY SECURITIES: The Fund
invests in securities issued or guaranteed by
the U.S. government or its agencies (such as
Fannie Mae or Ginnie Mae securities). Although
U.S. government securities issued directly by
the U.S. government are guaranteed by the U.S.
Treasury, other U.S. government securities
issued by an agency or instrumentality of the
U.S. government may not be. No assurance can be
given that the U.S. government would provide
financial support to its agencies and
instrumentalities if not required to do so by
law.
The Fund may trade securities actively, which
could increase its transaction costs (thereby
lowering its performance) and may increase the
amount of taxes that you pay. If the Fund
invests in securities with additional risks,
its share price volatility accordingly could be
greater and its performance lower. For more
information about these risks, please see
Additional Investment Strategies and Risks on
page 83.
34
RISK/RETURN SUMMARY AND FUND EXPENSES INTERMEDIATE U.S. GOVERNMENT FUND
The chart and table on this page show how the Intermediate U.S. Government Fund
has performed and how its performance has varied from year to year. The bar
chart gives some indication of risk by showing changes in the Fund's yearly
performance to demonstrate that the Fund's value varied at different times. The
table below it compares the Fund's performance over time to that of the Lehman
Brothers U.S. Government/Mortgage Bond Index, an unmanaged index of U.S.
Treasury, government agency and mortgage-backed securities with maturities of 10
years or less. Of course, past performance does not indicate how the Fund will
perform in the future.
PERFORMANCE BAR CHART AND TABLE
YEAR-BY-YEAR TOTAL RETURNS AS OF 12/31
FOR INSTITUTIONAL SHARES(1)
"Performance Bar Chart and Table"
The performance information shown above is based on a calendar year.
Best quarter: 6.01% 9/30/98
Worst quarter: -2.62% 3/31/96
AVERAGE ANNUAL TOTAL RETURNS
(for the periods ended
December 31, 2005)(1)
SINCE INCEPTION
1 YEAR 5 YEARS 10 YEARS (10/9/92)
------ ------- -------- ---------------
INSTITUTIONAL SHARES(2)
RETURN BEFORE TAXES 1.89% 4.66% 5.23% 5.71%
RETURN AFTER TAXES ON DISTRIBUTIONS 0.42% 2.91% 3.17% 3.51%
RETURN AFTER TAXES ON DISTRIBUTIONS
AND SALE OF FUND SHARES 1.22% 2.96% 3.20% 3.52%
LEHMAN BROTHERS U.S.
GOVERNMENT/MORTGAGE BOND INDEX
(reflects no deductions for fees,
expenses, or taxes) 2.63% 5.40% 6.02% 6.32%(3)
(1) Both charts assume reinvestment of dividends and distributions. For current
performance information including the Fund's 30-day yield, call
1-800-228-1872.
(2) After-tax returns are calculated using the historical highest individual
federal marginal income tax rates and do not reflect the impact of state
and local taxes. Actual after-tax returns depend on an investor's tax
situation and may differ from those shown. The after-tax returns shown are
not relevant to investors who hold their Fund shares through tax-deferred
arrangements such as 401(k) plans or individual retirement accounts.
(3) Since 9/30/92.
35
RISK/RETURN SUMMARY AND FUND EXPENSES INTERMEDIATE U.S. GOVERNMENT FUND
As an investor in the Intermediate U.S. Government Fund, you will pay the
following fees and expenses when you buy and hold shares. Shareholder
transaction fees are paid from your account. Annual Fund operating expenses are
paid out of Fund assets and are reflected in the share price.
FEES AND EXPENSES
SHAREHOLDER TRANSACTION EXPENSES
(FEES PAID BY YOU DIRECTLY)(1) INSTITUTIONAL SHARES
-------------------------------- --------------------
Maximum Sales Charge (load) on Purchases None
Maximum Deferred Sales Charge (load) None
Redemption Fee (on shares sold within 7
calendar days of purchase)(2) 2.00%
ANNUAL FUND OPERATING EXPENSES
(FEES PAID FROM FUND ASSETS) INSTITUTIONAL SHARES
---------------------------- --------------------
Management Fee(3) 0.60%
Distribution and Service (12b-1) Fee 0.00%
Other Expenses 0.20%
Total Fund Operating Expenses 0.80%
Fee Waiver or Expense
Reimbursement(3) -0.12%
Net Fund Operating Expenses(3) 0.68%
(1) Participating banks or other financial institutions may charge their
customers account fees for automatic investment, exchanges and other cash
management services provided in connection with investment in the Funds.
(2) A wire transfer fee of $7.00 may be deducted from the amount of your
redemption, regardless of the date of purchase, if you request a wire
transfer. This fee is currently being waived.
(3) The Fund's Adviser has contractually agreed to limit the management fees
paid by the Fund to 0.48% for the period from February 1, 2006 through
January 31, 2007.
Use the table at right to compare fees and expenses with those of other funds.
It illustrates the amount of fees and expenses you would pay, assuming the
following:
- $ 10,000 investment
- 5% annual return
- redemption at the end of each period
- no changes in the Fund's operating expenses
Because this example is hypothetical and for comparison only, your actual costs
will be different.
EXPENSE EXAMPLE
INTERMEDIATE
U.S. GOVERNMENT FUND 1 YEAR 3 YEARS 5 YEARS 10 YEARS
-------------------- ------ ------- ------- --------
INSTITUTIONAL SHARES $69 $243 $432 $979
36
TOTAL RETURN BOND FUND
RISK/RETURN SUMMARY (FORMERLY THE INTERMEDIATE
AND FUND EXPENSES CORPORATE BOND FUND)
RISK/RETURN SUMMARY
INVESTMENT OBJECTIVE The Fund seeks a high level of current income
and a competitive total return.
PRINCIPAL To pursue this goal, the Fund invests primarily
INVESTMENT STRATEGIES in a diversified portfolio of bonds, including:
securities issued or guaranteed by the U.S.
government, its agencies or instrumentalities,
corporate bonds, asset-backed securities,
mortgage-backed securities, including
commercial mortgage-backed securities, and
convertible securities. The Fund will invest
the portion of its assets invested in corporate
bonds primarily in investment grade corporate
bonds. The Fund may invest up to 25% of its
total assets in bonds that are below investment
grade, which are commonly referred to as "high
yield" or "junk" bonds, and/or foreign and
emerging market bonds.
In managing the portfolio, the manager uses a
"top down" investment management approach
focusing on interest rate risk, allocation
among sectors, credit risk, and individual
securities selection. The manager employs a
proprietary regression model which provides an
indication of the trend in interest rates,
either rising or falling, over a three month
forward looking horizon enabling the firm to
position its portfolios relative to the
benchmark in terms of duration. For yield curve
management, in addition to the trend in
interest rates, other factors such as future
inflation expectations, supply factors, and
forward curve analysis are considered. Sector
weightings are driven by a combination of the
firm's macro view on interest rates and
volatility as well as relative spread analysis.
Utilizing fundamental analysis the manager then
selects individual securities consistent with
the target by looking for the best relative
values within particular sectors. The analysis
incudes an attempt to understand the structure
and embedded features of potential securities.
Features that are analyzed include puts, calls,
sinking fund requirements, prepayment and
extension risk, and individual company
financial date for potential corporate
holdings. Scenario analysis is the primary tool
employed for these assessments.
The Fund may also invest in certain other debt
securities in addition to those described
above. For a more complete description of the
various securities in which the Fund may
invest, please see Additional Investment
Strategies and Risks on page 83 or consult the
SAI.
37
TOTAL RETURN BOND FUND
RISK/RETURN SUMMARY (FORMERLY THE INTERMEDIATE
AND FUND EXPENSES CORPORATE BOND FUND)
PRINCIPAL INTEREST RATE RISK: The possibility that the
INVESTMENT RISKS value of the Fund's investments will decline
due to an increase in interest rates. Interest
rate risk is generally high for longer-term
bonds and low for shorter-term bonds.
CREDIT RISK: The possibility that an issuer
cannot make timely interest and principal
payments on its debt securities such as bonds.
The lower a security's rating, the greater its
credit risk.
INCOME RISK: The possibility that the Fund's
income will decline due to a decrease in
interest rates. Income risk is generally high
for shorter-term bonds and low for longer-term
bonds.
PREPAYMENT/CALL RISK: If a significant number
of the mortgages underlying a mortgage-backed
bond are refinanced, the bond may be "prepaid."
Call risk is the possibility that, during
periods of declining interest rates, a bond
issuer will "call" -- or repay --
higher-yielding bonds before their stated
maturity date. In both cases, investors receive
their principal back and are typically forced
to reinvest it in bonds that pay lower interest
rates. Rapid changes in prepayment and call
rates can cause bond prices and yields to be
volatile.
ESTIMATED MATURITY RISK: The possibility that
an underlying mortgage holder will exercise its
right to pay principal on an obligation (such
as mortgage-related securities) later than
expected. This may happen when there is a rise
in interest rates. These events may lengthen
the duration (i.e. interest rate sensitivity)
and potentially reduce the value of these
securities.
HIGH-YIELD/HIGH-RISK DEBT SECURITIES:
High-yield/high-risk debt securities are
securities that are rated below investment
grade by the primary rating agencies. These
securities are considered speculative and
involve greater risk of loss than investment
grade debt securities.
FOREIGN INVESTMENT RISK: Foreign securities
involve risks not typically associated with
investing in U.S. securities. Foreign
securities may be adversely affected by myriad
factors, including currency fluctuations and
social, economic or political instability.
These risks are particularly pronounced for
emerging markets.
The Fund may trade securities actively, which
could increase its transaction costs (thereby
lowering its performance) and may increase the
amount of taxes that you pay. If the Fund
invests in securities with additional risks,
its share price volatility accordingly could be
greater and its performance lower. For more
information about these risks, please see
Additional Investment Strategies and Risks on
page 83 or consult the SAI.
38
TOTAL RETURN BOND FUND
RISK/RETURN SUMMARY (FORMERLY THE INTERMEDIATE
AND FUND EXPENSES CORPORATE BOND FUND)
This chart and table on this page show how the Total Return Bond Fund has
performed and how its performance has varied from year to year. The bar chart
gives some indication of risk by showing changes in the Fund's yearly
performance to demonstrate that the Fund's value varied at different times. The
table below it compares the Fund's performance to that of the Lehman Brothers
Aggregate Index, an index that covers the U.S. investment grade fixed rate bond
market, with index components for government and corporate securities, mortgage
pass-through securities, and asset-backed securities. Of course, past
performance does not indicate how the Fund will perform in the future.
PERFORMANCE BAR CHART AND TABLE
YEAR-BY-YEAR TOTAL RETURNS AS OF 12/31
FOR INSTITUTIONAL SHARES(1)
"Performance Bar Chart and Table"
The performance information shown above is based on a calendar year.
Best quarter: 4.67% 9/30/02
Worst quarter: -3.22% 6/30/04
AVERAGE ANNUAL TOTAL RETURNS
(for the periods ended December 31, 2005)(1)
SINCE INCEPTION
1 YEAR 5 YEARS (12/2/99)
------ ------- ---------------
INSTITUTIONAL SHARES(2)
RETURN BEFORE TAXES 1.79% 5.56% 6.15%
RETURN AFTER TAXES ON DISTRIBUTIONS 0.16% 3.51% 4.00%
RETURN AFTER TAXES ON DISTRIBUTIONS
AND SALE OF FUNDS SHARES 1.24% 3.53% 3.96%
LEHMAN BROTHERS AGGREGATE INDEX(4)
(reflects no deductions for fees,
expenses, or taxes) 2.43% 5.87% 6.63%(3)
LEHMAN BROTHERS U.S. CREDIT INDEX(4)
(reflects no deductions for fees,
expenses, or taxes) 1.96% 7.11% 7.29%(3)
(1) Both charts assume reinvestment of dividends and distributions. For current
performance information including the Fund's 30-day yield, call
1-800-228-1872.
(2) After-tax returns are calculated using the historical highest individual
federal marginal income tax rates and do not reflect the impact of state
and local taxes. Actual after-tax returns depend on an investor's tax
situation and may differ from those shown. The after-tax returns shown are
not relevant to investors who hold their Fund shares through tax-deferred
arrangements such as 401(k) plans or individual retirement accounts.
(3) Since 11/30/99.
(4) The Fund has changed its standardized benchmark from the Lehman Brothers
U.S. Credit Index to the Lehman Brothers Aggregate Index in order to better
represent the Fund's investment policies for comparison purposes.
39
TOTAL RETURN BOND FUND
RISK/RETURN SUMMARY (FORMERLY THE INTERMEDIATE
AND FUND EXPENSES CORPORATE BOND FUND)
As an investor in the Total Return Bond Fund, you will pay the following fees
and expenses when you buy and hold shares. Shareholder transaction fees are paid
from your account. Annual Fund operating expenses are paid out of Fund assets
and are reflected in the share price.
FEES AND EXPENSES
SHAREHOLDER TRANSACTION EXPENSES
(FEES PAID BY YOU DIRECTLY)(1) INSTITUTIONAL SHARES
-------------------------------- --------------------
Maximum Sales Charge (load) on Purchases None
Maximum Deferred Sales Charge (load) None
Redemption Fee (on shares sold
within 7 calendar days of purchase)(2) 2.00%
ANNUAL FUND OPERATING EXPENSES
(FEES PAID FROM FUND ASSETS) INSTITUTIONAL SHARES
------------------------------ --------------------
Management Fee(3) 0.60%
Distribution and Service (12b-1) Fee 0.00%
Other Expenses 0.20%
Total Fund Operating Expenses 0.80%
Fee Waiver or Expense Reimbursement(3) -0.12%
Net Fund Operating Expenses(3) 0.68%
(1) Participating banks or other financial institutions may charge their
customers account fees for automatic investment, exchanges and other cash
management services provided in connection with investment in the Funds.
(2) A wire transfer fee of $7.00 may be deducted from the amount of your
redemption, regardless of the date of purchase, if you request a wire
transfer. This fee is currently being waived.
(3) The Fund's Adviser has contractually agreed to limit the management fees
paid by the Fund to 0.48% for the period from February 1, 2006 through
January 31, 2007.
Use the table at right to compare fees and expenses with those of other funds.
It illustrates the amount of fees and expenses you would pay, assuming the
following:
- $10,000 Investment
- 5% Annual Return
- redemption at the end of each period
- no changes in the Fund's operating expenses
Because this example is hypothetical and for comparison only, your actual costs
will be different.
EXPENSE EXAMPLE
TOTAL RETURN BOND FUND 1 YEAR 3 YEARS 5 YEARS 10 YEARS
---------------------- ------ ------- ------- --------
INSTITUTIONAL SHARES $69 $243 $432 $979
40
RISK/RETURN SUMMARY AND FUND EXPENSES KENTUCKY INTERMEDIATE TAX-FREE FUND
RISK/RETURN SUMMARY
INVESTMENT OBJECTIVE The Fund seeks current income exempt from
federal and Kentucky income taxes consistent
with preservation of capital.
PRINCIPAL To pursue this goal, the Fund invests primarily
INVESTMENT STRATEGIES in municipal securities of the Commonwealth of
Kentucky and its political subdivisions, that
provide income exempt from both federal
personal income tax and Kentucky personal
income tax. The Fund invests in Kentucky
municipal securities only if they are
"investment grade" (rated at the time of
purchase in one of the four highest rating
categories by an NRSRO, or are determined by
the portfolio manager to be of comparable
quality). The Fund will maintain an average
duration of 3.5 to 8 years.
In managing the Fund's portfolio, the portfolio
manager uses a "top down" investment management
approach focusing on interest rates and credit
quality. The portfolio manager sets, and
continually adjusts, a target for the interest
rate sensitivity of the Fund's portfolio based
on expectations about interest rate movements.
The portfolio manager then selects securities
consistent with this target based on their
individual characteristics.
The Fund is non-diversified and, therefore, may
concentrate its investments in a limited number
of issuers. The Fund may also invest in certain
other debt securities in addition to those
described above. For a more complete
description of the various securities in which
the Fund may invest, please see Additional
Investment Strategies and Risks on page 83 or
consult the SAI.
PRINCIPAL Your investment in the Fund may be subject to
INVESTMENT RISKS the following principal risks:
INTEREST RATE RISK: The possibility that the
value of the Fund's investments will decline
due to an increase in interest rates. Interest
rate risk is generally high for longer-term
bonds and low for shorter-term bonds.
STATE SPECIFIC RISK: By concentrating its
investments in securities issued by Kentucky
and its political subdivisions the Fund may be
more vulnerable to unfavorable developments in
Kentucky than funds that are more
geographically diversified.
CREDIT RISK: The possibility that an issuer
cannot make timely interest and principal
payments on its debt securities, such as bonds.
The lower a security's rating, the greater its
credit risk.
NON-DIVERSIFIED RISK: Because the Fund is
non-diversified, it may invest a greater
percentage of its assets in a particular issuer
compared with other funds. Accordingly, the
Fund's portfolio may be more sensitive to
changes in the market value of a single issuer
or industry.
CALL RISK: Call risk is the possibility that,
during periods of declining interest rates, a
bond issuer will "call" -- or repay --
higher-yielding bonds before their stated
maturity date. As a result, investors receive
their principal back and are typically forced
to reinvest it in bonds that pay lower interest
rates. Rapid changes in call rates can cause
bond prices and yields to be volatile.
ESTIMATED MATURITY RISK: The possibility that
an underlying obligor will exercise its right
to pay principal on an obligation (such as
mortgage-related securities) later than
expected. This may happen when there is a rise
in interest rates. These events may lengthen
the duration (i.e. interest rate sensitivity)
and potentially reduce the value of these
securities.
INCOME RISK: The possibility that the Fund's
income will decline due to a decrease in
interest rates. Income risk is generally high
for shorter-term bonds and low for longer-term
bonds.
The Fund may trade securities actively, which
could increase its transaction costs (thereby
lowering its performance) and may increase the
amount of taxes that you pay. If the Fund
invests in securities with additional risks,
its share price volatility accordingly could be
greater and its performance lower. For more
information about these risks, including the
state-specific risk associated with the Fund,
please see Additional Investment Strategies and
Risks on page 83 or consult the SAI.
41
RISK/RETURN SUMMARY AND FUND EXPENSES KENTUCKY INTERMEDIATE TAX-FREE FUND
The chart and table on this page show how the Kentucky Intermediate Tax-Free
Fund has performed and how its performance has varied from year to year. The bar
chart gives some indication of risk by showing changes in the Fund's yearly
performance to demonstrate that the Fund's value varied at different times. The
table below it compares the Fund's performance over time to that of the Lehman
Brothers 7-Year Municipal Bond Index, an unmanaged index generally
representative of the performance of municipal bonds with a minimum credit of at
least Baa, a maturity value of at least $5 million and a maturity range of 6-8
years. Of course, past performance does not indicate how the Fund will perform
in the future.
PERFORMANCE BAR CHART AND TABLE
YEAR-BY-YEAR TOTAL RETURNS AS OF 12/31
FOR INSTITUTIONAL SHARES(1)
"Performance Bar Chart and Table"
The performance information shown above is based on a calendar year.
Best quarter: 2.69% 9/30/04
Worst quarter: -2.17% 6/30/04
AVERAGE ANNUAL TOTAL RETURNS
(for the periods ended
December 31, 2005)(1)
SINCE INCEPTION
1 YEAR (2/24/03)
------ ---------------
INSTITUTIONAL SHARES(2)
RETURN BEFORE TAXES 1.38% 2.85%
RETURN AFTER TAXES ON DISTRIBUTIONS 1.38% 2.85%
RETURN AFTER TAXES ON DISTRIBUTIONS AND SALE OF
FUNDS SHARES 1.93% 2.84%
LEHMAN BROTHERS 7-YEAR MUNICIPAL BOND INDEX
(reflects no deductions for fees, expenses or taxes) 1.72% 3.20%(3)
(1) Both charts assume reinvestment of dividends and distributions. For current
performance information including the Fund's 30-day yield, call
1-800-228-1872.
(2) After-tax returns are calculated using the historical highest individual
federal marginal income tax rates and do not reflect the impact of state
and local taxes. Actual after-tax returns depend on an investor's tax
situation and may differ from those shown. The after tax returns shown are
not relevant to investors who hold their Fund shares through tax deferred
arrangements such as 401(k) plans or individual retirement accounts.
(3) Since 2/28/03.
42
RISK/RETURN SUMMARY AND FUND EXPENSES KENTUCKY INTERMEDIATE TAX-FREE FUND
As an investor in the Kentucky Intermediate Tax-Free Fund, you will pay the
following fees and expenses when you buy and hold shares. Shareholder
transaction fees are paid from your account. Annual Fund operating expenses are
paid out of Fund assets and are reflected in the share price.
FEES AND EXPENSES
SHAREHOLDER TRANSACTION EXPENSES INSTITUTIONAL
(FEES PAID BY YOU DIRECTLY)(1) SHARES
-------------------------------- -------------
Maximum Sales Charge (load)
on Purchases None
Maximum Deferred Sales Charge
(load) None
Redemption Fee (on shares sold
within 7 calendar days of
purchase)(2) 2.00%
ANNUAL FUND OPERATING EXPENSES INSTITUTIONAL
(FEES PAID FROM FUND ASSETS) SHARES
-------------------------------- -------------
Management Fee(3) 0.60%
Distribution and Service
(12b-1) Fee 0.00%
Other Expenses 0.30%
Total Fund Operating Expenses 0.90%
Fee Waiver or Expense
Reimbursement(3) -0.20%
Net Fund Operating Expenses(3) 0.70%
(1) Participating banks or other financial institutions may charge their
customers account fees for automatic investment, exchanges and other cash
management services provided in connection with investment in the Funds.
(2) A wire transfer fee of $7.00 may be deducted from the amount of your
redemption, regardless of the date of purchase, if you request a wire
transfer. This fee is currently being waived.
(3) The Fund's Adviser has contractually agreed to limit the management fees
paid by the Fund to 0.40% for the period from February 1, 2006 through
January 31, 2007.
Use the table at right to compare fees and expenses with those of other funds.
It illustrates the amount of fees and expenses you would pay, assuming the
following:
- $10,000 investment
- 5% annual return
- redemption at the end of each period
- no changes in the fund's operating expenses
Because this example is hypothetical and for comparison only, your actual costs
will be different.
EXPENSE EXAMPLE
KENTUCKY INTERMEDIATE 1 3 5 10
TAX-FREE FUND YEAR YEARS YEARS YEARS
--------------------- ---- ----- ----- ------
INSTITUTIONAL SHARES $72 $267 $479 $1,089
43
RISK/RETURN SUMMARY AND FUND EXPENSES MARYLAND INTERMEDIATE TAX-FREE FUND
RISK/RETURN SUMMARY
INVESTMENT OBJECTIVE The Fund seeks current income exempt from
federal and Maryland income taxes consistent
with preservation of capital.
PRINCIPAL To pursue this goal, the Fund invests primarily
INVESTMENT STRATEGIES in municipal securities of the State of
Maryland and its political subdivisions, that
provide income exempt from both federal
personal income tax and Maryland personal
income tax. The Fund invests in Maryland
municipal securities only if they are
"investment grade" (rated at the time of
purchase in one of the four highest rating
categories by an NRSRO, or are determined by
the portfolio manager to be of comparable
quality). The Fund will maintain an average
duration of 3.5 to 8 years.
In managing the Fund's portfolio, the portfolio
manager uses a "top down" investment management
approach focusing on interest rates and credit
quality. The portfolio manager sets, and
continually adjusts, a target for the interest
rate sensitivity of the Fund's portfolio based
on expectations about interest rate movements.
The portfolio manager then selects securities
consistent with this target based on their
individual characteristics.
The Fund is non-diversified and, therefore, may
concentrate its investments in a limited number
of issuers. The Fund may also invest in certain
other debt securities in addition to those
described above. For a more complete
description of the various securities in which
the Fund may invest, please see Additional
Investment Strategies and Risks on page 83 or
consult the SAI.
PRINCIPAL Your investment in the Fund may be subject to
INVESTMENT RISKS the following principal risks:
INTEREST RATE RISK: The possibility that the
value of the Fund's investments will decline
due to an increase in interest rates. Interest
rate risk is generally high for longer-term
bonds and low for shorter-term bonds.
STATE SPECIFIC RISK: By concentrating its
investments in securities issued by Maryland
and its political subdivisions the Fund may be
more vulnerable to unfavorable developments in
Maryland than funds that are more
geographically diversified.
CREDIT RISK: The possibility that an issuer
cannot make timely interest and principal
payments on its debt securities, such as bonds.
The lower a security's rating, the greater its
credit risk.
NON-DIVERSIFIED RISK: Because the Fund is
non-diversified, it may invest a greater
percentage of its assets in a particular issuer
compared with other funds. Accordingly, the
Fund's portfolio may be more sensitive to
changes in the market value of a single issuer
or industry.
CALL RISK: Call risk is the possibility that,
during periods of declining interest rates, a
bond issuer will "call" -- or repay --
higher-yielding bonds before their stated
maturity date. As a result, investors receive
their principal back and are typically forced
to reinvest it in bonds that pay lower interest
rates. Rapid changes in call rates can cause
bond prices and yields to be volatile.
ESTIMATED MATURITY RISK: The possibility that
an underlying mortgage holder will exercise its
right to pay principal on an obligation (such
as mortgage-related securities) later than
expected. This may happen when there is a rise
in interest rates. These events may lengthen
the duration (i.e. interest rate sensitivity)
and potentially reduce the value of these
securities.
INCOME RISK: The possibility that the Fund's
income will decline due to a decrease in
interest rates. Income risk is generally high
for shorter-term bonds and low for longer-term
bonds.
The Fund may trade securities actively, which
could increase its transaction costs (thereby
lowering its performance) and may increase the
amount of taxes that you pay. If the Fund
invests in securities with additional risks,
its share price volatility accordingly could be
greater and its performance lower. For more
information about these risks, including the
state-specific risk associated with the Fund,
please see Additional Investment Strategies and
Risks on page 83 or consult the SAI.
44
RISK/RETURN SUMMARY AND FUND EXPENSES MARYLAND INTERMEDIATE TAX-FREE FUND
The chart and table on this page show how the Maryland Intermediate Tax-Free
Fund has performed and how its performance has varied from year to year. The bar
chart gives some indication of risk by showing changes in the Fund's yearly
performance to demonstrate that the Fund's value varied at different times. The
table below it compares the Fund's performance over time to that of the Lehman
Brothers 7-Year Municipal Bond Index, an unmanaged index generally
representative of the performance of municipal bonds with a minimum credit of at
least Baa, a maturity value of at least $5 million and a maturity range of 6-8
years. Of course, past performance does not indicate how the Fund will perform
in the future.
PERFORMANCE BAR CHART AND TABLE
YEAR-BY-YEAR TOTAL RETURNS AS OF 12/31
FOR INSTITUTIONAL SHARES(1)
"Performance Bar Chart and Table"
The performance information shown above is based on a calendar year.
Best quarter: 2.84% 9/30/04
Worst quarter: -2.34% 6/30/04
AVERAGE ANNUAL TOTAL RETURNS
(for the periods ended
December 31, 2005)(1)
SINCE INCEPTION
1 YEAR (2/24/03)
------ ---------------
INSTITUTIONAL SHARES(2)
RETURN BEFORE TAXES 1.62% 2.72%
RETURN AFTER TAXES ON DISTRIBUTIONS 1.62% 2.72%
RETURN AFTER TAXES ON DISTRIBUTIONS AND
SALE OF FUNDS SHARES 2.07% 2.70%
LEHMAN BROTHERS 7-YEAR MUNICIPAL BOND INDEX
(reflects no deductions for fees, expenses or taxes) 1.72% 3.20%(3)
(1) Both charts assume reinvestment of dividends and distributions. For current
performance information including the Fund's 30-day yield, call
1-800-228-1872.
(2) After-tax returns are calculated using the historical highest individual
federal marginal income tax rates and do not reflect the impact of state
and local taxes. Actual after-tax returns depend on an investor's tax
situation and may differ from those shown. The after tax returns shown are
not relevant to investors who hold their Fund shares through tax deferred
arrangements such as 401(k) plans or individual retirement accounts.
(3) Since 2/28/03.
45
RISK/RETURN SUMMARY AND FUND EXPENSES MARYLAND INTERMEDIATE TAX-FREE FUND
As an investor in the Maryland Intermediate Tax-Free Fund, you will pay the
following fees and expenses when you buy and hold shares. Shareholder
transaction fees are paid from your account. Annual Fund operating expenses are
paid out of Fund assets and are reflected in the share price.
FEES AND EXPENSES
SHAREHOLDER TRANSACTION EXPENSES INSTITUTIONAL
(FEES PAID BY YOU DIRECTLY)(1) SHARES
-------------------------------- -------------
Maximum Sales Charge (load)
on Purchases None
Maximum Deferred Sales Charge
(load) None
Redemption Fee (on shares sold
within 7 calendar days of
purchase)(2) 2.00%
ANNUAL FUND OPERATING EXPENSES INSTITUTIONAL
(FEES PAID FROM FUND ASSETS) SHARES
------------------------------ -------------
Management Fee(3) 0.60%
Distribution and Service
(12b-1) Fee 0.00%
Other Expenses 0.34%
Total Fund Operating Expenses 0.94%
Fee Waiver or Expense
Reimbursement(3) -0.30%
Net Fund Operating Expenses(3) 0.64%
(1) Participating banks or other financial institutions may charge their
customers account fees for automatic investment, exchanges and other cash
management services provided in connection with investment in the Funds.
(2) A wire transfer fee of $7.00 may be deducted from the amount of your
redemption, regardless of the date of purchase, if you request a wire
transfer. This fee is currently being waived.
(3) The Fund's Adviser has contractually agreed to limit the management fees
paid by the Fund to 0.30% for the period from February 1, 2006 through
January 31, 2007.
Use the table at right to compare fees and expenses with those of other funds.
It illustrates the amount of fees and expenses you would pay, assuming the
following:
- $ 10,000 investment
- 5% annual return
- redemption at the end of each period
- no changes in the fund's operating expenses
Because this example is hypothetical and for comparison only, your actual costs
will be different.
EXPENSE EXAMPLE
MARYLAND INTERMEDIATE 1 3 5 10
TAX-FREE FUND YEAR YEARS YEARS YEARS
--------------------- ---- ----- ----- ------
INSTITUTIONAL SHARES $65 $270 $491 $1,127
46
RISK/RETURN SUMMARY AND FUND EXPENSES NORTH CAROLINA INTERMEDIATE TAX-FREE FUND
RISK/RETURN SUMMARY
INVESTMENT OBJECTIVE The Fund seeks current income exempt from
federal and North Carolina income taxes
consistent with preservation of capital.
PRINCIPAL To pursue this goal, the Fund invests primarily
INVESTMENT STRATEGIES in municipal securities of the State of North
Carolina and its political subdivisions that
provide income exempt from both Federal
personal income tax and North Carolina personal
income tax. The Fund invests in North Carolina
municipal securities only if they are
"investment grade" (rated at the time of
purchase in one of the four highest rating
categories by an NRSRO, or are determined by
the portfolio manager to be of comparable
quality). The Fund will maintain an average
duration of 3.5 to 8 years.
In managing the Fund's portfolio, the portfolio
manager uses a "top down" investment management
approach focusing on interest rates and credit
quality. The portfolio manager sets, and
continually adjusts, a target for the interest
rate sensitivity of the Fund's portfolio based
on expectations about interest rate movements.
The portfolio manager then selects securities
consistent with this target based on their
individual characteristics.
The Fund is non-diversified and, therefore, may
concentrate its investments in a limited number
of issuers. The Fund may also invest in certain
other debt securities in addition to those
described above. For a more complete
description of the various securities in which
the Fund may invest, please see Additional
Investment Strategies and Risks on page 83 or
consult the SAI.
PRINCIPAL Your investment in the Fund may be subject to
INVESTMENT RISKS the following principal risks:
INTEREST RATE RISK: The possibility that the
value of the Fund's investments will decline
due to an increase in interest rates. Interest
rate risk is generally high for longer-term
bonds and low for shorter-term bonds.
STATE SPECIFIC RISK: By concentrating its
investments in securities issued by North
Carolina and its political subdivisions, the
Fund may be more vulnerable to unfavorable
developments in North Carolina than funds that
are more geographically diversified.
CREDIT RISK: The possibility that an issuer
cannot make timely interest and principal
payments on its debt securities, such as bonds.
The lower a security's rating, the greater its
credit risk.
NON-DIVERSIFIED RISK: Because the Fund is
non-diversified, it may invest a greater
percentage of its assets in a particular issuer
compared with other funds. Accordingly, the
Fund's portfolio may be more sensitive to
changes in the market value of a single issuer
or industry.
CALL RISK: Call risk is the possibility that,
during periods of declining interest rates, a
bond issuer will "call" -- or repay --
higher-yielding bonds before their stated
maturity date. As a result, investors receive
their principal back and are typically forced
to reinvest it in bonds that pay lower interest
rates. Rapid changes in call rates can cause
bond prices and yields to be volatile.
ESTIMATED MATURITY RISK: The possibility that
an underlying mortgage holder will exercise its
right to pay principal on an obligation (such
as mortgage-related securities) later than
expected. This may happen when there is a rise
in interest rates. These events may lengthen
the duration (i.e. interest rate sensitivity)
and potentially reduce the value of these
securities.
INCOME RISK: The possibility that the Fund's
income will decline due to a decrease in
interest rates. Income risk is generally high
for shorter-term bonds and low for longer-term
bonds.
The Fund may trade securities actively, which
could increase its transaction costs (thereby
lowering its performance) and may increase the
amount of taxes that you pay. If the Fund
invests in securities with additional risks,
its share price volatility accordingly could be
greater and its performance lower. For more
information about these risks, including the
state-specific risk associated with the Fund,
please see Additional Investment Strategies and
Risks on page 83 or consult the SAI.
47
RISK/RETURN SUMMARY AND FUND EXPENSES NORTH CAROLINA INTERMEDIATE TAX-FREE FUND
The chart and table on this page show how the North Carolina Intermediate
Tax-Free Fund has performed and how its performance has varied from year to
year. The bar chart gives some indication of risk by showing changes in the
Fund's yearly performance to demonstrate that the Fund's value varied at
different times. The table below it compares the Fund's performance over time to
that of the Lehman Brothers 7-Year Municipal Bond Index, an unmanaged index
generally representative of the performance of municipal bonds with a minimum
credit of at least Baa, a maturity value of at least $5 million and a maturity
range of 6-8 years. Of course, past performance does not indicate how the Fund
will perform in the future.
PERFORMANCE BAR CHART AND TABLE
YEAR-BY-YEAR TOTAL RETURNS AS OF 12/31
FOR INSTITUTIONAL SHARES(1)
"Performance Bar Chart and Table"
The performance information shown above is based on a calendar year.
Best quarter: 4.07% 6/30/02
Worst quarter: -2.31% 6/30/04
AVERAGE ANNUAL TOTAL RETURNS
(for the periods ended
December 31, 2005)(1)
1 YEAR 5 YEARS 10 YEARS SINCE INCEPTION
(10/16/92)
------ ------- -------- ---------------
INSTITUTIONAL SHARES(2)
RETURN BEFORE TAXES 1.66% 4.19% 4.24% 4.35%
RETURN AFTER TAXES ON DISTRIBUTIONS 1.51% 4.08% 4.17% 4.29%
RETURN AFTER TAXES ON DISTRIBUTIONS AND
SALE OF FUND SHARES 2.48% 4.07% 4.17% 4.27%
LEHMAN BROTHERS 7-YEAR MUNICIPAL BOND INDEX
(reflects no deductions for fees, expenses
or taxes) 1.72% 5.13% 5.26% 5.77%(3)
(1) Both charts assume reinvestment of dividends and distributions. For current
performance information including the Fund's 30-day yield, call
1-800-228-1872.
(2) After-tax returns are calculated using the historical highest individual
federal marginal income tax rates and do not reflect the impact of state
and local taxes. Actual after-tax returns depend on an investor's tax
situation and may differ from those shown. The after-tax returns shown are
not relevant to investors who hold their Fund shares through tax-deferred
arrangements such as 401(k) plans or individual retirement accounts.
(3) Since 10/31/92.
48
RISK/RETURN SUMMARY AND FUND EXPENSES NORTH CAROLINA INTERMEDIATE TAX-FREE FUND
As an investor in the North Carolina Intermediate Tax-Free Fund, you will pay
the following fees and expenses when you buy and hold shares. Shareholder
transaction fees are paid from your account. Annual Fund operating expenses are
paid out of Fund assets and are reflected in the share price.
FEES AND EXPENSES
SHAREHOLDER TRANSACTION EXPENSES INSTITUTIONAL
(FEES PAID BY YOU DIRECTLY)(1) SHARES
-------------------------------- -------------
Maximum Sales Charge (load)
on Purchases None
Maximum Deferred Sales Charge
(load) None
Redemption Fee (on shares sold
within 7 calendar days of
purchase)(2) 2.00%
ANNUAL FUND OPERATING EXPENSES INSTITUTIONAL
(FEES PAID FROM FUND ASSETS) SHARES
------------------------------ -------------
Management Fee(3) 0.60%
Distribution and Service
(12b-1) Fee 0.00%
Other Expenses 0.22%
Total Fund Operating Expenses 0.82%
Fee Waiver or Expense
Reimbursement(3) -0.15%
Net Fund Operating Expenses(3) 0.67%
(1) Participating banks or other financial institutions may charge their
customers account fees for automatic investment, exchanges and other cash
management services provided in connection with investment in the Funds.
(2) A wire transfer fee of $7.00 may be deducted from the amount of your
redemption, regardless of the date of purchase, if you request a wire
transfer. This fee is currently being waived.
(3) The Fund's Adviser has contractually agreed to limit the management fees
paid by the Fund to 0.45% for the period from February 1, 2006 through
January 31, 2007.
Use the table at right to compare fees and expenses with those of other funds.
It illustrates the amount of fees and expenses you would pay, assuming the
following:
- $ 10,000 investment
- 5% annual return
- redemption at the end of each period
- no changes in the Fund's operating expenses
Because this example is hypothetical and for comparison only, your actual costs
will be different.
EXPENSE EXAMPLE
NORTH CAROLINA
INTERMEDIATE 1 3 5 10
TAX-FREE FUND YEAR YEARS YEARS YEARS
-------------- ---- ----- ----- ------
INSTITUTIONAL SHARES $68 $247 $440 $1,000
49
RISK/RETURN SUMMARY AND FUND EXPENSES SOUTH CAROLINA INTERMEDIATE TAX-FREE FUND
RISK/RETURN SUMMARY
INVESTMENT OBJECTIVE The Fund seeks current income exempt from
federal and South Carolina income taxes
consistent with preservation of capital.
PRINCIPAL To pursue this goal, the Fund invests primarily
INVESTMENT STRATEGIES in municipal securities of the State of South
Carolina and its political subdivisions that
provide income exempt from both Federal
personal income tax and South Carolina personal
income tax. The Fund invests in South Carolina
municipal securities only if they are
"investment grade" (rated at the time of
purchase in one of the four highest rating
categories by an NRSRO, or are determined by
the portfolio manager to be of comparable
quality). The Fund will maintain an average
duration of 3.5 to 8 years.
In managing the Fund's portfolio, the portfolio
manager uses a "top down" investment management
approach focusing on interest rates and credit
quality. The portfolio manager sets, and
continually adjusts, a target for the interest
rate sensitivity of the Fund's portfolio based
on expectations about interest rate movements.
The portfolio manager then selects securities
consistent with this target based on their
individual characteristics.
The Fund is non-diversified and, therefore, may
concentrate its investments in a limited number
of issuers. The Fund may also invest in certain
other debt securities in addition to those
described above. For a more complete
description of the various securities in which
the Fund may invest, please see Additional
Investment Strategies and Risks on page 83 or
consult the SAI.
PRINCIPAL Your investment in the Fund may be subject to
INVESTMENT RISKS the following principal risks:
INTEREST RATE RISK: The possibility that the
value of the Fund's investments will decline
due to an increase in interest rates. Interest
rate risk is generally high for longer-term
bonds and low for shorter-term bonds.
STATE SPECIFIC RISK: By concentrating its
investments in securities issued by South
Carolina and its political subdivisions, the
Fund may be more vulnerable to unfavorable
developments in South Carolina than funds that
are more geographically diversified.
CREDIT RISK: The possibility that an issuer
cannot make timely interest and principal
payments on its debt securities, such as bonds.
The lower a security's rating, the greater its
credit risk.
NON-DIVERSIFIED RISK: Because the Fund is
non-diversified, it may invest a greater
percentage of its assets in a particular issuer
compared with other funds. Accordingly, the
Fund's portfolio may be more sensitive to
changes in the market value of a single issuer
or industry.
CALL RISK: Call risk is the possibility that,
during periods of declining interest rates, a
bond issuer will "call" -- or repay --
higher-yielding bonds before their stated
maturity date. As a result, investors receive
their principal back and are typically forced
to reinvest it in bonds that pay lower interest
rates. Rapid changes in call rates can cause
bond prices and yields to be volatile.
ESTIMATED MATURITY RISK: The possibility that
an underlying mortgage holder will exercise its
right to pay principal on an obligation (such
as mortgage-related securities) later than
expected. This may happen when there is a rise
in interest rates. These events may lengthen
the duration (i.e. interest rate sensitivity)
and potentially reduce the value of these
securities.
INCOME RISK: The possibility that the Fund's
income will decline due to a decrease in
interest rates. Income risk is generally high
for shorter-term bonds and low for longer-term
bonds.
The Fund may trade securities actively, which
could increase its transaction costs (thereby
lowering its performance) and may increase the
amount of taxes that you pay. If the Fund
invests in securities with additional risks,
its share price volatility accordingly could be
greater and its performance lower. For more
information about these risks, including the
state-specific risk associated with the Fund,
please see Additional Investment Strategies and
Risks on page 83 or consult the SAI.
50
RISK/RETURN SUMMARY AND
FUND EXPENSES SOUTH CAROLINA INTERMEDIATE TAX-FREE FUND
The chart and table on this page show how the South Carolina Intermediate
Tax-Free Fund has performed and how its performance has varied from year to
year. The bar chart gives some indication of risk by showing changes in the
Fund's yearly performance to demonstrate that the Fund's value varied at
different times. The table below it compares the Fund's performance over time to
that of the Lehman Brothers 7-Year Municipal Bond Index, an unmanaged index
generally representative of the performance of municipal bonds with a minimum
credit of at least Baa, a maturity value of at least $5 million and a maturity
range of 6-8 years. Of course, past performance does not indicate how the Fund
will perform in the future.
PERFORMANCE BAR CHART AND TABLE
YEAR-BY-YEAR TOTAL RETURNS AS OF 12/31
FOR INSTITUTIONAL SHARES(1)
"Performance Bar Chart and Table"
The performance information shown above is based on a calendar year.
Best quarter: 4.12% 6/30/02
Worst quarter: -2.40% 6/30/99
AVERAGE ANNUAL TOTAL RETURNS
(for the periods ended
December 31, 2005)(1)
SINCE INCEPTION
1 YEAR 5 YEARS (10/20/97)
------ ------- ---------------
INSTITUTIONAL SHARES(2)
RETURN BEFORE TAXES 1.49% 4.39% 4.50%
RETURN AFTER TAXES ON DISTRIBUTIONS 1.23% 4.31% 4.41%
RETURN AFTER TAXES ON DISTRIBUTIONS AND
SALE OF FUND SHARES 2.54% 4.29% 4.38%
LEHMAN BROTHERS 7-YEAR MUNICIPAL BOND INDEX
(reflects no deductions for fees, expenses
or taxes) 1.72% 5.13% 5.17%(3)
(1) Both charts assume reinvestment of dividends and distributions. For current
performance information including the Fund's 30-day yield, call
1-800-228-1872.
(2) After-tax returns are calculated using the historical highest individual
federal marginal income tax rates and do not reflect the impact of state
and local taxes. Actual after-tax returns depend on an investor's tax
situation and may differ from those shown. The after-tax returns shown are
not relevant to investors who hold their Fund shares through tax-deferred
arrangements such as 401(k) plans or individual retirement accounts.
(3) Since 10/31/97.
51
RISK/RETURN SUMMARY AND FUND EXPENSES SOUTH CAROLINA INTERMEDIATE TAX-FREE FUND
As an investor in the South Carolina Intermediate Tax-Free Fund, you will pay
the following fees and expenses when you buy and hold shares. Shareholder
transaction fees are paid from your account. Annual Fund operating expenses are
paid out of Fund assets and are reflected in the share price.
FEES AND EXPENSES
SHAREHOLDER TRANSACTION EXPENSES INSTITUTIONAL
(FEES PAID BY YOU DIRECTLY)(1) SHARES
-------------------------------- -------------
Maximum Sales Charge (load)
on Purchases None
Maximum Deferred Sales Charge
(load) None
Redemption Fee (on shares sold
within 7 calendar days of
purchase)(2) 2.00%
ANNUAL FUND OPERATING EXPENSES INSTITUTIONAL
(FEES PAID FROM FUND ASSETS) SHARES
-------------------------------- -------------
Management Fee(3) 0.60%
Distribution and Service
(12b-1) Fee 0.00%
Other Expenses 0.23%
Total Fund Operating Expenses 0.83%
Fee Waiver or Expense
Reimbursement(3) -0.15%
Net Fund Operating Expenses(3) 0.68%
(1) Participating banks or other financial institutions may charge their
customers account fees for automatic investment, exchanges and other cash
management services provided in connection with investment in the Funds.
(2) A wire transfer fee of $7.00 may be deducted from the amount of your
redemption, regardless of the date of purchase, if you request a wire
transfer. This fee is currently being waived.
(3) The Fund's Adviser has contractually agreed to limit the management fees
paid by the Fund to 0.45% for the period from February 1, 2006 through
January 31, 2007.
Use the table at right to compare fees and expenses with those of other funds.
It Illustrates the amount of fees and expenses you would pay, assuming the
following:
- $ 10,000 investment
- 5% annual return
- redemption at the end of each period
- no changes in the Fund's operating expenses
Because this example is hypothetical and for comparison only, your actual costs
will be different.
EXPENSE EXAMPLE
SOUTH CAROLINA
INTERMEDIATE 1 3 5 10
TAX-FREE FUND YEAR YEARS YEARS YEARS
------------- ---- ----- ----- ------
INSTITUTIONAL SHARES $69 $250 $446 $1,011
52
RISK/RETURN SUMMARY AND FUND EXPENSES VIRGINIA INTERMEDIATE TAX-FREE FUND
RISK/RETURN SUMMARY
INVESTMENT OBJECTIVE The Fund seeks current income exempt from
federal and Virginia income taxes consistent
with preservation of capital.
PRINCIPAL To pursue this goal, the Fund invests primarily
INVESTMENT STRATEGIES in municipal securities of the Commonwealth of
Virginia and its political subdivisions that
provide income exempt from both Federal
personal income tax and Virginia personal
income tax. The Fund invests in Virginia
municipal securities only if they are
"investment grade" (rated at the time of
purchase in one of the four highest rating
categories by an NRSRO, or are determined by
the portfolio manager to be of comparable
quality). The Fund will maintain on average
duration of 3.5 to 8 years.
In managing the Fund's portfolio, the portfolio
manager uses a "top down" investment management
approach focusing on interest rates and credit
quality. The portfolio manager sets, and
continually adjusts, a target for the interest
rate sensitivity of the Fund's portfolio based
on expectations about interest rate movements.
The portfolio manager then selects securities
consistent with this target based on their
individual characteristics.
The Fund is non-diversified and, therefore, may
concentrate its investments in a limited number
of issuers. The Fund may also invest in certain
other debt securities in addition to those
described above. For a more complete
description of the various securities in which
the Fund may invest, please see Additional
Investment Strategies and Risks on page 83 or
consult the SAI.
PRINCIPAL Your investment in the Fund may be subject to
INVESTMENT RISKS the following principal risks:
INTEREST RATE RISK: The possibility that the
value of the Fund's investments will decline
due to an increase in interest rates. Interest
rate risk is generally high for longer-term
bonds and low for shorter-term bonds.
STATE SPECIFIC RISK: By concentrating its
investments in securities issued by Virginia
and its political subdivisions, the Fund may be
more vulnerable to unfavorable developments in
Virginia than funds that are more
geographically diversified.
CREDIT RISK: The possibility that an issuer
cannot make timely interest and principal
payments on its debt securities, such as bonds.
The lower a security's rating, the greater its
credit risk.
NON-DIVERSIFIED RISK: Because the Fund is
non-diversified, it may invest a greater
percentage of its assets in a particular issuer
compared with other funds. Accordingly, the
Fund's portfolio may be more sensitive to
changes in the market value of a single issuer
or industry.
CALL RISK: Call risk is the possibility that,
during periods of declining interest rates, a
bond issuer will "call" -- or repay --
higher-yielding bonds before their stated
maturity date. As a result, investors receive
their principal back and are typically forced
to reinvest it in bonds that pay lower interest
rates. Rapid changes in call rates can cause
bond prices and yields to be volatile.
ESTIMATED MATURITY RISK: The possibility that
an underlying mortgage holder will exercise its
right to pay principal on an obligation (such
as mortgage-related securities) later than
expected. This may happen when there is a rise
in interest rates. These events may lengthen
the duration (i.e. interest rate sensitivity)
and potentially reduce the value of these
securities.
INCOME RISK: The possibility that the Fund's
income will decline due to a decrease in
interest rates. Income risk is generally high
for shorter-term bonds and low for longer-term
bonds.
The Fund may trade securities actively, which
could increase its transaction costs (thereby
lowering its performance) and may increase the
amount of taxes that you pay. If the Fund
invests in securities with additional risks,
its share price volatility accordingly could be
greater and its performance lower. For more
information about these risks, including the
state-specific risk associated with the Fund,
please see Additional Investment Strategies and
Risks on page 83 or consult the SAI.
53
RISK/RETURN SUMMARY AND FUND EXPENSES VIRGINIA INTERMEDIATE TAX-FREE FUND
The chart and table on this page show how the Virginia Intermediate Tax-Free
Fund has performed and how its performance has varied from year to year. The bar
chart gives some indication of risk by showing changes in the Fund's yearly
performance to demonstrate that the Fund's value varied at different times. The
table below it compares the Fund's performance over time to that of the Lehman
Brothers 7-Year Municipal Bond Index, an unmanaged index generally
representative of the performance of municipal bonds with a minimum credit of at
least Baa, a maturity value of at least $5 million and a maturity range of 6-8
years. Of course, past performance does not indicate how the Fund will perform
in the future.
PERFORMANCE BAR CHART AND TABLE
YEAR-BY-YEAR TOTAL RETURNS AS OF 12/31
FOR INSTITUTIONAL SHARES(1)
"Performance Bar Chart and Table"
The performance information shown above is based on a calendar year.
Best quarter: 3.88% 9/30/02
Worst quarter: -2.03% 6/30/04
AVERAGE ANNUAL TOTAL RETURNS
(for the periods ended
December 31, 2005)(1)
SINCE INCEPTION
1 YEAR 5 YEARS (5/17/99)
------ ------- ---------------
INSTITUTIONAL SHARES(2)
RETURN BEFORE TAXES 1.53% 4.16% 4.26%
RETURN AFTER TAXES ON DISTRIBUTIONS 1.45% 4.09% 4.20%
RETURN AFTER TAXES ON DISTRIBUTIONS AND
SALE OF FUND SHARES 2.39% 4.07% 4.18%
LEHMAN BROTHERS 7-YEAR MUNICIPAL BOND INDEX
(reflects no deductions for fees, expenses,
or taxes) 1.72% 5.13% 5.13%(3)
(1) Both charts assume reinvestment of dividends and distributions. For current
performance information including the Fund's 30-day yield, call
1-800-228-1872.
(2) After-tax returns are calculated using the historical highest individual
federal marginal income tax rates and do not reflect the impact of state
and local taxes. Actual after-tax returns depend on an investor's tax
situation and may differ from those shown. The after-tax returns shown are
not relevant to investors who hold their Fund shares through tax-deferred
arrangements such as 401(k) plans or individual retirement accounts.
(3) Since 5/31/99.
54
RISK/RETURN SUMMARY AND FUND EXPENSES VIRGINIA INTERMEDIATE TAX-FREE FUND
As an investor in the Virginia Intermediate Tax-Free Fund, you will pay the
following fees and expenses when you buy and hold shares. Shareholder
transaction fees are paid from your account. Annual Fund operating expenses are
paid out of Fund assets and are reflected in the share price.
FEES AND EXPENSES
SHAREHOLDER TRANSACTION EXPENSES INSTITUTIONAL
(FEES PAID BY YOU DIRECTLY)(1) SHARES
-------------------------------- -------------
Maximum Sales Charge (load)
on Purchases None
Maximum Deferred Sales Charge
(load) None
Redemption Fee (on shares sold
within 7 calendar days of
purchase)(2) 2.00%
ANNUAL FUND OPERATING EXPENSES INSTITUTIONAL
(FEES PAID FROM FUND ASSETS) SHARES
-------------------------------- -------------
Management Fee(3) 0.60%
Distribution and Service
(12b-1) Fee 0.00%
Other Expenses 0.21%
Total Fund Operating Expenses 0.81%
Fee Waiver or Expense
Reimbursement(3) -0.15%
Net Fund Operating Expenses(3) 0.66%
(1) Participating banks or other financial institutions may charge their
customers account fees for automatic investment, exchanges and other cash
management services provided in connection with investment in the Funds.
(2) A wire transfer fee of $7.00 may be deducted from the amount of your
redemption, regardless of the date of purchase, if you request a wire
transfer. This fee is currently being waived.
(3) The Fund's Adviser has contractually agreed to limit the management fees
paid by the Fund to 0.45% for the period from February 1, 2006 through
January 31, 2007.
Use the table at right to compare fees and expenses with those of other funds.
It illustrates the amount of fees and expenses you would pay, assuming the
following:
- $10,000 Investment
- 5% Annual Return
- redemption at the end of each period
- no changes in the Fund's operating expenses
Because this example is hypothetical and for comparison only, your actual costs
will be different.
EXPENSE EXAMPLE
VIRGINIA INTERMEDIATE 1 3 5 10
TAX-FREE FUND YEAR YEARS YEARS YEARS
--------------------- ---- ----- ----- -----
INSTITUTIONAL SHARES $67 $244 $435 $988
55
RISK/RETURN SUMMARY AND FUND EXPENSES WEST VIRGINIA INTERMEDIATE TAX-FREE FUND
RISK/RETURN SUMMARY
INVESTMENT OBJECTIVE The Fund seeks current income exempt from
federal and West Virginia income taxes
consistent with preservation of capital.
PRINCIPAL To pursue this goal, the Fund invests primarily
INVESTMENT STRATEGIES in municipal securities of West Virginia and
its political subdivisions that provide income
exempt from both federal personal income tax
and West Virginia personal income tax. The Fund
invests in West Virginia municipal securities
only if they are "investment grade" (rated at
the time of purchase in one of the four highest
rating categories by an NRSRO, or are
determined by the portfolio manager to be of
comparable quality). The Fund will maintain an
average duration of 3.5 to 8 years.
In managing the Fund's portfolio, the portfolio
manager uses a "top down" investment management
approach focusing on interest rates and credit
quality. The portfolio manager sets, and
continually adjusts, a target for the interest
rate sensitivity of the Fund's portfolio based
on expectations about interest rate movements.
The portfolio manager then selects securities
consistent with this target based on their
individual characteristics.
The Fund is non-diversified and, therefore, may
concentrate its investments in a limited number
of issuers. The Fund may also invest in certain
other debt securities in addition to those
described above. For a more complete
description of the various securities in which
the Fund may invest, please see Additional
Investment Strategies and Risks on page 83 or
consult the SAI.
PRINCIPAL Your investment in the Fund may be subject to
INVESTMENT RISKS the following principal risks:
INTEREST RATE RISK: The possibility that the
value of the Fund's investments will decline
due to an increase in interest rates. Interest
rate risk is generally high for longer-term
bonds and low for shorter-term bonds.
STATE SPECIFIC RISK: By concentrating its
investments in securities issued by West
Virginia and its political subdivisions, the
Fund may be more vulnerable to unfavorable
developments in West Virginia than funds that
are more geographically diversified.
CREDIT RISK: The possibility that an issuer
cannot make timely interest and principal
payments on its debt securities, such as bonds.
The lower a security's rating, the greater its
credit risk.
NON-DIVERSIFIED RISK: Because the Fund is
non-diversified, it may invest a greater
percentage of its assets in a particular issuer
compared with other funds. Accordingly, the
Fund's portfolio may be more sensitive to
changes in the market value of a single issuer
or industry.
CALL RISK: Call risk is the possibility that,
during periods of declining interest rates, a
bond issuer will "call" -- or repay --
higher-yielding bonds before their stated
maturity date. As a result, investors receive
their principal back and are typically forced
to reinvest it in bonds that pay lower interest
rates. Rapid changes in call rates can cause
bond prices and yields to be volatile.
ESTIMATED MATURITY RISK: The possibility that
an underlying mortgage holder will exercise its
right to pay principal on an obligation (such
as mortgage-related securities) later than
expected. This may happen when there is a rise
in interest rates. These events may lengthen
the duration (i.e. interest rate sensitivity)
and potentially reduce the value of these
securities.
INCOME RISK: The possibility that the Fund's
income will decline due to a decrease in
interest rates. Income risk is generally high
for shorter-term bonds and low for longer-term
bonds.
The Fund may trade securities actively, which
could increase its transaction costs (thereby
lowering its performance) and may increase the
amount of taxes that you pay. If the Fund
invests in securities with additional risks,
its share price volatility accordingly could be
greater and its performance lower. For more
information about these risks, including the
state-specific risk associated with the Fund,
please see Additional Investment Strategies and
Risks on page 83 or consult the SAI.
56
RISK/RETURN SUMMARY AND FUND EXPENSES WEST VIRGINIA INTERMEDIATE TAX-FREE FUND
The chart and table on this page show how the West Virginia Intermediate
Tax-Free Fund has performed and how its performance has varied from year to
year. The bar chart gives some indication of risk by showing changes in the
Fund's yearly performance to demonstrate that the Fund's value varied at
different times. The table below it compares the Fund's performance over time to
that of the Lehman Brothers 7-Year Municipal Bond Index, an unmanaged index
generally representative of the performance of municipal bonds with a minimum
credit of at least Baa, a maturity value of at least $5 million and a maturity
range of 6-8 years. Of course, past performance does not indicate how the Fund
will perform in the future.
PERFORMANCE BAR CHART AND TABLE
YEAR-BY-YEAR TOTAL RETURNS AS OF 12/31
FOR INSTITUTIONAL SHARES(1,2)
"Performance Bar Chart and Table"
The performance information shown above is based on a calendar year.
Best quarter: 4.77% 12/31/00
Worst quarter: -1.98% 6/30/04
AVERAGE ANNUAL TOTAL RETURNS
(for the periods ended December 31, 2005)(1,2)
SINCE INCEPTION
1 YEAR 5 YEARS 10 YEARS (12/1/93)
------ ------- -------- ---------------
INSTITUTIONAL SHARES(3)
RETURN BEFORE TAXES 2.22% 4.39% 4.76% 4.90%
RETURN AFTER TAXES ON DISTRIBUTIONS 2.12% 4.20% 4.59% 4.75%
RETURN AFTER TAXES ON DISTRIBUTIONS AND SALE OF FUND SHARES 2.91% 4.26% 4.63% 4.78%
LEHMAN BROTHERS 7-YEAR MUNICIPAL BOND INDEX
(reflects no deductions for fees, expenses, or taxes) 1.72% 5.13% 5.26% 5.39%(4)
(1) Both charts assume reinvestment of dividends and distributions. For current
performance information including the Fund's 30 day yield, call
1-800-228-1872.
(2) Performance data includes the performance of the OVB West Virginia
Tax-Exempt Income Portfolio for the period prior to its consolidation with
the BB&T West Virginia Intermediate Tax-Free Fund on July 23, 2001.
(3) After-tax returns are calculated using the historical highest individual
federal marginal income tax rates and do not reflect the impact of state
and local taxes. Actual after-tax returns depend on an investor's tax
situation and may differ from those shown. The after-tax returns shown are
not relevant to investors who hold their Fund shares through tax-deferred
arrangements such as 401(k) plans or individual retirement accounts.
(4) Since 11/30/93.
57
RISK/RETURN SUMMARY AND FUND EXPENSES WEST VIRGINIA INTERMEDIATE TAX-FREE FUND
As an investor in the West Virginia Intermediate Tax-Free Fund, you will pay the
following fees and expenses when you buy and hold shares. Shareholder
transaction fees are paid from your account. Annual Fund operating expenses are
paid out of Fund assets and are reflected in the share price.
FEES AND EXPENSES
SHAREHOLDER TRANSACTION EXPENSES INSTITUTIONAL
(FEES PAID BY YOU DIRECTLY)(1) SHARES
-------------------------------- -------------
Maximum Sales Charge (load) on
Purchases None
Maximum Deferred Sales Charge
(load) None
Redemption Fee (on shares sold
within 7 calendar days of
purchase)(2) 2.00%
ANNUAL FUND OPERATING EXPENSES INSTITUTIONAL
(FEES PAID FROM FUND ASSETS) SHARES
------------------------------ -------------
Management Fee 0.45%
Distribution and Service
(12b-1) Fee 0.00%
Other Expenses 0.22%
Total Fund Operating Expenses 0.67%
(1) Participating banks or other financial institutions may charge their
customers account fees for automatic investment, exchanges and other cash
management services provided in connection with investment in the Funds.
(2) A wire transfer fee of $7.00 may be deducted from the amount of your
redemption, regardless of the date of purchase, if you request a wire
transfer. This fee is currently being waived.
Use the table at right to compare fees and expenses with those of other Funds.
It illustrates the amount of fees and expenses you would pay, assuming the
following:
- $ 10,000 investment
- 5% annual return
- redemption at the end of each period
- no changes in the Fund's operating expenses
Because this example is hypothetical and for comparison only, your actual costs
will be different.
EXPENSE EXAMPLE
WEST VIRGINIA
INTERMEDIATE TAX-FREE 1 3 5 10
FUND YEAR YEARS YEARS YEARS
--------------------- ---- ----- ----- -----
INSTITUTIONAL SHARES $68 $214 $373 $835
58
RISK/RETURN SUMMARY AND FUND EXPENSES OVERVIEW
MONEY MARKET FUNDS
These Funds seek current income with liquidity
and stability of principal by investing
primarily in short-term debt securities. The
Funds seek to maintain a stable price of $1.00
per share.
WHO MAY WANT TO INVEST Consider investing in these Funds if you are:
- seeking preservation of capital
- investing short-term reserves
- willing to accept lower potential
returns in exchange for a higher
degree of safety
These Funds may not be appropriate if you are:
- seeking high total return
- pursuing a long-term goal or
investing for retirement
59
RISK/RETURN SUMMARY AND FUND EXPENSES PRIME MONEY MARKET FUND
RISK/RETURN SUMMARY
INVESTMENT OBJECTIVE The Fund seeks to provide as high a level of
current interest income as is consistent with
maintaining liquidity and stability of
principal.
PRINCIPAL To pursue this goal, the Fund invests only in
INVESTMENT STRATEGIES U.S. dollar-denominated, "high-quality" short-
term debt securities, including the following:
- Obligations issued or supported by the
credit of U.S. or foreign banks or savings
institutions with total assets in excess
of $1 billion (including obligations of
foreign branches of such banks);
- "High quality" commercial paper and other
obligations issued or guaranteed by U.S.
and foreign corporations and other issuers
including corporate debt securities that
the issuer or a third party, such as a
dealer or bank, must repay upon demand;
- Asset-backed securities;
- Securities issued or guaranteed as to
principal and interest by the U.S.
Government or by its agencies or
instrumentalities and related custodial
receipts;
- Securities issued or guaranteed by foreign
governments or their political
subdivisions, agencies or
instrumentalities;
- Funding agreements issued by highly-rated
U.S. insurance companies;
- Securities issued or guaranteed by state
or local government bodies; and
- Repurchase agreements relating to the
above instruments.
"High-quality" debt securities are those
obligations which, at the time of purchase, (i)
possess one of the two highest short-term
ratings from at least two NRSROs (for example,
commercial paper rated "A-1" or "A-2" by
Standard & Poor's Corporation and "P-1" or
"P-2" by Moody's Investors Service, Inc.); or
(ii) are single rated and have received one of
the two highest short-term ratings by an NRSRO;
or (iii) if unrated, are determined by the Sub-
Adviser to be of comparable quality.
When selecting securities for the Fund's
portfolio, the portfolio manager first
considers safety of principal and the quality
of an investment. The portfolio manager then
focuses on generating a high level of income.
The portfolio manager generally evaluates
investments based on interest rate sensitivity
selecting those securities whose maturities fit
the Fund's interest rate sensitivity target and
which the portfolio manager believes to be the
best relative values.
The Fund will maintain an average weighted
portfolio maturity of 90 days or less and will
limit the maturity of each security in its
portfolio to 397 days or less.
For a more complete description of the
securities in which the Fund may invest, please
see Additional Investment Strategies and Risks
on page 83 or consult the SAI.
PRINCIPAL Your investment in the Fund may be subject to
INVESTMENT RISKS the following principal risk:
INTEREST RATE RISK: The possibility that the
value of the Fund's investments will decline
due to an increase in interest rates or that
the Fund's yield will decrease due to a
decrease in interest rates. Interest rate risk
is generally high for longer-term debt
securities and low for shorter-term debt
securities.
CREDIT RISK: The possibility that an issuer
cannot make timely interest and principal
payments on its debt securities such as bonds.
The lower a security's rating, the greater its
credit risk.
PREPAYMENT/CALL RISK: If a significant number
of the mortgages underlying a mortgage-backed
bond are refinanced, the bond may be "prepaid."
Call risk is the possibility that, during
periods of declining interest rates, a bond
issuer will "call" -- or repay --
higher-yielding bonds before their stated
maturity date. In both cases, investors receive
their principal back and are typically forced
to reinvest it in bonds that pay lower interest
rates. Rapid changes in prepayment and call
rates can cause bond prices and yields to be
volatile.
FOREIGN INVESTMENT RISK: Foreign securities
make risks not typically associated with
investing in U.S. securities. Foreign
securities may be adversely affected by various
factors, including currency fluctuations and
social, economic or political instability.
For more information about this risk, please
see Additional Investment Strategies and Risks
on page 83.
AN INVESTMENT IN THE FUND IS NOT A DEPOSIT OR
AN OBLIGATION OF BRANCH BANKING AND TRUST
COMPANY, BB&T CORPORATION, THEIR AFFILIATES, OR
ANY BANK, AND IT IS NOT INSURED OR GUARANTEED
BY THE FEDERAL DEPOSIT INSURANCE CORPORATION OR
ANY OTHER GOVERNMENT AGENCY. ALTHOUGH THE FUND
SEEKS TO PRESERVE THE VALUE OF YOUR INVESTMENT
AT $1 PER SHARE, IT IS POSSIBLE TO LOSE MONEY
BY INVESTING IN THE FUND.
60
RISK/RETURN SUMMARY AND FUND EXPENSES PRIME MONEY MARKET FUND
The chart and table on this page show how the Prime Money Market Fund has
performed and how its performance has varied from year to year. The bar chart
gives some indication of risk by showing changes in the Fund's yearly
performance to demonstrate that the Fund's value varied at different times. The
table below it shows the Fund's performance over time. Of course, past
performance does not indicate how the Fund will perform in the future.
PERFORMANCE BAR CHART AND TABLE
YEAR-BY-YEAR TOTAL RETURNS AS OF 12/31 FOR INTITUTIONAL SHARES(1)
"Performance Bar Chart and Table"
The performance information shown above is based on a calendar year.
Best quarter: 1.56% 12/31/00
Worst quarter: 0.15% 6/30/04
AVERAGE ANNUAL TOTAL RETURNS
(for the periods ended December 31, 2005)(1)
SINCE INCEPTION
1 YEAR 5 YEARS (10/1/97)
------ ------- ---------------
INSTITUTIONAL SHARES 2.89% 1.94% 3.25%
(1) Both charts assume reinvestment of dividends and distributions.
As of December 31, 2005, the Fund's 7-day yield for Institutional Shares was
3.88%. Without fee waivers and expense reimbursements, the Fund's yield would
have been 3.77% for this time period. For current yield information on the Fund,
call 1-800-228-1872. The Fund's yield appears in The Wall Street Journal each
Thursday.
61
RISK/RETURN SUMMARY AND FUND EXPENSES PRIME MONEY MARKET FUND
As an investor in the Prime Money Market Fund, you will pay the following fees
and expenses when you buy and hold shares. Shareholder transaction fees are paid
from your account. Annual Fund operating expenses are paid out of Fund assets
and are reflected in the share price.
FEES AND EXPENSES
SHAREHOLDER TRANSACTION EXPENSES INSTITUTIONAL
(FEES PAID BY YOU DIRECTLY)(1) SHARES
-------------------------------- -------------
Maximum Sales Charge (load) on
Purchases None
Maximum Deferred Sales Charge
(load) None
Redemption Fee(2) 0%
ANNUAL FUND OPERATING EXPENSES INSTITUTIONAL
(FEES PAID FROM FUND ASSETS) SHARES
------------------------------ -------------
Management Fee(3) 0.40%
Distribution and Service
(12b-1) Fee 0.00%
Other Expenses 0.20%
Total Fund Operating Expenses 0.60%
Fee Waiver or Expense
Reimbursement(3) -0.11%
Net Fund Operating Expenses(3) 0.49%
(1) Participating banks or other financial institutions may charge their
customers account fees for automatic investment, exchanges and other cash
management services provided in connection with investment in the Funds.
(2) A wire transfer fee of $7.00 may be deducted from the amount of your
redemption if you request a wire transfer. This fee is currently being
waived.
(3) The Fund's Adviser has contractually agreed to limit the management fees
paid by the Fund to 0.29% for the period from February 1, 2006 through
January 31, 2007.
Use the table at right to compare fees and expenses with those of other funds.
It illustrates the amount of fees and expenses you would pay, assuming the
following:
- $10,000 Investment
- 5% Annual Return
- redemption at the end of each period
- no changes in the Fund's operating expenses
Because this example is hypothetical and for comparison only, your actual costs
will be different.
EXPENSE EXAMPLE
PRIME MONEY MARKET 1 3 5 10
FUND YEAR YEARS YEARS YEARS
------------------ ---- ----- ----- -----
INSTITUTIONAL SHARES $50 $181 $324 $740
62
RISK/RETURN SUMMARY AND FUND EXPENSES U.S. TREASURY MONEY MARKET FUND
RISK/RETURN SUMMARY
INVESTMENT OBJECTIVE The Fund seeks current income with liquidity
and stability of principal by investing
exclusively in short-term United States
dollar-denominated obligations issued or
guaranteed by the U.S. Treasury, some of which
may be subject to repurchase agreements.
PRINCIPAL INVESTMENT To pursue this goal, the Fund invests
STRATEGIES exclusively in short-term U.S. dollar-
denominated obligations issued by the U.S.
Treasury ( "U.S. Treasury Securities "), and
repurchase agreements collateralized by U.S.
Treasury Securities. Obligations purchased by
the Fund are limited to U.S. dollar-denominated
obligations which the Board of Trustees has
determined present minimal credit risks.
In managing the Fund, the portfolio manager
focuses on generating a high level of income.
The portfolio manager generally evaluates
investments based on interest rate sensitivity
selecting those securities whose maturities fit
the Fund's interest rate sensitivity target and
which the portfolio manager believes to be the
best relative values. Generally, the portfolio
manager buys and holds securities until their
maturity.
The Fund will maintain an average weighted
portfolio maturity of 90 days or less and will
limit the maturity of each security in its
portfolio to 397 days or less.
For a more complete description of the
securities in which the Fund may invest, please
see Additional Investment Strategies and Risks
on page 83 or consult the SAI.
PRINCIPAL INVESTMENT RISKS Your investment in the Fund may be subject to
the following principal risk:
INTEREST RATE RISK: The possibility that the
Fund's yield will decrease due to a decrease in
interest rates or that the value of the Fund's
investments will decline due to an increase in
interest rates. Interest rate risk is generally
high for longer-term debt securities and low
for shorter-term debt securities.
For more information about this risk, please
see Additional Investment Strategies and Risks
on page 83.
AN INVESTMENT IN THE FUND IS NOT A DEPOSIT OR
AN OBLIGATION OF BRANCH BANKING AND TRUST
COMPANY, BB&T CORPORATION, THEIR AFFILIATES, OR
ANY BANK, AND IT IS NOT INSURED OR GUARANTEED
BY THE FEDERAL DEPOSIT INSURANCE CORPORATION OR
ANY OTHER GOVERNMENT AGENCY. ALTHOUGH THE FUND
SEEKS TO PRESERVE THE VALUE OF YOUR INVESTMENT
AT $1 PER SHARE, IT IS POSSIBLE TO LOSE MONEY
BY INVESTING IN THE FUND.
63
RISK/RETURN SUMMARY AND FUND EXPENSES U.S. TREASURY MONEY MARKET FUND
The chart and table on this page show how the U.S. Treasury Money Market Fund
has performed and how its performance has varied from year to year. The bar
chart gives some indication of risk by showing changes in the Fund's yearly
performance to demonstrate that the Fund's value varied at different times. The
table below it shows the Fund's performance over time. Of course, past
performance does not indicate how the Fund will perform in the future.
PERFORMANCE BAR CHART AND TABLE
YEAR-BY-YEAR TOTAL RETURNS AS OF 12/31
FOR INSTITUTIONAL SHARES(1)
"Performance Bar Chart and Table"
The performance information shown above is based on a calendar year.
Best quarter: 1.48% 12/31/00
Worst quarter: 0.10% 12/31/03
AVERAGE ANNUAL TOTAL RETURNS
(for the periods ended December 31, 2005)(1)
SINCE INCEPTION
1 YEAR 5 YEARS 10 YEARS (10/5/92)
------ ------- -------- ---------------
INSTITUTIONAL SHARES 2.63% 1.73% 3.29% 3.39%
(1) Both charts assume reinvestment of dividends and distributions.
As of December 31, 2005, the Fund's 7-day yield for Institutional Shares
was 3.45%. Without fee waivers and expense reimbursements, the Fund's yield
would have been 3.33% for this time period. For current yield information
on the Fund, call 1-800-228-1872. The Fund's yield appears in The Wall
Street Journal each Thursday.
64
RISK/RETURN SUMMARY AND FUND EXPENSES U.S. TREASURY MONEY MARKET FUND
As an investor in the U.S. Treasury Money Market Fund, you will pay the
following fees and expenses when you buy and hold shares. Shareholder
transaction fees are paid from your account. Annual Fund operating expenses are
paid out of Fund assets and are reflected in the share price.
FEES AND EXPENSES
SHAREHOLDER TRANSACTION EXPENSES INSTITUTIONAL
(FEES PAID BY YOU DIRECTLY)(1) SHARES
-------------------------------- -------------
Maximum Sales Charge (load)
on Purchases None
Maximum Deferred Sales
Charge (load) None
Redemption Fee(2) 0%
ANNUAL FUND OPERATING EXPENSES INSTITUTIONAL
(FEES PAID FROM FUND ASSETS) SHARES
-------------------------------- -------------
Management Fee(3) 0.40%
Distribution and Service
(12b-1) Fee 0.00%
Other Expenses 0.20%
Total Fund Operating Expenses 0.60%
Fee Waiver or Expense
Reimbursement(3) -0.14%
Net Fund Operating Expenses(3) 0.46%
(1) Participating banks or other financial institutions may charge their
customer's account fees for automatic investment, exchanges and other cash
management services provided in connection with investment in the Funds.
(2) A wire transfer fee of $7.00 may be deducted from the amount of your
redemption if you request a wire transfer. This fee is currently being
waived.
(3) The Fund's Adviser has contractually agreed to limit the management fees
paid by the Fund to 0.26% for the period from February 1, 2006 through
January 31, 2007.
Use the table at right to compare fees and expenses with those of other funds.
It illustrates the amount of fees and expenses you would pay, assuming the
following:
- $10,000 investment
- 5% annual return
- redemption at the end of each period
- no changes in the Fund's operating expenses
Because this example is hypothetical and for comparison only, your actual costs
will be different.
EXPENSE EXAMPLE
U.S. TREASURY MONEY 1 3 5 10
MARKET FUND YEAR YEARS YEARS YEARS
------------------- ---- ----- ----- -----
INSTITUTIONAL SHARES $47 $178 $321 $737
65
RISK/RETURN SUMMARY AND FUND EXPENSES OVERVIEW
FUNDS OF FUNDS
These Funds invest substantially all of their
assets in Institutional shares of the BB&T
Funds described earlier in this prospectus.
WHO MAY WANT TO INVEST Consider investing in these Funds if you are:
- seeking to spread your investment
among many different mutual funds
that match your goals in one simple
package
- seeking investment professionals to
select and maintain a portfolio of
mutual funds for you
- seeking the benefits of asset
allocation and multiple levels of
risk reducing diversification
This Fund may not be appropriate if you are:
- pursuing a short-term goal or
investing emergency reserves
- uncomfortable with an investment that
will fluctuate in value
66
RISK/RETURN SUMMARY AND FUND EXPENSES CAPITAL MANAGER CONSERVATIVE GROWTH FUND
RISK/RETURN SUMMARY
INVESTMENT OBJECTIVE The Fund seeks capital appreciation and income
by investing primarily in a group of
diversified BB&T Funds which invest primarily
in equity and fixed income securities.
PRINCIPAL INVESTMENT To pursue this goal, the Fund allocates its
STRATEGIES assets among the Underlying Funds (listed
below) within predetermined strategy ranges set
forth below. The portfolio manager will make
allocation decisions according to his outlook
for the economy, financial markets and relative
market valuation of the Underlying Funds.
The Fund will invest 25% to 55% of its total
assets in Underlying Funds which invest
primarily in equity securities, 45% to 75% of
its total assets in Underlying Funds which
invest primarily in fixed income securities and
up to 20% of its total assets in Underlying
Funds which are money market funds. The Fund
will invest its assets in the following
Underlying Funds within the strategy ranges
(expressed as a percentage of the Fund's total
assets) indicated below:
INVESTMENT RANGE
UNDERLYING FUND (PERCENTAGE OF FUND ASSETS)
--------------- ---------------------------
STOCK FUNDS
Large Cap Fund* 0%-55%
Large Cap Growth Fund* 0%-55%
Mid Cap Value Fund 0%-30%
Mid Cap Growth Fund 0%-30%
Small Cap Fund* 0%-30%
International Equity Fund 0%-30%
BOND FUNDS
Short U.S. Government Fund 0%-75%
Intermediate U.S. Government Fund 0%-75%
Total Return Bond Fund* 0%-75%
MONEY MARKET FUNDS
Prime Money Market Funds 0%-20%
U.S. Treasury Money Market Fund 0%-20%
The Underlying Funds are described earlier in
this Prospectus.
For a more complete description of the various
securities in which the Fund may invest, please
see Additional Investment Strategies and Risks
on page 83 or consult the SAI.
* Prior to March 14, 2006, the BB&T Large Cap Fund was known as the BB&T
Large Cap Value Fund; prior to February 1, 2006, the BB&T Large Cap Value
Fund (currently the BB&T Large Cap Fund) and the BB&T Large Cap Growth Fund
were known as the BB&T Large Company Value Fund and the BB&T Large Company
Growth Fund, respectively; prior to November 21, 2005, the BB&T Small Cap
Fund was known as the BB&T Small Company Value Fund; and prior to June 1,
2005, the BB&T Total Return Bond Fund was known as the BB&T Intermediate
Corporate Bond Fund.
67
RISK/RETURN SUMMARY AND FUND EXPENSES CAPITAL MANAGER CONSERVATIVE GROWTH FUND
RISK/RETURN SUMMARY CONTINUED
PRINCIPAL INVESTMENT RISKS Your investment in the Fund may be subject to
the following principal risks:
INVESTING IN MUTUAL FUNDS: The Fund's
investments are concentrated in the Underlying
Funds, so the Fund's investment performance is
directly related to the performance of those
Underlying Funds. Before investing in the Fund,
investors should assess the risks associated
with the Underlying Funds in which the Fund
invests and the types of investments made by
those Underlying Funds. In addition, since the
Fund must allocate its investments among the
Underlying Funds, the Fund does not have the
same flexibility to invest as a mutual fund
without these constraints. As a result, you
could lose money by investing in the Fund,
particularly if there is a sudden decline in
the share prices of the Underlying Funds'
holdings.
FIXED INCOME FUNDS: The Fund invests in
Underlying Funds that invest primarily in fixed
income securities, which are subject to
interest rate and credit risk. Interest rate
risk is the potential for a decline in bond
prices due to rising interest rates. Credit
risk is the possibility that the issuer of a
fixed-income security will fail to make timely
payments of interest or principal, or that the
security will have its credit rating
downgraded.
EQUITY FUNDS: The Fund also invests in
Underlying Funds that invest primarily in
equity securities, which are subject to market
risk. Stocks and other equity securities
fluctuate in price, often based on factors
unrelated to the issuers' value, and such
fluctuations can be pronounced. Equity Funds
may also be subject to investment style risk
which is the risk that the particular market
segment on which a Fund focuses will
underperform other kinds of investments.
FOREIGN INVESTMENT RISK: Foreign securities
involve risks not typically associated with
investing in U.S. securities. Foreign
securities may be adversely affected by myriad
factors, including currency fluctuations and
social, economic or political instability.
The Fund may trade securities actively, which
could increase its transaction costs (thereby
lowering its performance) and may increase the
amount of taxes that you pay. If the Fund
invests in securities with additional risks,
its share price volatility accordingly could be
greater and its performance lower. For more
information about these risks, please see
Additional Investment Strategies and Risks on
page 83.
68
RISK/RETURN SUMMARY AND FUND EXPENSES CAPITAL MANAGER CONSERVATIVE GROWTH FUND
The chart and table on this page shows how the Capital Manager Conservative
Growth Fund has performed and how its performance has varied from year to year.
The bar chart gives some indication of risk by showing changes in the Fund's
yearly performance to demonstrate that the Fund's value varied at different
times. The table below it compares the Fund's performance over time to that of
the S&P 500(R) Index, a widely recognized, unmanaged index of common stocks, and
the Lehman Brothers Intermediate Government Bond Index, an unmanaged index
representative of the total return of government bonds with maturities of less
than 10 years. Of course, past performance does not indicate how the Fund will
perform in the future.
PERFORMANCE BAR CHART AND TABLE
YEAR-BY-YEAR TOTAL RETURNS AS OF 12/31
FOR INSTITUTIONAL SHARES(1)
"Performance Bar Chart and Table"
The performance information shown above is based on a calendar year.
Best quarter: 7.76% 12/31/98
Worst quarter: -5.60% 9/30/02
AVERAGE ANNUAL TOTAL RETURNS
(for the periods ended December 31, 2005)(1)
SINCE INCEPTION
1 YEAR 5 YEARS (10/2/97)
------ ------- ---------------
INSTITUTIONAL SHARES(2)
RETURN BEFORE TAXES 3.88% 2.51% 4.10%
RETURN AFTER TAXES ON DISTRIBUTIONS 2.91% 1.58% 2.74%
RETURN AFTER TAXES ON DISTRIBUTIONS AND SALE OF FUND SHARES 2.62% 1.62% 2.77%
S&P 500(R) INDEX
(reflects no deductions for fees, expenses, or taxes) 4.91% 0.54% 5.00%(3)
LEHMAN BROTHERS INTERMEDIATE GOVERNMENT BOND INDEX
(reflects no deductions for fees, expenses, or taxes) 1.68% 4.82% 5.52%(3)
(1) Both charts assume reinvestment of dividends and distributions.
(2) After-tax returns are calculated using the historical highest individual
federal marginal income tax rates and do not reflect the impact of state
and local taxes. Actual after-tax returns depend on an investor's tax
situation and may differ from those shown. The after-tax returns shown are
not relevant to investors who hold their Fund shares through tax-deferred
arrangements such as 401(k) plans or individual retirement accounts.
(3) Since 9/30/97.
69
RISK/RETURN SUMMARY AND FUND EXPENSES CAPITAL MANAGER CONSERVATIVE GROWTH FUND
As an investor in the Capital Manager Conservative Growth Fund, you will pay the
following fees and expenses when you buy and hold shares. Shareholder
transaction fees are paid from your account. Annual Fund operating expenses are
paid out of Fund assets and are reflected in the share price.
FEES AND EXPENSES
SHAREHOLDER TRANSACTION EXPENSES INSTITUTIONAL
(FEES PAID BY YOU DIRECTLY)(1) SHARES
-------------------------------- -------------
Maximum Sales Charge (load)
on Purchases None
Maximum Deferred Sales Charge (load) None
Redemption Fee (on shares sold within
7 calendar days of purchase)(2) 2.00%
ANNUAL FUND OPERATING EXPENSES INSTITUTIONAL
(FEES PAID FROM FUND ASSETS) SHARES
-------------------------------- -------------
Management Fee(3) 0.25%
Distribution and Service
(12b-1) Fee 0.00%
Other Expenses(3) 0.20%
Total Fund Operating Expenses(3,4) 0.45%
Fee Waiver or Expense
Reimbursement(3) -0.25%
Net Fund Operating Expenses(3,4) 0.20%
(1) Participating banks or other financial institutions may charge their
customers account fees for automatic investment, exchanges and other cash
management services provided in connection with investment in the Funds.
(2) A wire transfer fee of $7.00 may be deducted from the amount of your
redemption, regardless of the date of purchase, if you request a wire
transfer. This fee is currently being waived.
(3) The Fund's Adviser has contractually agreed to limit the management fees
paid by the Fund to 0.00% for the period from February 1, 2006 through
January 31, 2007. For the current fiscal year, total actual operating
expenses are expected to be less than the amount shown above because of
voluntary additional fee waivers or expense reimbursements. With these fee
waivers or reimbursements, the Fund's total actual operating expenses for
the Institutional Shares are expected to be 0.08%. These voluntary fee
waivers or expense reimbursement arrangements may be discontinued at any
time.
(4) In addition to the expenses shown above, if you buy and hold shares of the
Fund you will indirectly bear your pro rata share of fees and expenses
incurred by the Underlying Funds in which the Fund invests, so that the
investment returns of the Fund will be net of the expenses of the
Underlying Funds. After combining the total operating expenses of the Fund
with those of the Underlying Funds, the weighted average expense ratio
after all waivers and reimbursements is expected to be 0.87%, after
contractual expense waivers and reimbursements 0.99%, and prior to any
expense waivers and reimbursements 1.34%.
Use the table at right to compare fees and expenses with those of other funds.
It illustrates the amount of fees and expenses you would pay, assuming the
following:
- $10,000 investment
- 5% annual return
- redemption at the end of each period
- no changes in the fund's operating expenses
Because this example is hypothetical and for comparison only, your actual costs
will be different.
EXPENSE EXAMPLE
CAPITAL MANAGER
CONSERVATIVE 1 3 5 10
GROWTH FUND YEAR YEARS YEARS YEARS
--------------- ---- ----- ----- -----
INSTITUTIONAL SHARES $20 $119 $227 $543
70
RISK/RETURN SUMMARY AND FUND EXPENSES CAPITAL MANAGER MODERATE GROWTH FUND
RISK/RETURN SUMMARY
INVESTMENT OBJECTIVE The Fund seeks capital appreciation and,
secondarily, income by investing primarily in a
group of diversified BB&T Funds which invest
primarily in equity and fixed income
securities.
PRINCIPAL To pursue this goal, the Fund allocates its
INVESTMENT STRATEGIES assets among the Underlying Funds (listed
below) within predetermined strategy ranges set
forth below. The portfolio manager will make
allocation decisions according to his outlook
for the economy, financial markets and relative
market valuation of the Underlying Funds. The
Fund will invest 45% to 75% of its total assets
in Underlying Funds which invest primarily in
equity securities, 25% to 55% of its total
assets in Underlying Funds which invest
primarily in fixed income securities and up to
15% of its total assets in Underlying Funds
which are money market funds. The Fund will
invest its assets in the following Underlying
Funds within the strategy ranges (expressed as
a percentage of the Fund's total assets)
indicated below:
INVESTMENT
RANGE
(PERCENTAGE
OF FUND
UNDERLYING FUND ASSETS)
--------------- -----------
STOCK FUNDS
Large Cap Fund* 0%-75%
Large Cap Growth Fund* 0%-75%
Mid Cap Value Fund 0%-50%
Mid Cap Growth Fund 0%-50%
Small Cap Fund* 0%-50%
International Equity Fund 0%-50%
BOND FUNDS
Short U.S. Government Fund 0%-55%
Intermediate U.S. Government Fund 0%-55%
Total Return Bond Fund* 0%-55%
MONEY MARKET FUNDS
Prime Money Market Fund 0%-15%
U.S. Treasury Money Market Fund 0%-15%
The Underlying Funds are described earlier in
this Prospectus.
For a more complete description of the various
securities in which the Fund may invest, please
see Additional Investment Strategies and Risks
on page 83 or consult the SAI.
* Prior to March 14, 2006, the BB&T Large Cap Fund was known as the BB&T
Large Cap Value Fund; prior to February 1, 2006, the BB&T Large Cap Value
Fund (currently the BB&T Large Cap Fund) and the BB&T Large Cap Growth Fund
were known as the BB&T Large Company Value Fund and the BB&T Large Company
Growth Fund, respectively; prior to November 21, 2005, the BB&T Small Cap
Fund was known as the BB&T Small Company Value Fund; and prior to June 1,
2005, the BB&T Total Return Bond Fund was known as the BB&T Intermediate
Corporate Bond Fund.
71
RISK/RETURN SUMMARY AND FUND EXPENSES CAPITAL MANAGER MODERATE GROWTH FUND
RISK/RETURN SUMMARY
CONTINUED
PRINCIPAL Your investment in the Fund may be subject to
INVESTMENT RISKS the following principal risks:
INVESTING IN MUTUAL FUNDS: The Fund's
investments are concentrated in the Underlying
Funds, so the Fund's investment performance is
directly related to the performance of those
Underlying Funds. Before investing in the Fund,
investors should assess the risks associated
with the Underlying Funds in which the Fund
invests and the types of investments made by
those Underlying Funds. In addition, since the
Fund must allocate its investments among the
Underlying Funds, the Fund does not have the
same flexibility to invest as a mutual fund
without these constraints. As a result, you
could lose money by investing in the Fund,
particularly if there is a sudden decline in
the share prices of the Underlying Funds'
holdings.
EQUITY FUNDS: The Fund invests in Underlying
Funds that invest primarily in equity
securities, which are subject to market risk.
Stocks and other equity securities fluctuate in
price, often based on factors unrelated to the
issuers' value, and such fluctuations can be
pronounced. Equity Funds may also be subject to
investment style risk which is the risk that
the particular market segment on which a Fund
focuses will underperform other kinds of
investments.
FIXED INCOME FUNDS: The Fund also invests in
Underlying Funds that invest primarily in fixed
income securities, which are subject to
interest rate and credit risk. Interest rate
risk is the potential for a decline in bond
prices due to rising interest rates. Credit
risk is the possibility that the issuer of a
fixed-income security will fail to make timely
payments of interest or principal, or that the
security will have its credit rating
downgraded.
FOREIGN INVESTMENT RISK: Foreign securities
involve risks not typically associated with
investing in U.S. securities. Foreign
securities may be adversely affected by myriad
factors, including currency fluctuations and
social, economic or political instability.
The Fund may trade securities actively, which
could increase its transaction costs (thereby
lowering its performance) and may increase the
amount of taxes that you pay. If the Fund
invests in securities with additional risks,
its share price volatility accordingly could be
greater and its performance lower. For more
information about these risks, please see
Additional Investment Strategies and Risks on
page 83.
72
RISK/RETURN SUMMARY AND FUND EXPENSES CAPITAL MANAGER MODERATE GROWTH FUND
The chart and table on this page shows how the Capital Manager Moderate Growth
Fund has performed and how its performance has varied from year to year. The bar
chart gives some indication or risk by showing changes in the Fund's yearly
performance to demonstrate that the Fund's value varied at different times. The
table below it compares the Fund's performance over time to that of the S&P
500(R) Index, a widely recognized, unmanaged index of common stocks, and the
Lehman Brothers Intermediate Government Bond Index, an unmanaged index
representative of the total return of government bonds with maturities of less
than 10 years. Of course, past performance does not indicate how the Fund will
perform in the future.
PERFORMANCE BAR CHART AND TABLE
YEAR-BY-YEAR TOTAL RETURNS AS OF 12/31
FOR INSTITUTIONAL SHARES (1)
"Performance Bar Chart and Table"
The performance information shown above is based on a calendar year.
Best quarter: 11.74 12/31/98
Worst quarter: -10.39 9/30/02
AVERAGE ANNUAL TOTAL RETURNS
(for the periods ended
December 31, 2005)(1)
1 YEAR 5 YEARS SINCE INCEPTION
------ ------- ---------------
INSTITUTIONAL SHARES(2) (10/2/97)
RETURN BEFORE TAXES 4.90% 1.76% 3.82%
RETURN AFTER TAXES ON DISTRIBUTIONS 4.20% 1.13% 2.69%
RETURN AFTER TAXES ON DISTRIBUTIONS
AND SALE OF FUND SHARES 3.36% 1.19% 2.71%
S&P 500(R) INDEX
(reflects no deductions for fees,
expenses, or taxes) 4.91% 0.54% 5.00%(3)
LEHMAN BROTHERS INTERMEDIATE
GOVERNMENT BOND INDEX
(reflects no deductions for fees,
expenses, or taxes) 1.68% 4.82% 5.52%(3)
(1) Both charts assume reinvestment of dividends and distributions.
(2) After-tax returns are calculated using the historical highest individual
federal marginal income tax rates and do not reflect the impact of state
and local taxes. Actual after-tax returns depend on an investor's tax
situation and may differ from those shown. The after-tax returns shown are
not relevant to investors who hold their Fund shares through tax-deferred
arrangements such as 401(k) plans or individual retirement accounts.
(3) Since 9/30/97.
73
RISK/RETURN SUMMARY AND FUND EXPENSES CAPITAL MANAGER GROWTH FUND
As an investor in the Capital Manager Moderate Growth Fund, you will pay the
following fees and expenses when you buy and hold shares. Shareholder
transaction fees are paid from your account. Annual Fund operating expenses are
paid out of Fund assets and are reflected in the share price.
FEES AND EXPENSES
SHAREHOLDER TRANSACTION EXPENSES INSTITUTIONAL
(FEES PAID BY YOU DIRECTLY)(1) SHARES
-------------------------------- -------------
Maximum Sales Charge (load) on Purchases None
Maximum Deferred Sales Charge (load) None
Redemption Fee (on shares sold within
7 calendar days of purchase)(2) 2.00%
ANNUAL FUND OPERATING EXPENSES INSTITUTIONAL
(FEES PAID FROM FUND ASSETS) SHARES
------------------------------ -------------
Management Fee(3) 0.25%
Distribution and Service (12b-1) Fee 0.00%
Other Expenses(3) 0.24%
Total Fund Operating Expenses(3,4) 0.49%
Fee Waiver or Expense
Reimbursement(3) -0.25%
Net Fund Operating Expenses(3,4) 0.24%
(1) Participating banks or other financial institutions may charge their
customers account fees for automatic investment, exchanges and other cash
management services provided in connection with investment in the Funds.
(2) A wire transfer fee of $7.00 may be deducted from the amount of your
redemption, regardless of the date of purchase, if you request a wire
transfer. This fee is currently being waived.
(3) The Fund's Adviser has contractually agreed to limit the management fees
paid by the Fund to 0.00% for the period from February 1, 2006 through
January 31, 2007. For the current fiscal year, total actual operating
expenses are expected to be less than the amount shown above because of
voluntary additional fee waivers or expense reimbursements. With these fee
waivers or reimbursements, the Fund's total actual operating expenses for
the Institutional Shares are expected to be 0.12%. These voluntary fee
waivers or expense reimbursement arrangements may be discontinued at any
time.
(4) In addition to the expenses shown above, if you buy and hold shares of the
Fund you will indirectly bear your pro rata share of fees and expenses
incurred by the Underlying Funds in which the Fund invests, so that the
investment returns of the Fund will be net of the expenses of the
Underlying Funds. After combining the total operating expenses of the Fund
with those of the Underlying Funds, the weighted average expense ratio
after all waivers and reimbursements is expected to be 0.97%, after
contractual expense waivers and reimbursements 1.09%, and prior to any
expense waivers and reimbursements 1.43%.
Use the table at right to compare fees and expenses with those of other funds.
It illustrates the amount of fees and expenses you would pay, assuming the
following:
- $10,000 investment
- 5% annual return
- redemption at the end of each period
- no changes in the Fund's operating expenses
Because this example is hypothetical and for comparison only, your actual costs
will be different.
EXPENSE EXAMPLE
CAPITAL MANAGER 1 3 5 10
MODERATE GROWTH FUND YEAR YEARS YEARS YEARS
-------------------- ---- ----- ----- -----
INSTITUTIONAL SHARES $25 $132 $249 $592
74
RISK/RETURN SUMMARY AND FUND EXPENSES CAPITAL MANAGER GROWTH FUND
RISK/RETURN SUMMARY
INVESTMENT OBJECTIVE The Fund seeks capital appreciation by
investing primarily in a group of diversified
BB&T Funds which invest primarily in equity
securities.
PRINCIPAL INVESTMENT To pursue this goal, the Fund allocates its
STRATEGIES assets among the Underlying Funds (listed
below) within predetermined strategy ranges set
forth below. The portfolio manager will make
allocation decisions according to his outlook
for the economy, financial markets and relative
market valuation of the Underlying Funds.
The Fund will invest 60% to 90% of its total
assets in Underlying Funds which invest
primarily in equity securities, 10% to 40% of
its total assets in Underlying Funds which
invest primarily in fixed income securities and
up to 10% of its total assets in Underlying
Funds which are money market funds. The Fund
will invest its assets in the following
Underlying Funds within the strategy ranges
(expressed as a percentage of the Fund's total
assets) indicated below:
INVESTMENT RANGE
UNDERLYING FUND (PERCENTAGE OF FUND ASSETS)
--------------- ---------------------------
STOCK FUNDS
Large Cap Fund* 0%-90%
Large Cap Growth Fund* 0%-90%
Mid Cap Value Fund 0%-65%
Mid Cap Growth Fund 0%-65%
Small Cap Fund* 0%-65%
International Equity Fund 0%-65%
BOND FUNDS
Short U.S. Government Fund 0%-40%
Intermediate U.S. Government Fund 0%-40%
Total Return Bond Fund* 0%-40%
MONEY MARKET FUNDS
Prime Money Market Fund 0%-10%
U.S. Treasury Money Market Fund 0%-10%
The Underlying Funds are described earlier in
this Prospectus.
For a more complete description of the various
securities in which the Fund may invest, please
see Additional Investment Strategies and Risks
on page 83 or consult the SAI.
* Prior to March 14, 2006, the BB&T Large Cap Fund was known as the BB&T
Large Cap Value Fund; prior to February 1, 2006, the BB&T Large Cap Value
Fund (currently the BB&T Large Cap Fund) and the BB&T Large Cap Growth Fund
were known as the BB&T Large Company Value Fund and the BB&T Large Company
Growth Fund, respectively; prior to November 21, 2005, the BB&T Small Cap
Fund was known as the BB&T Small Company Value Fund; and prior to June 1,
2005, the BB&T Total Return Bond Fund was known as the BB&T Intermediate
Corporate Bond Fund.
75
RISK/RETURN SUMMARY AND FUND EXPENSES CAPITAL MANAGER GROWTH FUND
RISK/RETURN SUMMARY
CONTINUED
PRINCIPAL Your investment in the Fund may be subject to
INVESTMENT RISKS the following principal risks:
INVESTING IN MUTUAL FUNDS: The Fund's
investments are concentrated in the Underlying
Funds, so the Fund's investment performance is
directly related to the performance of those
Underlying Funds. Before investing in the Fund,
investors should assess the risks associated
with the Underlying Funds in which the Fund
invests and the types of investments made by
those Underlying Funds. In addition, since the
Fund must allocate its investments among the
Underlying Funds, the Fund does not have the
same flexibility to invest as a mutual fund
without these constraints. As a result, you
could lose money by investing in the Fund,
particularly if there is a sudden decline in
the share prices of the Underlying Funds'
holdings.
EQUITY FUNDS: The Fund invests in Underlying
Funds that invest primarily in equity
securities, which are subject to market risk.
Stocks and other equity securities fluctuate in
price, often based on factors unrelated to the
issuers' value, and such fluctuations can be
pronounced. Equity Funds may also be subject to
investment style risk which is the risk that
the particular market segment on which a Fund
focuses will underperform other kinds of
investments.
FIXED INCOME FUNDS: The Fund also invests in
Underlying Funds that invest primarily in fixed
income securities, which are subject to
interest rate and credit risk. Interest rate
risk is the potential for a decline in bond
prices due to rising interest rates. Credit
risk is the possibility that the issuer of a
fixed-income security will fail to make timely
payments of interest or principal, or that the
security will have its credit rating
downgraded.
FOREIGN INVESTMENT RISK: Foreign securities
involve risks not typically associated with
investing in U.S. securities. Foreign
securities may be adversely affected by myriad
factors, including currency fluctuations and
social, economic or political instability.
The Fund may trade securities actively, which
could increase its transaction costs (thereby
lowering its performance) and may increase the
amount of taxes that you pay. If the Fund
invests in securities with additional risks,
its share price volatility accordingly could be
greater and its performance lower. For more
information about these risks, please see
Additional Investment Strategies and Risks on
page 83.
76
RISK/RETURN SUMMARY AND FUND EXPENSES CAPITAL MANAGER GROWTH FUND
The chart and table on this page shows how the Capital Manager Growth Fund has
performed and how its performance has varied from year to year. The bar chart
gives some indication of risk by showing changes in the Fund's yearly
performance to demonstrate that the Fund's value varied at different times. The
table below it compares the Fund's performance over time to that of the S&P
500(R) Index, a widely recognized, unmanaged index of common stocks, and the
Lehman Brothers Intermediate Government Bond Index, an unmanaged index
representative of the total return of government bonds with maturities of less
than 10 years. Of course, past performance does not indicate how the Fund will
perform in the future.
PERFORMANCE BAR CHART AND TABLE
YEAR-BY-YEAR TOTAL RETURNS AS OF 12/31
FOR INSTITUTIONAL SHARES(1)
"Performance Bar Chart and Table"
The performance information shown above is based on a calendar year.
Best quarter: 14.77% 12/31/98
Worst quarter: -13.97% 9/30/02
AVERAGE ANNUAL TOTAL RETURNS
(for the periods ended December 31, 2005)(1)
SINCE
INCEPTION
1 YEAR 5 YEARS (10/2/97)
------ ------- ---------
INSTITUTIONAL SHARES(2)
RETURN BEFORE TAXES 5.69% 0.65% 3.31%
RETURN AFTER TAXES ON DISTRIBUTIONS 5.19% 0.23% 2.37%
RETURN AFTER TAXES ON DISTRIBUTIONS AND SALE OF
FUND SHARES 3.95% 0.39% 2.42%
S&P 500(R) INDEX
(reflects no deductions for fees, expenses, or taxes) 4.91% 0.54% 5.00%(3)
LEHMAN BROTHERS INTERMEDIATE GOVERNMENT BOND INDEX
(reflects no deductions for fees, expenses, or taxes) 1.68% 4.82% 5.52%(3)
(1) Both charts assume reinvestment of dividends and distributions.
(2) After-tax returns are calculated using the historical highest individual
federal marginal income tax rates and do not reflect the impact of state
and local taxes. Actual after-tax returns depend on an investor's tax
situation and may differ from those shown. The after-tax returns shown are
not relevant to investors who hold their Fund shares through tax-deferred
arrangements such as 401(k) plans or individual retirement accounts.
(3) Since 9/30/97.
77
RISK/RETURN SUMMARY AND FUND EXPENSES CAPITAL MANAGER GROWTH FUND
As an investor in the Capital Manager Growth Fund, you will pay the following
fees and expenses when you buy and hold shares. Shareholder transaction fees are
paid from your account. Annual Fund operating expenses are paid out of Fund
assets and are reflected in the share price.
FEES AND EXPENSES
SHAREHOLDER TRANSACTION EXPENSES INSTITUTIONAL
(FEES PAID BY YOU DIRECTLY)(1) SHARES
-------------------------------- -------------
Maximum Sales Charge (load) on Purchases None
Maximum Deferred Sales Charge (load) None
Redemption Fee (on shares sold within 7
calendar days of purchase)(2) 2.00%
ANNUAL FUND OPERATING EXPENSES INSTITUTIONAL
(FEES PAID FROM FUND ASSETS) SHARES
------------------------------ -------------
Management Fee(3) 0.25%
Distribution and Service (12b-1) Fee 0.00%
Other Expenses(3) 0.25%
Total Fund Operating Expenses(3,4) 0.50%
Fee Waiver or Expense
Reimbursement(3) -0.25%
Net Fund Operating Expenses(3,4) 0.25%
(1) Participating banks or other financial institutions may charge their
customers account fees for automatic investment, exchanges and other cash
management services provided in connection with investment in the Funds.
(2) A wire transfer fee of $7.00 may be deducted from the amount of your
redemption, regardless of the date of purchase, if you request a wire
transfer. This fee is currently being waived.
(3) The Fund's Adviser has contractually agreed to limit the management fees
paid by the Fund to 0.00% for the period from February 1, 2006 through
January 31, 2007. For the current fiscal year, total actual operating
expenses are expected to be less than the amount shown above because of
voluntary additional fee waivers or expense reimbursements. With these fee
waivers or reimbursements, the Fund's total actual operating expenses for
the Institutional Shares are expected to be 0.13%. These voluntary fee
waivers or expense reimbursement arrangements may be discontinued at any
time.
(4) In addition to the expenses shown above, if you buy and hold shares of the
Fund you will indirectly bear your pro rata share of fees and expenses
incurred by the Underlying Funds in which the Fund invests, so that the
investment returns of the Fund will be net of the expenses of the
Underlying Funds. After combining the total operating expenses of the Fund
with those of the Underlying Funds, the weighted average expense ratio
after all waivers and reimbursements is expected to be 1.02%, after
contractual expense waivers and reimbursements 1.14%, and prior to any
expense waivers and reimbursements 1.48%.
Use the table at right to compare fees and expenses with those of other funds.
It illustrates the amount of fees and expenses you would pay, assuming the
following:
- $ 10,000 Investment
- 5% Annual Return
- redemption at the end of each period
- no changes in the Fund's operating expenses
Because this example is hypothetical and for comparison only, your actual costs
will be different.
EXPENSE EXAMPLE
1 3 5 10
CAPITAL MANAGER GROWTH FUND YEAR YEARS YEARS YEARS
--------------------------- ---- ----- ----- -----
INSTITUTIONAL SHARES $26 $135 $255 $604
78
RISK/RETURN SUMMARY AND FUND EXPENSES CAPITAL MANAGER EQUITY FUND
RISK/RETURN SUMMARY
INVESTMENT OBJECTIVE The Fund seeks capital appreciation by
investing primarily in a group of diversified
BB&T Funds which invest primarily in equity
securities.
PRINCIPAL INVESTMENT To pursue this goal, the Fund allocates its
STRATEGIES assets among the Underlying Funds (listed
below) within predetermined strategy ranges set
forth below. The portfolio manager will make
allocation decisions according to his outlook
for the economy, financial markets and relative
market valuation of the Underlying Funds.
The Fund will invest up to 100% of its total
assets in Underlying Funds which invest
primarily in equity securities and up to 10% of
its total assets in Underlying Funds which
invest primarily in fixed income securities and
money market funds. The Fund will invest its
assets in the following Underlying Funds within
the strategy ranges (expressed as a percentage
of the Fund's total assets) indicated below:
INVESTMENT RANGE
UNDERLYING FUND (PERCENTAGE OF FUND ASSETS)
--------------- ---------------------------
STOCK FUNDS
Large Cap Fund* 0%-90%
Large Cap Growth Fund* 0%-90%
Mid Cap Value Fund 0%-65%
Mid Cap Growth Fund 0%-65%
Small Cap Fund* 0%-65%
International Equity Fund 0%-65%
BOND FUNDS
Short U.S. Government Fund 0%-40%
Intermediate U.S. Government Fund 0%-40%
Total Return Bond Fund* 0%-40%
MONEY MARKET FUNDS
Prime Money Market Fund 0%-10%
U.S. Treasury Money Market Fund 0%-10%
The Underlying Funds are described earlier in
this Prospectus.
For a more complete description of the various
securities in which the Fund may invest, please
see Additional Investment Strategies and Risks
on page 83 or consult the SAI.
* Prior to March 14, 2006, the BB&T Large Cap Fund was known as the BB&T
Large Cap Value Fund; prior to February 1, 2006, the BB&T Large Cap Value
Fund (currently the BB&T Large Cap Fund) and the BB&T Large Cap Growth Fund
were known as the BB&T Large Company Value Fund and the BB&T Large Company
Growth Fund, respectively; prior to November 21, 2005, the BB&T Small Cap
Fund was known as the BB&T Small Company Value Fund; and prior to June 1,
2005, the BB&T Total Return Bond Fund was known as the BB&T Intermediate
Corporate Bond Fund.
79
RISK/RETURN SUMMARY AND FUND EXPENSES CAPITAL MANAGER EQUITY FUND
RISK/RETURN SUMMARY
CONTINUED
PRINCIPAL INVESTMENT RISKS Your investment in the Fund may be subject to
the following principal risks:
INVESTING IN MUTUAL FUNDS: The Fund's
investments are concentrated in the Underlying
Funds, so the Fund's investment performance is
directly related to the performance of those
Underlying Funds. Before investing in the Fund,
investors should assess the risks associated
with the Underlying Funds in which the Fund
invests and the types of investments made by
those Underlying Funds. In addition, since the
Fund must allocate its investments among the
Underlying Funds, the Fund does not have the
same flexibility to invest as a mutual fund
without these constraints. As a result, you
could lose money by investing in the Fund,
particularly if there is a sudden decline in
the share prices of the Underlying Funds'
holdings.
EQUITY FUNDS: The Fund invests in Underlying
Funds that invest primarily in equity
securities, which are subject to market risk.
Stocks and other equity securities fluctuate in
price, often based on factors unrelated to the
issuers' value, and such fluctuations can be
pronounced. Equity Funds may also be subject to
investment style risk which is the risk that
the particular market segment on which a Fund
focuses will underperform other kinds of
investments.
FIXED INCOME FUNDS: The Fund also invests in
Underlying Funds that invest primarily in fixed
income securities, which are subject to
interest rate and credit risk. Interest rate
risk is the potential for a decline in bond
prices due to rising interest rates. Credit
risk is the possibility that the issuer of a
fixed-income security will fail to make timely
payments of interest or principal, or that the
security will have its credit rating
downgraded.
FOREIGN INVESTMENT RISK: Foreign securities
involve risks not typically associated with
investing in U.S. securities. Foreign
securities may be adversely affected by myriad
factors, including currency fluctuations and
social, economic or political instability.
The Fund may trade securities actively, which
could increase its transaction costs (thereby
lowering its performance) and may increase the
amount of taxes that you pay. If the Fund
invests in securities with additional risks,
its share price volatility accordingly could be
greater and its performance lower. For more
information about these risks, please see
Additional Investment Strategies and Risks on
page 83.
80
RISK/RETURN SUMMARY AND FUND EXPENSES CAPITAL MANAGER EQUITY FUND
The chart and table on this page shows how the Capital Manager Equity Fund has
performed and how its performance has varied from year to year. The bar chart
gives some indication of risk by showing changes in the Fund's yearly
performance to demonstrate that the Fund's value varied at different times. The
table below it compares the Fund's performance over time to that of the S&P
500(R) Index, a widely recognized, unmanaged index of common stocks. Of course,
past performance does not indicate how the Fund will perform in the future.
PERFORMANCE BAR CHART AND TABLE
YEAR-BY-YEAR TOTAL RETURNS AS OF 12/31
FOR INSTITUTIONAL SHARES(1)
"Performance Bar Chart and Table"
The performance information shown above is based on a calendar year.
Best quarter: 13.91% 6/30/03
Worst quarter: -16.31% 9/30/02
AVERAGE ANNUAL TOTAL RETURNS
(for the periods ended December 31, 2005)(1)
SINCE
INCEPTION
1 YEAR (3/19/01)
------ ---------
INSTITUTIONAL SHARES(2)
RETURN BEFORE TAXES 7.12% 2.84%
RETURN AFTER TAXES ON DISTRIBUTIONS 6.19% 2.59%
RETURN AFTER TAXES ON DISTRIBUTIONS AND SALE OF
FUND SHARES 4.93% 2.33%
S&P 500(R) INDEX
(reflects no deductions for fees, expenses, or taxes) 4.91% 3.28%(3)
(1) Both charts assume reinvestment of dividends and distributions.
(2) After-tax returns are calculated using the historical highest individual
federal marginal income tax rates and do not reflect the impact of state
and local taxes. Actual after-tax returns depend on an investor's tax
situation and may differ from those shown. The after-tax returns shown are
not relevant to investors who hold their Fund shares through tax-deferred
arrangements such as 401(k) plans or individual retirement accounts.
(3) Since 3/31/01.
81
RISK/RETURN SUMMARY AND FUND EXPENSES CAPITAL MANAGER EQUITY FUND
As an investor in the Capital Manager Equity Fund, you will pay the following
fees and expenses when you buy and hold shares. Shareholder transaction fees are
paid from your account. Annual Fund operating expenses are paid out of Fund
assets and are reflected in the share price.
FEES AND EXPENSES
SHAREHOLDER TRANSACTION EXPENSES INSTITUTIONAL
(FEES PAID BY YOU DIRECTLY)(1) SHARES
-------------------------------- -------------
Maximum Sales Charge (load) on Purchases None
Maximum Deferred Sales Charge (load) None
Redemption Fee (on shares sold within 7
calendar days of purchase)(2) 2.00%
ANNUAL FUND OPERATING EXPENSES INSTITUTIONAL
(FEES PAID FROM FUND ASSETS) SHARES
-------------------------------- -------------
Management Fee(3) 0.25%
Distribution and Service (12b-1) Fee 0.00%
Other Expenses(3) 0.23%
Total Fund Operating Expenses(3, 4) 0.48%
Fee Waiver or Expense
Reimbursement(3) -0.25%
Net Fund Operating Expenses(3, 4) 0.23%
(1) Participating banks or other financial institutions may charge their
customers account fees for automatic investment, exchanges and other cash
management services provided in connection with investment in the Funds.
(2) A wire transfer fee of $7.00 may be deducted from the amount of your
redemption, regardless of the date of purchase, if you request a wire
transfer. This fee is currently being waived.
(3) The Fund's Adviser has contractually agreed to limit the management fees
paid by the Fund to 0.00% for the period from February 1, 2006 through
January 31, 2007. For the current fiscal year, total actual operating
expenses are expected to be less than the amount shown above because of
voluntary additional fee waivers or expense reimbursements. With these fee
waivers or reimbursements, the Fund's total actual operating expenses for
the Institutional Shares are expected to be 0.11%. These voluntary fee
waivers or expense reimbursement arrangements may be discontinued at any
time.
(4) In addition to the expenses shown above, if you buy and hold shares of the
Fund you will indirectly bear your pro rata share of fees and expenses
incurred by the Underlying Funds in which the Fund invests, so that the
investment returns of the Fund will be net of the expenses of the
Underlying Funds. After combining the total operating expenses of the Fund
with those of the Underlying Funds, the weighted average expense ratio
after all waivers and reimbursements is expected to be 1.00%, after
contractual expense waivers and reimbursements 1.12%, and prior to any
expense waivers and reimbursements 1.46%.
Use the table at right to compare fees and expenses with those of other funds.
It illustrates the amount of fees and expenses you would pay, assuming the
following:
- $10,000 investment
- 5% annual return
- redemption at the end of each period
- no changes in the Fund's operating expenses
Because this example is hypothetical and for comparison only, your actual costs
will be different.
EXPENSE EXAMPLE
1 3 5 10
CAPITAL MANAGER EQUITY FUND YEAR YEARS YEARS YEARS
--------------------------- ---- ----- ----- -----
INSTITUTIONAL SHARES $24 $129 $244 $580
82
ADDITIONAL INVESTMENT STRATEGIES AND RISKS
STOCK FUNDS
LARGE CAP FUND. Under normal circumstances, the Fund will invest at least 80% of
its net assets plus borrowings in the securities of large companies. This policy
will not be changed without 60 days' advance notice to shareholders. Large
companies are those companies with market capitalizations within the range of
those companies in the Russell 1000(R) Value Index. These stocks, which may
include common stock, preferred stock, warrants, or debt instruments that are
convertible to common stock.
LARGE CAP GROWTH FUND. Under normal circumstances, the Fund will invest at least
80% of its net assets plus borrowings in the securities of large companies. This
policy will not be changed without 60 days' advance notice to shareholders.
Large companies are those companies with market capitalizations within the range
of those companies in the Russell 1000(R) Growth Index.
MID CAP VALUE FUND. Under normal circumstances, the Fund will invest at least
80% of its net assets plus borrowings in the securities of middle capitalization
companies. This policy will not be changed without 60 days' advance notice to
shareholders. Middle capitalization companies are those companies with market
capitalizations within the range of those companies in the Russell Midcap(R)
Value Index.
MID CAP GROWTH FUND. Under normal circumstances, the Fund will invest at least
80% of its net assets plus borrowings in the securities of middle capitalization
companies. This policy will not be changed without 60 days' advance notice to
shareholders. Middle capitalization companies are those companies with market
capitalizations within the range of those companies in the Russell Midcap(R)
Growth Index.
SMALL CAP FUND. Under normal circumstances, the Fund will invest at least 80% of
its net assets plus borrowings in the common stocks of small companies with
market capitalization less than $3 billion. This policy will not be changed
without 60 days' advance notice to shareholders.
INTERNATIONAL EQUITY FUND. The Fund normally invests at least 65% of its total
assets in the equity securities of foreign issuers. Under normal circumstances,
the Fund will invest at least 80% of its net assets plus borrowings in equity
securities. This policy will not be changed without 60 days advance notice to
shareholders. The Fund invests primarily in equity securities of issuers located
throughout the world.
From time to time the Fund may invest more than 25% of its total assets in the
securities of issuers located in countries such as France, Germany, Japan, and
the United Kingdom.
The Fund may invest in both sponsored and unsponsored American Depositary
Receipts ("ADRs"), European Depositary Receipts ("EDRs"), Global Depositary
Receipts ("GDRs") and other similar global instruments.
The Fund may also invest its assets in equity securities of issuers located in
countries with emerging economies or securities markets. The Fund intends to
limit its investment in such countries to 20% of its total assets. The Fund may
(but is not required to) use forward foreign currency exchange contracts to
hedge against movements in the value of foreign currencies (including the Euro)
relative to the U.S. dollar in connection with specific portfolio transactions
or with respect to portfolio positions.
SPECIAL OPPORTUNITIES EQUITY FUND. Under normal circumstances, the Fund will
invest at least 80% of its net assets plus borrowings in equity securities. This
policy will not be changed without 60 days' advance notice to shareholders.
EQUITY INCOME FUND. Under normal circumstances, the Fund will invest at least
80% of its net assets plus borrowings in equity securities. This policy will not
be changed without 60 days' advance notice to shareholders.
ALL STOCK FUNDS (EXCEPT THE INTERNATIONAL EQUITY FUND): FOREIGN SECURITIES. Each
Fund may invest in foreign securities through the purchase of ADRs or the
purchase of foreign securities on the New York Stock Exchange. However, a Fund
will not do so if immediately after a purchase and as a result of the purchase
the total value of foreign securities owned by the Fund would exceed 25% of the
value of its total assets.
83
ADDITIONAL INVESTMENT STRATEGIES AND RISKS
BOND FUNDS
SHORT U.S. GOVERNMENT FUND. Under normal circumstances, the Fund will invest at
least 80% of its net assets plus borrowings in securities issued or guaranteed
by the U.S. Government or its agencies and instrumentalities. This policy will
not be changed without 60 days' advance notice to shareholders. The Fund may
invest up to 20% of its net assets in bonds, notes and debentures of corporate
issuers. The Fund invests in bonds, notes and debentures only if they are high
grade (rated at time of purchase in one of the three highest rating categories
by an NRSRO), or are determined by the portfolio manager to be of comparable
quality.
The Fund may also invest in short-term obligations, commercial bonds and the
shares of other investment companies.
INTERMEDIATE U.S. GOVERNMENT FUND. Under normal circumstances, the Fund will
invest at least 80% of its net assets plus borrowings in bonds issued or
guaranteed by the U.S. Government or its agencies and instrumentalities. This
policy will not be changed without 60 days' advance notice to shareholders.
Bonds for this purpose include Treasury bills (maturities of less than one
year), bonds (maturities of ten years or more) and notes (maturities of one to
ten years) of the U.S. Government. The Fund may invest up to 20% of its net
assets in bonds, notes and debentures of corporate issuers. The Fund invests in
bonds, notes and debentures only if they are high grade (rated at time of
purchase in one of the three highest rating categories by an NRSRO), or are
determined by the portfolio manager to be of comparable quality.
The Fund may also invest in short-term obligations, commercial bonds and the
shares of other investment companies.
TOTAL RETURN BOND FUND. Under normal market conditions, the Fund will invest at
least 80% of its assets in a diversified portfolio of bonds, including:
securities issued or guaranteed by the U.S. government, its agencies or
instrumentalities, corporate bonds, asset-backed securities, commercial
mortgage-backed securities and convertible securities. This policy will not be
changed without 60 days' advance notice to shareholders. The Fund may invest up
to 25% of its total assets in bonds that are below investment grade and/or
foreign and emerging market bonds.
The Fund may also invest in short-term obligations, commercial bonds and the
shares of other investment companies.
ALL TAXABLE BOND FUNDS. Mortgage-related securities purchased by the Taxable
Bond Funds will be either (i) issued by U.S. Government-owned or sponsored
corporations or (ii) rated in the highest category by an NRSRO at the time of
purchase (for example, rated Aaa by Moody's or AAA by S&P), or, if not rated,
are of comparable quality as determined by the Adviser.
KENTUCKY INTERMEDIATE TAX-FREE FUND. As a matter of fundamental policy, the Fund
will invest, under normal market conditions, at least 80% of its net assets plus
borrowings in investments the income from which is exempt from federal personal
income tax and Kentucky personal income tax ("Kentucky Tax-Exempt Obligations").
For temporary defensive purposes, the Fund may increase its holdings in
tax-exempt obligations other than Kentucky tax-exempt obligations to over 20% of
its total assets.
MARYLAND INTERMEDIATE TAX-FREE FUND. As a matter of fundamental policy, the Fund
will invest, under normal market conditions, at least 80% of its net assets plus
borrowings in investments the income from which is exempt from federal income
tax and Maryland personal income tax ("Maryland Tax-Exempt Obligations").
For temporary defensive purposes, the Fund may increase its holdings in
tax-exempt obligations other than Maryland tax-exempt obligations to over 20% of
its total assets.
NORTH CAROLINA INTERMEDIATE TAX-FREE FUND. As a matter of fundamental policy,
the Fund will invest, under normal market conditions, at least 80% of its net
assets plus borrowings in investments the income from which is exempt from
federal income tax and North Carolina personal income tax. ("North Carolina
Tax-Exempt Obligations").
For temporary defensive purposes, the Fund may increase its total holdings in
tax-exempt obligations other than North Carolina tax-exempt obligations to over
20% of its total assets.
SOUTH CAROLINA INTERMEDIATE TAX-FREE FUND. As a matter of fundamental policy,
the Fund will invest, under normal market conditions, at least 80% of its net
assets plus borrowings in investments the income from which is exempt from
federal income tax and South Carolina personal income tax. ("South Carolina
Tax-Exempt Obligations").
For temporary defensive purposes, the Fund may increase its holdings in
tax-exempt obligations other than South Carolina tax-exempt obligations to over
20% of its total assets.
84
ADDITIONAL INVESTMENT STRATEGIES AND RISKS
VIRGINIA INTERMEDIATE TAX-FREE FUND. As a matter of fundamental policy, the Fund
will invest, under normal market conditions, at least 80% of its net assets plus
borrowings in investments the income from which is exempt from federal income
tax and Virginia personal income tax. ("Virginia Tax-Exempt Obligations").
For temporary defensive purposes, the Fund may increase its holdings in
tax-exempt obligations other than Virginia tax-exempt obligations to over 20% of
its total assets.
WEST VIRGINIA INTERMEDIATE TAX-FREE FUND. As a matter of fundamental policy, the
Fund will invest, under normal market conditions, at least 80% of its net assets
plus borrowings in investments the income from which is exempt from federal
income tax and West Virginia personal income tax ("West Virginia Tax-Exempt
Obligations").
For temporary defensive purposes, the Fund may increase its holdings in
tax-exempt obligations other than West Virginia tax-exempt obligations to over
20% of its total assets.
ALL TAX-FREE BOND FUNDS. Each Fund will invest in Tax-Exempt Obligations which
are rated at the time of purchase in one of the four highest categories by an
NRSRO in the case of bonds; one of the two highest categories by an NRSRO in the
case of notes; rated "SP-1" or higher by S&P or "MIG-2" or higher by Moody's or
rated at a comparable level of quality by another NRSRO in the case of
tax-exempt commercial paper; or rated "VMIG-1" or higher by Moody's or rated at
a comparable level of quality by another NRSRO in the case of variable rate
demand obligations or, if unrated, are determined by the portfolio manager to be
of comparable quality.
Each Fund may invest up to 20% of its net assets in taxable obligations or debt
securities, the interest income from which may be subject to the federal
alternative minimum tax for individual shareholders.
ALL BOND FUNDS: PORTFOLIO MATURITY. Certain debt securities such as, but not
limited to, mortgage backed securities, CMOs and asset-backed securities, as
well as securities subject to prepayment of principal prior to the stated
maturity date, are expected to be repaid prior to their stated maturity dates.
As a result, the effective maturity of these securities is expected to be
shorter than the stated maturity. For purposes of calculating a Fund's weighted
average portfolio maturity, the effective maturity of these securities will be
used.
MONEY MARKET FUNDS
PRIME MONEY MARKET FUND. The Fund will not make investments that will result in
the concentration of its investments in the securities of issuers primarily
engaged in the same industry. Government securities, municipal securities and
bank instruments will not be deemed to constitute an industry. Bank instruments
include bank accounts, time deposits, certificates of deposit, and banker's
acceptances. As a matter of non-fundamental policy, instruments of foreign banks
will not be considered bank instruments for purposes of the above-described
exclusion from the above industry concentration limit.
The Fund may invest in debt obligations of foreign corporations and banks
including Eurodollar Time Deposits and Yankee Certificates of Deposit.
The Prime Money Market Fund may purchase securities subject to credit
enhancement. Credit enhancement consists of an arrangement in which a company
agrees to pay amounts due on a fixed income security if the issuer defaults. In
some cases the company providing credit enhancement makes all payments directly
to the security holders and receives reimbursement from the issuer. Normally,
the credit enhancer has greater financial resources and liquidity than the
issuer. For this reason, the Sub-Adviser usually evaluates the credit risk of a
fixed income security based solely upon its credit enhancement.
The Fund will only purchase securities that present minimal credit risk as
determined by the Adviser pursuant to guidelines approved by the Board of
Trustees of BB&T Funds. Securities purchased by the Fund (or the issuers of such
securities) will be Eligible Securities. Applicable Eligible Securities are:
- Securities that have short-term debt ratings at the time of purchase
(or which are guaranteed or in some cases otherwise supported by
guarantees or other credit supports with such ratings) in the two
highest rating categories by at least two unaffiliated NRSROs (or one
NRSRO if the security or guarantee was rated by only one NRSRO);
85
ADDITIONAL INVESTMENT STRATEGIES AND RISKS
- securities that are issued or guaranteed by a person with such
ratings;
- securities without such short-term ratings that have been determined
to be of comparable quality by the Adviser pursuant to guidelines
approved by the Board of Trustees; or
- shares of other open-end investment companies that invest in the type
of obligations in which the Fund may invest.
FUNDS OF FUNDS
The Funds of Funds' net asset values will fluctuate with changes in the equity
markets and the value of the Underlying Funds, which invest in growth and income
stocks, foreign securities, debt securities, and cash and cash equivalents. With
their remaining assets, the Funds of Funds may make direct investments in
government securities and short-term paper. The Funds of Funds and the
Underlying Funds may also hold cash for liquidity purposes.
CAPITAL MANAGER EQUITY FUND. Under normal circumstances, the Fund will invest at
least 80% of its net assets plus borrowings in Underlying Funds that invest
primarily in equity securities. This policy will not be changed without 60 days'
advance notice to shareholders.
ALL STOCK FUNDS, BOND FUNDS AND FUNDS OF FUNDS
TEMPORARY DEFENSIVE MEASURES. If deemed appropriate under the circumstances,
each Stock Fund, Bond Fund, and Fund of Funds may increase its holdings in
short-term obligations to up to 100% of its total assets. Under normal market
conditions, the Stock Funds will limit their investment in short-term
obligations to 20% of its total assets. Such short-term obligations may include
money market instruments and repurchase agreements.
ALL FUNDS
FUNDAMENTAL POLICIES. Any of the policies identified above as fundamental may
only be changed with respect to a particular Fund by a vote of a majority of the
outstanding shares of that Fund.
86
ADDITIONAL INVESTMENT STRATEGIES AND RISKS
INVESTMENT PRACTICES
The Funds invest in a variety of securities and employ a number of investment
techniques. Each security and technique involves certain risks. The following
table describes the securities and techniques the Funds use, as well as the main
risks they pose. Equity securities are subject mainly to market risk. Fixed
income securities are primarily influenced by market, credit and prepayment
risks, although certain securities may be subject to additional risks.
FOLLOWING THE TABLE IS A MORE COMPLETE DISCUSSION OF RISK. You may also consult
the SAI for additional details regarding these and other permissible
investments.
FUND NAME FUND CODE
--------- ---------
Large Cap Fund 1
Large Cap Growth Fund 2
Mid Cap Value Fund 3
Mid Cap Growth Fund 4
Small Cap Fund 5
International Equity Fund 6
Special Opportunities Equity Fund 7
Equity Income Fund 8
Short U.S. Government Fund 9
Intermediate U.S. Government Fund 10
Total Return Bond Fund 11
Kentucky Intermediate Tax-Free Fund 12
Maryland Intermediate Tax-Free Fund 13
North Carolina Intermediate Tax-Free Fund 14
South Carolina Intermediate Tax-Free Fund 15
Virginia Intermediate Tax-Free Fund 16
West Virginia Intermediate Tax-Free Fund 17
Prime Money Market Fund 18
U.S. Treasury Money Market Fund 19
87
ADDITIONAL INVESTMENT STRATEGIES AND RISKS
INSTRUMENT FUND CODE RISK TYPE
---------- -------------- ------------------
AMERICAN DEPOSITARY RECEIPTS ("ADRS"): ADRs are foreign 1-8 Market
shares of a company held by a U.S. bank that issues a Political
receipt evidencing ownership. Foreign Investment
ASSET-BACKED SECURITIES: Securities secured by company 9-11, 18 Pre-payment
receivables, home equity loans, truck and auto loans, Market
leases, credit card receivables and other securities Credit
backed by other types of receivables or other assets. Interest Rate
Regulatory
Liquidity
Estimated Maturity
BANKERS' ACCEPTANCES: Bills of exchange or time drafts 3, 4, 8-11, 18 Credit
drawn on and accepted by a commercial bank. Maturities are Liquidity
generally six months or less. Market
Interest Rate
BANK INSTRUMENTS: Unsecured interest bearing deposits with 18 Credit
banks. Bank instruments include bank accounts, time Liquidity
deposits, certificates of deposit and banker's Market
acceptances. Yankee instruments are denominated in U.S. Interest Rate
dollars and issued by U.S. branches of foreign banks.
Eurodollar instruments are denominated in U.S. dollars and
issued by non-U.S. branches of U.S. branches of U.S. or
foreign banks. For purposes of the Prime Money Market
Fund's concentration limitation, bank instruments also
include fixed income securities credit enhanced by a bank.
BONDS: Interest-bearing or discounted government or 6, 8-19 Market
corporate securities that obligate the issuer to pay the Credit
bondholder a specified sum of money, usually at specific Interest Rate
intervals, and to repay the principal amount of the loan
at maturity.
CALL AND PUT OPTIONS: A call option gives the buyer the 1-8 Management
right to buy, and obligates the seller of the option to Liquidity
sell, a security at a specified price. A put option gives Credit
the buyer the right to sell, and obligates the seller of Market
the option to buy a security at a specified price. The Leverage
Funds will sell only covered call and secured put options.
CERTIFICATES OF DEPOSIT: Negotiable instruments with a 1-8, 18 Market
stated maturity. Credit
Liquidity
Interest Rate
COMMERCIAL PAPER: Secured and unsecured short-term 1-11, 18 Credit
promissory notes issued by corporations and other Liquidity
entities. Maturities generally vary from a few days to Market
nine months. Interest Rate
COMMON STOCK: Shares of ownership of a company. 1-8 Market
CONVERTIBLE SECURITIES: Bonds or preferred stock that 1-8, 11 Market
convert to common stock. Credit
DERIVATIVES: Instruments whose value is derived from an 1-17 Management
underlying contract, index or security, or any combination Market
thereof, including futures, options (e.g., put and calls), Credit
options on futures, swap agreements, and some Liquidity
mortgage-backed securities. Leverage
Interest Rate
EMERGING MARKETS: Bonds issued by foreign companies in 6, 11 Market
countries that are defined as an emerging or developing Political
economy by any one of the International Bank for Liquidity
Reconstruction and Development (the World Bank), the Foreign Investment
International Finance Corporation or the United Nations or
its authorities.
88
ADDITIONAL INVESTMENT STRATEGIES AND RISKS
INSTRUMENT FUND CODE RISK TYPE
---------- -------------- ------------------
EXCHANGE-TRADED FUNDS: Exchange-traded funds such as 1-17 Market
Standard & Poor's Depository Receipts ("SPDRs") and ETF
NASDAQ-100 Index Tracking Stock ("NASDAQ 100s"), Liquidity
represent ownership in a long-term unit investment trust
that holds a portfolio of common stocks designed to track
the price, performance and dividend yield of an index,
such as the S&P 500 Index or the NASDAQ-100 Index, or a
group of stocks in a particular geographic area.
Exchange-traded funds entitle a holder to receive
proportionate quarterly cash distributions corresponding
to the dividends that accrue to the stocks in the
underlying portfolio, less trust expenses. Unit investment
trusts are registered investment companies. Therefore, a
Fund's investment in exchange-traded funds is subject to
the limitations on investing in investment company
securities described below.
FOREIGN SECURITIES: Stocks issued by foreign companies, as 1-11, 18 Market
well as commercial paper of foreign issuers and Political
obligations of foreign banks, overseas branches of U.S. Liquidity
banks and supranational entities. Foreign Investment
FORWARD FOREIGN CURRENCY CONTRACTS: An obligation to 6 Management
purchase or sell a specific amount of a currency at a Market
fixed future date and price set by the parties involved at Credit
the time the contract is negotiated. Liquidity
Leverage
Foreign Investment
Political
FUTURES AND RELATED OPTIONS: A contract providing for the 1-17 Management
future sale and purchase of a specified amount of a Market
specified security, class of securities, or an index at a Credit
specified time in the future and at a specified price. Liquidity
Leverage
HIGH-YIELD/HIGH-RISK DEBT SECURITIES: High-yield/high-risk 11 Credit
debt securities are securities that are rated below Market
investment grade by the primary rating agencies (e.g., BB Liquidity
or lower by Standard & Poor's and Ba or lower by Moody's).
These securities are considered speculative and involve
greater risk of loss than investment grade debt
securities. Other terms commonly used to describe such
securities include "lower rated bonds," "non-
investment grade bonds" and "junk bonds."
INVESTMENT COMPANY SECURITIES: Shares of investment 1-19 ETF
companies. A Fund (except the Funds of Funds) may invest Market
up to 5% of its total assets in the shares of any one
registered investment company, but may not own more than
3% of the securities of any one registered investment
company or invest more than 10% of its total assets in the
securities of other registered investment companies. These
registered investment companies may include money market
funds of BB&T Funds and shares of other registered
investment companies for which the Adviser to a Fund or
any of their affiliates serves as investment adviser,
administrator or distributor. The Prime Money Market Fund
may only invest in shares of other investment companies
with similar objectives.
89
ADDITIONAL INVESTMENT STRATEGIES AND RISKS INSTRUMENT
INSTRUMENT FUND CODE RISK TYPE
---------- -------------- ------------------
MORTGAGE-BACKED SECURITIES: Debt obligations secured by 9-11, 18 Pre-payment
real estate loans and pools of loans. These include Market
collateralized mortgage obligations and real estate Credit
mortgage investment conduits. Regulatory
Estimated Maturity
MUNICIPAL SECURITIES: Securities issued by a state or 9-18 Market
political subdivision to obtain funds for various public Credit
purposes. Municipal securities include industrial Political
development bonds and other private activity bonds, as Tax
well as general obligation bonds, revenue bonds, tax Regulatory
anticipation notes, bond anticipation notes, revenue
anticipation notes, project notes, other short-term
tax-exempt obligations, municipal leases, obligations of
municipal housing authorities (single family revenue
bonds), and obligations issued on behalf of Section
501(c)(3) organizations.
There are two general types of municipal bonds:
General-obligations bonds, which are secured by the taxing
power of the issuer and revenue bonds, which take many
shapes and forms but are generally backed by revenue from
a specific project or tax. These include, but are not
limited to, certificates of participation ("COPs");
utility and sales tax revenues; tax increment or tax
allocations; housing and special tax, including assessment
district and community facilities district issues which
are secured by specific real estate parcels; hospital
revenue; and industrial development bonds that are secured
by a private company.
PREFERRED STOCKS: Preferred Stocks are equity securities 1-8 Market
that generally pay dividends at a specified rate and have
preference over common stock in the payment of dividends
and liquidation. Preferred stock generally does not carry
voting rights.
REPURCHASE AGREEMENTS: The purchase of a security and the 1-19 Market
simultaneous commitment to return the security to the Credit
seller at an agreed upon price on an agreed upon date.
This is treated as a loan.
RESTRICTED SECURITIES: Securities not registered under the 6, 8-18 Liquidity
Securities Act of 1933, such as privately placed Market
commercial paper and Rule 144A securities.
REVERSE REPURCHASE AGREEMENT: The sale of a security and 5-7, 11 Market
the simultaneous commitment to buy the security back at an Leverage
agreed upon price on an agreed upon date. This is treated
as a borrowing by a Fund.
SECURITIES LENDING: The lending of up to 33 1/3% of the 1-11, 18-19 Market
Fund's total assets. In return the Fund will receive cash, Leverage
other securities, and/or letters of credit. Liquidity
Credit
SHORT-TERM OBLIGATIONS: High quality U.S. 1-19 Market
dollar-denominated debt securities that have remaining Credit
maturities of one year or less. These securities may
include U.S. government obligations, domestic and foreign
commercial paper (including variable-amount master demand
notes), bankers' acceptances, certificates of deposit and
demand and time deposits of domestic and foreign branches
of U.S. banks and foreign banks, and repurchase
agreements. These investments are limited to those
obligations which, at the time of purchase, (i) possess
one of the two highest short-term ratings from at least
two NRSROs (for example, commercial paper rated "A-1" or
"A-2" by S&P and "P-1" or "P-2" by Moody's), or (ii) do
not possess a rating (i.e., are unrated) but are
determined by the Adviser or Sub-Adviser to be of
comparable quality.
90
ADDITIONAL INVESTMENT STRATEGIES AND RISKS INSTRUMENT
INSTRUMENT FUND CODE RISK TYPE
---------- -------------- ------------------
STRUCTURED PRODUCTS: Individually negotiated agreements 9-11 Credit
organized and operated to restructure the investment Market
characteristics of the underlying security, involving the Liquidity
deposit with or purchase by an entity, such as a
corporation or trust, of specified instruments (such as
commercial bank loans) and the issuance by that entity of
one or more classes of securities ("structured
securities") backed by, or representing interests in, the
underlying instruments.
STAND-BY COMMITMENTS: The Fund may acquire "stand-by 12-18 Market
commitments" with respect to Municipal Securities held in
its portfolio. The Fund will acquire stand-by commitments
solely to facilitate portfolio liquidity.
TIME DEPOSITS: Non-negotiable receipts issued by a bank in 8, 18-19 Liquidity
exchange for the deposit of funds. Credit
Market
U.S. GOVERNMENT AGENCY SECURITIES: Securities issued by 1-18 Interest Rate
agencies and instrumentalities of the U.S. government. Credit
These include Ginnie Mae, Fannie Mae, and Freddie Mac. U.S. Gov't.
Agency
U.S. TREASURY OBLIGATIONS: Bills, notes, bonds, separately 1-19 Interest Rate
traded registered interest and principal securities, and
coupons under bank entry safekeeping.
VARIABLE AMOUNT MASTER DEMAND NOTES: Unsecured demand 9-19 Credit
notes that permit the indebtedness to vary and provide for Liquidity
periodic adjustments in the interest rate according to the Interest Rate
terms of the instrument. Because master demand notes are
direct lending arrangements between a Fund and the issuer,
they are not normally traded. Although there is no
secondary market in these notes, the Fund may demand
payment of principal and accrued interest at specified
intervals.
VARIABLE AND FLOATING RATE INSTRUMENTS: Obligations with 9-18 Credit
interest rates which are reset daily, weekly, quarterly or Liquidity
some other period and which may be payable to the Fund on Market
demand.
WARRANTS: Securities, typically issued with preferred 1-8 Market
stock or bonds, that give the holder the right to buy a Credit
proportionate amount of common stock at a specified price.
WHEN-ISSUED SECURITIES AND FORWARD COMMITMENTS: Purchase 2-4, 7-18 Market
or contract to purchase securities at a fixed price for Leverage
delivery at a future date. Under normal market conditions, Liquidity
when-issued purchases and forward commitments will not Credit
exceed 25% of the value of a Fund's total assets.
YANKEE BONDS AND SIMILAR DEBT OBLIGATIONS: U.S. dollar 8-18 Market
denominated bonds issued by foreign corporations or Credit
governments. Sovereign bonds are those issued by the Interest Rate
government of a foreign country. Supranational bonds are
those issued by supranational entities, such as the World
Bank and European Investment Bank. Canadian bonds are
those issued by Canadian provinces.
ZERO-COUPON DEBT OBLIGATIONS: Bonds and other debt that 8-19 Credit
pay no interest, but are issued at a discount from their Market
value at maturity. When held to maturity, their entire Interest Rate
return equals the difference between their issue price and
their maturity value.
INVESTMENT RISKS
Below is a more complete discussion of the types of risks inherent in the
securities and investment techniques listed above as well as those risks
discussed in "Risk/Return Summary and Fund Expenses." Because of these risks,
the value
91
ADDITIONAL INVESTMENT STRATEGIES AND RISKS
of the securities held by the Funds may fluctuate, as will the value of your
investment in the Funds. Certain investments and Funds are more susceptible to
these risks than others.
CREDIT RISK. The risk that the issuer of a security, or the counterparty to a
contract, will default or otherwise become unable to honor a financial
obligation. Credit risk is generally higher for non-investment grade securities.
The price of a security can be adversely affected prior to actual default as its
credit status deteriorates and the probability of default rises.
EMERGING MARKETS RISK. The risks associated with foreign investments (see
"Foreign Investment Risk") are particularly pronounced in connection with
investments in emerging markets. In addition, profound social changes and
business practices that depart from norms in developed countries' economies have
hindered the orderly growth of emerging economies and their markets in the past
and have caused instability. High levels of debt tend to make emerging economies
heavily reliant on foreign capital and vulnerable to capital flight. These
countries are also more likely to experience high levels of inflation, deflation
or currency devaluation, which could also hurt their economies and securities
markets. For these and other reasons, investments in emerging markets are often
considered speculative.
ESTIMATED MATURITY RISK. The possibility that an underlying mortgage holder will
exercise its right to pay principal on an obligation (such as mortgage-related
securities) later than expected. This may happen when there is a rise in
interest rates. These events may lengthen the duration (i.e. interest rate
sensitivity) and potentially reduce the value of these securities.
ETF RISK. The risk associated with the risks of owning the underlying securities
the ETF is designed to track. Lack of liquidity in an ETF could result in being
more volatile than the underlying portfolio of securities. When a Fund invests
in an ETF, in addition to directly bearing expenses associated with its own
operations, it will bear a pro rata portion of the ETF's expenses. As a result,
it may be more costly to own an ETF.
FOREIGN INVESTMENT RISK. The risk associated with higher transaction costs,
delayed settlements, currency controls and adverse economic developments. This
also includes the risk that fluctuations in the exchange rates between the U.S.
dollar and foreign currencies may negatively affect an investment. Adverse
changes in exchange rates may erode or reverse any gains produced by foreign
currency denominated investments and may widen any losses. Exchange rate
volatility also may affect the ability of an issuer to repay U.S. dollar
denominated debt, thereby increasing credit risk. Foreign securities may also be
affected by incomplete or inaccurate financial information on companies, social
upheavals or political actions ranging from tax code changes to governmental
collapse. These risks are more significant in emerging markets.
INTEREST RATE RISK. The risk that debt prices overall will decline over short or
even long periods due to rising interest rates. A rise in interest rates
typically causes a fall in values, while a fall in rates typically causes a rise
in values. Interest rate risk should be modest for shorter-term securities,
moderate for intermediate-term securities, and high for longer-term securities.
Generally, an increase in the average maturity of the Fund will make it more
sensitive to interest rate risk. The market prices of securities structured as
zero coupon or pay-in-kind securities are generally affected to a greater extent
by interest rate changes. These securities tend to be more volatile than
securities which pay interest periodically.
INVESTMENT STYLE RISK. The risk that returns from a particular class or group of
stocks (e.g., value, growth, small cap, large cap) will trail returns from other
asset classes or the overall stock market. Groups or asset classes of stocks
tend to go through cycles of doing better -- or worse -- than common stocks in
general. These periods can last for periods as long as several years.
Additionally, a particular asset class or group of stocks could fall out of
favor with the market, causing the Fund to underperform funds that focus on
other types of stocks.
LEVERAGE RISK. The risk associated with securities or practices that multiply
small index or market movements into large changes in value. Leverage is often
associated with investments in derivatives, but also may be embedded directly in
the characteristics of other securities.
HEDGED. When a derivative (a security whose value is based on another
security or index) is used as a hedge against an opposite position that the
Portfolio also holds, any loss generated by the derivative should be
substantially offset by gains on the hedged investment, and vice versa.
Hedges are sometimes subject to imperfect matching between the derivative
and underlying security, and there can be no assurance that a Portfolio's
hedging transactions will be effective.
92
ADDITIONAL INVESTMENT STRATEGIES AND RISKS
SPECULATIVE. To the extent that a derivative is not used as a hedge, the
Portfolio is directly exposed to the risks of that derivative. Gains or
losses from speculative positions in a derivative may be substantially
greater than the derivatives original cost.
LIQUIDITY RISK. The risk that certain securities may be difficult or impossible
to sell at the time and the price that would normally prevail in the market. The
seller may have to lower the price, sell other securities instead or forego an
investment opportunity, any of which could have a negative effect on Portfolio
management or performance. This includes the risk of missing out on an
investment opportunity because the assets necessary to take advantage of it are
tied up in less advantageous investments.
MANAGEMENT RISK. The risk that a strategy used by a Fund's portfolio manager may
fail to produce the intended result. This includes the risk that changes in the
value of a hedging instrument will not match those of the asset being hedged.
Incomplete matching can result in unanticipated risks.
MARKET RISK. The risk that the market value of a security may move up and down,
sometimes rapidly and unpredictably. These fluctuations may cause a security to
be worth less than the price originally paid for it, or less than it was worth
at an earlier time. Market risk may affect a single issuer, industrial sector of
the economy or the market as a whole. There is also the risk that the current
interest rate may not accurately reflect existing market rates. For fixed income
securities, market risk is largely, but not exclusively, influenced by changes
in interest rates. A rise in interest rates typically causes a fall in values,
while a fall in rates typically causes a rise in values. Finally, key
information about a security or market may be inaccurate or unavailable. This is
particularly relevant to investments in foreign securities.
POLITICAL RISK. The risk of losses attributable to unfavorable governmental or
political actions, seizure of foreign deposits, changes in tax or trade
statutes, and governmental collapse and war.
PRE-PAYMENT/CALL RISK. The risk that the principal repayment of a security will
occur at an unexpected time. Prepayment risk is the chance that the repayment of
a mortgage will occur sooner than expected. Call risk is the possibility that,
during times of declining interest rates, a bond issuer will "call" -- or
repay-higher yielding bonds before their stated maturity. Changes in pre-payment
rates can result in greater price and yield volatility. Pre-payments and calls
generally accelerate when interest rates decline. When mortgage and other
obligations are pre-paid or called, a Fund may have to reinvest in securities
with a lower yield. In this event, the Fund would experience a decline in income
- and the potential for taxable capital gains. Further, with early prepayment, a
Fund may fail to recover any premium paid, resulting in an unexpected capital
loss. Prepayment/call risk is generally low for securities with a short-term
maturity, moderate for securities with an intermediate-term maturity, and high
for securities with a long-term maturity.
REGULATORY RISK. The risk associated with Federal and state laws which may
restrict the remedies that a lender has when a borrower defaults on loans. These
laws include restrictions on foreclosures, redemption rights after foreclosure,
Federal and state bankruptcy and debtor relief laws, restrictions on "due on
sale" clauses, and state usury laws.
SMALL COMPANY RISK. Stocks of small-capitalization companies are more risky than
stocks of larger companies and may be more vulnerable than larger companies to
adverse business or economic developments. Many of these companies are young and
have a limited track record. Small cap companies may also have limited product
lines, markets, or financial resources. Securities of such companies may be less
liquid and more volatile than securities of larger companies or the market
averages in general and, therefore, may involve greater risk than investing in
larger companies. In addition, small cap companies may not be well-known to the
investing public, may not have institutional ownership, and may have only
cyclical, static, or moderate growth prospects. If a Fund concentrates on
small-capitalization companies, its performance may be more volatile than that
of a fund that invests primarily in larger companies.
TAX RISK. The risk that the issuer of the securities will fail to comply with
certain requirements of the Internal Revenue Code, which would cause adverse tax
consequences.
U.S. GOVERNMENT AGENCY SECURITIES RISK. The risk associated with securities
issued by agencies of the U.S. government such as Fannie Mae, Ginnie Mae or
Freddie Mac. Although U.S. government securities issued directly by the U.S.
government are guaranteed by the U.S. Treasury, other U.S. government securities
issued by an agency or instrumentalities of the U.S. government may not be. No
assurance can be given that the U.S. government would provide financial support
to its agencies and instrumentalities if not required to do so by law.
93
FUND MANAGEMENT
THE INVESTMENT ADVISER
BB&T Asset Management, Inc. ("BB&T Asset Management" or the "Adviser") is the
adviser for the Funds. BB&T Asset Management, located at 434 Fayetteville Street
Mall, Raleigh, NC 27601, is a wholly-owned subsidiary of BB&T Corporation
("BB&T") a financial holding company that is a North Carolina corporation,
headquartered in Winston-Salem, North Carolina. As of December 31, 2005, BB&T
had assets of approximately $109.2 billion. Through its subsidiaries, BB&T
operates over 1,400 banking offices in Alabama, Florida, Georgia, Indiana,
Kentucky, Tennessee, Maryland, North Carolina, South Carolina, Virginia, West
Virginia and Washington, D.C., providing a broad range of financial services to
individuals and businesses.
In addition to general commercial, mortgage and retail banking services, BB&T
also provides trust, investment, and retail and wholesale insurance services.
BB&T has provided investment management services through its Trust and
Investment Management Division since 1912. BB&T Asset Management employs an
experienced staff of professional portfolio managers and traders who use a
disciplined investment process that focuses on maximization of risk-adjusted
investment returns. BB&T Asset Management and its predecessors have managed
common and collective investment funds for its fiduciary accounts for more than
20 years. BB&T Asset Management currently manages discretionary assets of more
than $16 billion.
The Adviser may appoint one or more subadvisors to manage all or a portion of
the assets of the Funds. The Funds and the Adviser intend to seek exemptive
relief from the Securities and Exchange Commission (SEC) to permit the Adviser,
subject to certain conditions, including the one-time prior approval of the
Funds' Board of Trustees and shareholders, to appoint and replace subadvisors,
enter into subadvisory agreements, and amend and terminate subadvisory
agreements on behalf of the Fund without shareholder approval. The Adviser has
received the one-time approval from the Funds' Board of Trustees and
shareholders, and if the Adviser obtains an exemptive order from the SEC, the
Adviser will have the ability to change the fee payable to a subadvisor or
appoint a new subadvisor at a fee different than that paid to the current
subadvisor, which in turn may result in a different fee retained by the Adviser.
As of the date of this Prospectus, the Funds and the Adviser had not yet filed
an exemptive application with the SEC. Once filed, there is no guarantee that
the SEC will grant exemptive relief.
Through its portfolio management team, BB&T Asset Management makes the
day-to-day investment decisions and continuously reviews, supervises and
administers the Funds' investment programs.
For these advisory services, the Funds paid as follows during their fiscal year
ended:
PERCENTAGE OF AVERAGE NET
ASSETS FOR THE FISCAL YEAR
ENDED 09/30/05
--------------------------
Large Cap Fund 0.67%
Large Cap Growth Fund 0.67%
Mid Cap Value Fund 0.67%
Mid Cap Growth Fund 0.67%
Small Cap Fund
(formerly the Small Company Value Fund) 0.80%
International Equity Fund 0.90%
Special Opportunities Equity Fund 0.80%
Equity Income Fund 0.50%
Short U.S. Government Fund 0.45%
Intermediate U.S. Government Fund 0.50%
Total Return Bond Fund
(formerly the Intermediate Corporate Bond Fund) 0.50%
Kentucky Intermediate Tax Free Fund 0.34%
Maryland Intermediate Tax Free Fund 0.18%
North Carolina Intermediate Tax-Free Fund 0.45%
South Carolina Intermediate Tax-Free Fund 0.44%
Virginia Intermediate Tax-Free Fund 0.45%
West Virginia Intermediate Tax-Free Fund 0.45%
Prime Money Market Fund 0.29%
U.S. Treasury Money Market Fund 0.28%
Capital Manager Conservative Growth Fund 0.05%
Capital Manager Moderate Growth Fund 0.05%
Capital Manager Growth Fund 0.03%
Capital Manager Equity Fund 0.01%
A discussion regarding the basis for the board of trustees approving the
investment advisory agreement with BB&T Asset Management and sub-advisory
agreements with UBS Global AM, Scott & Stringfellow, Federated IMC, and Sterling
Capital is available in the Funds' annual report to shareholders for the period
ended September 30, 2005.
94
FUND MANAGEMENT
THE INVESTMENT SUB-ADVISERS
INTERNATIONAL EQUITY FUND. UBS Global Asset Management (Americas) Inc. ("UBS
Global AM") serves as the Sub-advisor to the International Equity Fund pursuant
to a Sub-advisory Agreement BB&T Asset Management. Under the Sub-Advisory
Agreement, UBS Global AM will provide investment management sub-advisory
services to the Fund, select investments and place all orders for purchases and
sales of the Fund's securities, subject to the direction and supervision of the
BB&T Funds' Board of Trustees and the Adviser, any written guidelines adopted by
the Fund's Board of Trustees or the Adviser and furnished to UBS Global AM, and
in accordance with the Fund's written investment restrictions.
UBS Global AM, located at One North Wacker Drive, Chicago, IL 60606, began
managing institutional assets in 1974 through its predecessor entities,
including Brinson Partners, Inc. and First Chicago Investment Advisors. Swiss
Bank Corporation ("SBC") acquired the firm in 1995. In 1998, SBC merged with
Union Bank of Switzerland to form UBS AG. UBS Global AM is a member of the UBS
Global Asset Management business group (the "Group") of UBS AG. As of September
30, 2005, UBS Global AM had approximately $66.8 billion in assets under
management and the Group has approximately $568.9 billion in assets under
management.
SPECIAL OPPORTUNITIES EQUITY FUND AND EQUITY INCOME FUND. Scott & Stringfellow,
Inc. ("Scott & Stringfellow" or the "Sub-Adviser") serves as the sub-adviser to
the Special Opportunities Equity Fund and the Equity Income Fund pursuant to a
Sub-Advisory Agreement with BB&T Asset Management. Under the Sub-Advisory
Agreement, Scott & Stringfellow manages the Funds, selects their investments,
and places all orders for purchases and sales of the Funds' securities, subject
to the general supervision of BB&T Funds' Board of Trustees and BB&T Asset
Management and in accordance with the Funds' investment objectives.
Scott & Stringfellow's address is: 909 E. Main Street, Richmond, Virginia 23219.
Scott & Stringfellow is a wholly-owned subsidiary of BB&T. As of December 31,
2005, Scott & Stringfellow had over $18.6 billion in client funds. Founded in
1893, Scott & Stringfellow operates as a full-service regional brokerage and
investment banking firm serving individual, institutional, corporate and
municipal clients.
PRIME MONEY MARKET FUND. Federated Investment Management Company ("Federated
IMC") serves as the Sub-Adviser to the Prime Money Market Fund pursuant to a
Sub-Advisory Agreement with BB&T Asset Management. Under the Sub-Advisory
Agreement, Federated IMC manages the Fund, selects its investments, and places
all orders for purchases and sales of the Fund's securities, subject to the
general supervision of the BB&T Funds' Board of Trustees and BB&T Asset
Management and in accordance with the Prime Money Market Fund's investment
objective, policies and restrictions.
Federated IMC's address is: Federated Investors Tower, 1001 Liberty Avenue,
Pittsburgh, PA 15222-3779. Federated IMC and other subsidiaries of Federated
Investors, Inc. advise approximately 185 mutual funds and separate accounts,
which totaled approximately $213 billion in assets as of December 31, 2005.
Federated was established in 1955 and is one of the largest mutual fund
investment managers in the United States with approximately 1,600 employees.
More than 4,000 investment professionals make Federated Funds available to their
customers.
MID CAP VALUE FUND AND TOTAL RETURN BOND FUND. Sterling Capital Management LLC
("Sterling Capital") serves as the sub-adviser to the Mid Cap Value Fund and the
Total Return Bond Fund pursuant to a Sub-Advisory Agreement with BB&T Asset
Management. Under the Sub-Advisory Agreement, Sterling Capital manages the
Funds, selects their investments and places all orders for purchases and sales
of the Funds' securities, subject to the direction and supervision of the Board
of Trustees and BB&T Asset Management, any written guidelines adopted by the
Board of Trustees or BB&T Asset Management and furnished to Sterling Capital,
and in accordance with the Funds' written investment restrictions.
Sterling Capital's address is: 4064 Colony Road, Suite 300, Charlotte, NC 28211.
Sterling Capital was organized as a limited liability company on January 27,
2005. Sterling Capital, originally founded in 1970, is an affiliate of BB&T
Asset Management because it is 70% owned by the parent of BB&T Asset Management,
BB&T Corporation. As of September 30, 2005, Sterling Capital had over $8.5
billion in assets under management.
95
FUND MANAGEMENT
PORTFOLIO MANAGERS
LARGE CAP FUND. Ronald T. Rimkus, CFA, has been primarily responsible for the
management of the Fund since March 2006. Mr. Rimkus joined BB&T Asset
Management, Inc. in January 2006 as the Director of Core Equity. From 2000 to
2006, Mr. Rimkus managed a large cap core equity product for Mesirow Financial,
Inc.
LARGE CAP GROWTH FUND. Jeffrey J. Schappe, CFA, has headed the team that has
served as portfolio manager for the Large Company Growth Fund since March 2005.
Mr. Schappe has served as Chief Investment Officer for BB&T Asset Management,
Inc. since April 2004. From 2002 through April 2004, he served as Senior Vice
President and Chief Investment Officer for Citizens Advisers. He joined Citizens
in 2001 as Director of Research. Before working at Citizens Advisers, Schappe
managed the research department at George K. Baum & Company, a regional
broker/dealer and investment bank. Prior to that, he served as Vice
President/Portfolio Manager and Director of Research for Conseco Capital
Management.
Effective March 27, 2006, David Nolan will become the portfolio manager of the
Large Cap Growth Fund. Mr. Nolan is a Senior Vice President and portfolio
manager with the Adviser. He has been with the Adviser and its predecessors
since 1985.
MID CAP VALUE FUND. Timothy P. Beyer has been the manager and/or co-portfolio
manager of the BB&T Mid Cap Value Fund since July 2005.
Mr. Beyer, CFA, joined Sterling Capital in 2004 and is currently an Executive
Director. From 2003-2004, Mr. Beyer served as Portfolio Manager of the AIM
Midcap Basic Value Fund for AIM Investments. From 2000-2002, Mr. Beyer worked at
USAA managing the USAA Value Fund and USAA Balanced Fund.
MID CAP GROWTH FUND. David Nolan has managed or has been a member of the team
that manages the Mid Cap Growth Fund since its inception. Mr. Nolan managed the
OVB Capital Appreciation Fund (predecessor to the BB&T Mid Cap Growth Fund)
since December 1993. Mr. Nolan is a Senior Vice President and portfolio manager
with the Adviser. He has been with the Adviser and its predecessors since 1985.
SMALL CAP FUND. John Kvantas, CFA, has managed the Small Cap fund since its May
2003 inception. Mr. Kvantas is a Senior Vice President and portfolio manager for
the Adviser. He has been with the Advisor since March 2003. From November 1997
to February 2003, he was a portfolio manager and equity analyst with Wachovia.
INTERNATIONAL EQUITY FUND. Thomas Madsen has been the portfolio manager of the
BB&T International Equity Fund since April 2003. Mr. Madsen is the Global Head
of Equities at UBS Global Asset Management and has been a Managing Director of
UBS Global Asset Management since February, 2000.
SPECIAL OPPORTUNITIES EQUITY FUND AND EQUITY INCOME FUND. George F. Shipp, CFA,
has been the portfolio manager of the Special Opportunities Equity Fund and the
Equity Income Fund since their inception. Mr. Shipp is the Senior Managing
Director of CHOICE Asset Management, a department of Scott & Stringfellow, and
serves as Chief Investment Officer of the CHOICE portfolios, separate accounts
sponsored by Scott & Stringfellow. Mr. Shipp has been with Scott & Stringfellow
since 1982.
SHORT U.S. GOVERNMENT FUND. Kevin McNair, CFA, has managed or has been a member
of the team that manages the Short U.S. Government Fund since 1994. Mr. McNair
is a Senior Vice President and portfolio manager with the Adviser.
INTERMEDIATE U.S. GOVERNMENT FUND. Brad D. Eppard, CFA, has been the portfolio
manager of the Intermediate U.S. Government Fund since July 2003. Mr. Eppard is
a Senior Vice President and portfolio manager with the Adviser, positions which
he has held since July 2003. From October 2000 to July 2003 Mr. Eppard was a
senior fixed income strategist for Legg Mason Wood Walker. From February 2000 to
October 2000 Mr. Eppard was a senior fixed income strategist for Wachovia
Securities. Prior to that Mr. Eppard was a senior portfolio manager and Director
at Boatman's Capital Management from April 1997 to January 2000.
TOTAL RETURN BOND FUND. David M. Ralston has been the portfolio manager of the
BB&T Total Return Bond Fund since July 2005. Mr. Ralston is a Managing Director
and CIO of Sterling Capital Management, and is a Fixed Income Portfolio Manager
and the head of Sterling's fixed income team. Mr. Ralston co-founded Trinity
Capital Advisors in 1989, which merged into Sterling Capital Management in 1991.
96
FUND MANAGEMENT
TAX-FREE BOND FUNDS. Robert Millikan, CFA, has managed or has been a member of
the team that manages each of the Tax-Free Bond Funds since February 2000. Mr.
Millikan is a Senior Vice President and Director of Fixed Income Management with
the Adviser. He has been with the Adviser and its predecessors since February
2000. From July 1990 to February 2000, he was an investment officer with First
Citizens Bank.
FUND OF FUNDS. All decisions for the Capital Manager Conservative Growth Fund,
Capital Manager Moderate Growth Fund, Capital Manager Growth Fund, and Capital
Manager Equity Fund are made by the BB&T Balanced Portfolio Management Team,
which includes Jeffrey J. Schappe, Robert F. Millikan, Ronald T. Rimkus and Will
Gholston.
Mr. Schappe, CFA, has been a member of the team that manages the Fund of Funds
since March 2005. Mr. Schappe has served as Chief Investment Officer for BB&T
Asset Management, Inc. since April 2004. From 2002 through April 2004, he served
as Senior Vice President and Chief Investment Officer for Citizens Advisers. He
joined Citizens in 2001 as Director of Research. Before working at Citizens
Advisers, Schappe managed the research department at George K. Baum & Company, a
regional broker-dealer and investment bank. Prior to that, he served as Vice
President/Portfolio Manager and Director of Research for Conseco Capital
Management.
Mr. Millikan, CFA, has been a member of the team that manages the Fund of Funds
since September 2004. Mr. Millikan is a Senior Vice President and Director of
Fixed Income Management with the Adviser. He has been with the Adviser and its
predecessors since February 2000. From July 1990 to February 2000, he was an
investment officer with First Citizens Bank.
Mr. Rimkus, CFA, has been a member of the team that manages the Fund of Funds
since March 2006. Mr. Rimkus joined BB&T Asset Management, Inc. in January 2006
as the Director of Core Equity. From 2000 to 2006, Mr. Rimkus managed a large
cap core equity product for Mesirow Financial, Inc.
Mr. Gholston, CFA, has been a member of the team since March 2006. Mr. Gholston
is an Assistant Vice President and Manager of Quantitative Analysis with the
Adviser. He has been with the Adviser since October 2003. Prior to joining the
Adviser, he served as an Investment Performance Associate/Analyst for Cambridge
Associates and UNC Management Company.
Additional information regarding the portfolio managers' 'compensation, other
accounts managed by the portfolio managers, and the portfolio managers'
ownership of shares in Funds for which they are portfolio managers is available
in the Statement of Additional Information.
SCOTT & STRINGFELLOW-RELATED PERFORMANCE OF SEPARATELY MANAGED ACCOUNTS
In addition to acting as Sub-Adviser to the Special Opportunities Equity Fund
and the Equity Income Fund, Scott & Stringfellow manages a wrap fee program
pursuant to the multi-style investment strategy. The following table shows the
historical performance of all accounts managed by Scott & Stringfellow, which
have substantially similar investment objectives, policies, strategies and risks
to the Special Opportunities Equity Fund and Equity Income Fund, respectively.
These composites are provided to illustrate the past performance of Scott &
Stringfellow in managing accounts substantially similar to the Special
Opportunities Equity Fund and the Equity Income Fund. THESE COMPOSITES DO NOT
REPRESENT THE PERFORMANCE OF THE SPECIAL OPPORTUNITIES EQUITY FUND OR THE EQUITY
INCOME FUND. YOU SHOULD NOT CONSIDER THIS PERFORMANCE DATA AS AN INDICATION OF
FUTURE PERFORMANCE OF THE SPECIAL OPPORTUNITIES EQUITY FUND, THE EQUITY INCOME
FUND OR OF SCOTT & STRINGFELLOW.
The Sub-Adviser's composite performance data shown below was calculated on a
time weighted basis and includes all dividends and interest, accrued income and
realized and unrealized gains and losses. All returns reflect the deduction of a
2.2% fee comprising advisory services, brokerage commissions and execution
costs, without provision for federal or state income taxes or custody fees. This
fee represents the highest account fee paid at the account level by the
underlying private accounts used to construct the composite. Securities
transactions are accounted for on the trade date and accrual accounting is
utilized. Cash and equivalents are included in performance returns. Returns are
calculated by geometrically linking the monthly and quarterly returns
respectively. There is no use of leverage or derivatives.
The accounts that are included in the Sub-Adviser's composites are not subject
to the same types of expenses to which the Special Opportunities Equity Fund and
the Equity Income Fund are subject nor to the diversification requirements,
specific tax restrictions and investment limitations imposed on the Funds by the
1940 Act or Subchapter M of the Internal Revenue Code.
Consequently, the performance results for the Sub-Adviser's composites could
have been adversely affected if the accounts included in the composites had been
regulated as investment companies under the federal securities laws.
97
FUND MANAGEMENT
SCOTT & STRINGFELLOW-RELATED PERFORMANCE OF SEPARATELY MANAGED ACCOUNTS
CONTINUED
The investment results of the Sub-Adviser's composites presented below are
unaudited. The investment results of the Sub-Adviser's composites were not
calculated pursuant to the methodology established by the SEC that will be used
to calculate the performance results of the Special Opportunities Equity Fund
and the Equity Income Fund. Investors should also be aware that the use of a
methodology different from that used below to calculate performance could result
in different performance data.
SUB-ADVISER'S COMPOSITE RELATED TO SUB-ADVISER'S COMPOSITE
[TO BE UPDATED] THE SPECIAL OPPORTUNITIES EQUITY RELATED TO THE EQUITY INCOME S&P 500
CALENDAR YEAR FUND(2) FUND(3) INDEX(4)
--------------- ---------------------------------- ---------------------------- --------
2001 8.45% 3.56% -11.88%
2002 -18.39% -14.71% -22.12%
2003 43.14% 29.16% 28.69%
2004 27.69% 21.05% 10.87%
2005 2.47% 7.93% 4.91%
SUB-ADVISER'S COMPOSITE RELATED TO SUB-ADVISER'S COMPOSITE
THE SPECIAL OPPORTUNITIES EQUITY RELATED TO THE EQUITY INCOME S&P 500
ANNUALIZED PERIOD FUND(2) FUND(3) INDEX(4)
----------------- ---------------------------------- ---------------------------- --------
1 Year Ended 12/31/05 2.47% 7.93% 4.91%
2 Years Ended 12/31/05 14.39% 14.30% 7.60%
3 Years Ended 12/31/05 23.26% 19.05% 14.38%
Inception through 12/31/05(1) 10.64% 8.31% 0.54%
(1) Inception is 12/27/00 for the Sub-Adviser's composites for the Special
Opportunities Equity Fund and the Equity Income Fund.
(2) A 2.2% fee comprising advisory services, brokerage commissions and
execution costs was applied to the performance of the Sub-Adviser's
composite related to Special Opportunities Equity Fund. This represents the
highest account fee paid at the account level by the underlying private
accounts used to construct the composite. This fee is higher than the
estimated total fund operating expenses of 1.04% for the Institutional
Shares of the Special Opportunities Equity Fund. The performance of the
Sub-Adviser's composite related to Special Opportunities Equity Fund does
not take into account federal or state income taxes.
(3) A 2.2% fee comprising advisory services, brokerage commissions and
execution costs was applied to the performance of the Sub-Adviser's
composite related to Equity Income Fund. This represents the highest
account fee paid at the account level by the underlying private accounts
used to construct this composite. This fee is higher than the estimated
total fund operating expenses of 1.04% for the Institutional Shares of the
Equity Income Fund. The performance of the Sub-Adviser's composite related
to Equity Income Fund does not take into account federal or state income
taxes.
(4) The S&P 500 Index is a widely recognized, unmanaged index of common stocks.
THE DISTRIBUTOR AND ADMINISTRATOR
BB&T Asset Management, Inc. (the "Administrator"), 434 Fayetteville Street Mall,
Raleigh, NC 27601, serves as each Fund's administrator. The administrative
services of the Administrator include providing office space, equipment and
clerical personnel to the Funds and supervising custodial, auditing, valuation,
bookkeeping, legal and dividend disbursing services. BISYS Fund Services Ohio,
Inc. (the "Sub-Administrator"), 3435 Stelzer Road, Columbus, Ohio 43219, serves
as each Fund's sub-administrator.
BB&T Funds Distributor, Inc. (the "Distributor") serves as the distributor of
each Fund's shares. The Distributor may provide financial assistance in
connection with pre-approved seminars, conferences and advertising to the extent
permitted by applicable state or self-regulatory agencies, such as the National
Association of Securities Dealers.
The SAI has more detailed information about the Investment Adviser and other
service providers.
98
SHAREHOLDER INFORMATION
CHOOSING A SHARE CLASS
BB&T Funds offer different classes of Fund shares, which have different expenses
and other characteristics. Only one class of Fund shares, Institutional Shares,
is offered in this prospectus. To choose the one that is best suited to your
needs and goals, consider the amount of money you want to invest, how long you
expect to invest it and whether you plan to make additional investments. The
following are some of the main characteristics of the Institutional Shares:
INSTITUTIONAL SHARES
- No sales charges.
- No distribution and service (12b-1) fees.
- Available only to Branch Banking and Trust Company and its affiliates and
other financial service providers approved by the Distributor for the
investment of funds for which they act in a fiduciary, advisory, agency,
custodial or similar capacity or to individuals or corporations investing
$1,500,000 or more.
INVESTMENT AMOUNTS
The minimum initial investment in Institutional Shares of the Funds offered by
this Prospectus is $1,500,000. An Institutional shareholder's minimum investment
cannot be calculated by combining all accounts he/she maintains with BB&T Funds
-- rather, the shareholder must meet the minimum amount for each Fund in which
he/she wishes to invest.
If your account falls below $1,500,000, the Fund may ask you to increase your
balance. If it is still below $1,500,000 after 60 days, the Fund may close your
account and send you the proceeds at the current NAV.
For actual past expenses of the Institutional Shares, see the fund-by-fund
information earlier in this prospectus.
The Funds also offer Class A Shares, Class B Shares, and Class C Shares, each of
which has its own expense structure. Class A Shares, Class B Shares, and Class C
Shares are available to investors who are not fiduciary clients of Branch
Banking and Trust Company and who are not otherwise eligible for Institutional
Shares. Call the Distributor for more information (see back cover of this
prospectus).
Generally, expenses applicable to the Fund are allocated to each share class of
the Fund on the basis of the relative net assets of each class. Expenses
applicable to a particular share class, such as distribution and service (12b-1)
fees, are borne solely by that share class.
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SHAREHOLDER INFORMATION
PRICING OF FUND SHARES
HOW NAV IS CALCULATED
The NAV is calculated by adding the total value of the Fund's investments and
other assets, subtracting its liabilities and then dividing that figure by the
number of outstanding shares of the Fund:
NAV =
Total Assets - Liabilities
----------------------------
Number of Shares Outstanding
Generally, for Funds other than the Money Market Funds, you can find the Fund's
NAV daily in The Wall Street Journal and other newspapers. NAV is calculated
separately for each class of shares.
MONEY MARKET FUNDS
The per share net asset value ("NAV") of the Prime Money Market Fund and the
U.S. Treasury Money Market Fund will be determined at 3:00 p.m. Eastern Time on
days the Exchange and the Federal Reserve Bank of New York are open. On days
when the Federal Reserve Bank of New York is closed, the Funds may elect to be
open, in their discretion, if it is determined to be in shareholders' best
interests.
Your order for purchase, sale or exchange of shares is priced at the next NAV
calculated after your order is received. This is what is known as the offering
price.
Each Fund uses the amortized cost method of valuing its investments, which does
not take into account unrealized gains or losses. For further information
regarding the methods used in valuing the Fund's investments, please see the
SAI.
OTHER FUNDS
Per share NAV for each Fund is determined and its shares are priced at the close
of regular trading on the New York Stock Exchange, normally at 4:00 p.m. Eastern
time on days the Exchange is open.
Your order for purchase, sale or exchange of shares is priced at the next NAV
calculated after your order is accepted by the Fund. This is what is known as
the offering price. For further information regarding the methods used in
valuing the Fund's investments, please see the SAI.
A Fund's securities are generally valued at current market prices. If market
quotations are not available, prices will be based on fair value as determined
by BB&T Funds' Pricing Committee pursuant to procedures established by BB&T
Funds' Board of Trustees. For further information regarding the methods used in
valuing the Fund's investments, please see the SAI.
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SHAREHOLDER INFORMATION
PURCHASING AND ADDING TO YOUR SHARES
You may purchase Institutional Shares of the Funds through procedures
established by the Distributor in connection with the requirements of fiduciary,
advisory, agency, custodial and other similar accounts maintained by or on
behalf of customers of Branch Banking and Trust Company or one of its affiliates
or other financial service providers approved by the Distributor.
These parties are responsible for transmitting orders by close of business.
Consult your investment representative or institution for specific information.
All purchases must be in U.S. dollars. A fee will be charged for any checks that
do not clear. Third-party checks, money orders, credit card convenience checks,
cash and traveler's checks are not accepted. In addition, bank starter checks
are not accepted for initial purchase into the Funds.
The Fund's transfer agent is required by law to obtain certain personal
information from you (or a person acting on your behalf) in order to verify your
(or such person's) identity. If this information is not provided, the transfer
agent may not be able to open your account. If the transfer agent is unable to
verify your identity (or that of another person authorized to act on your
behalf), or believes it has identified potentially criminal activity, the Funds,
the Distributor and the Transfer Agent each reserve the right to close your
account or to take such other action as they deem reasonable or required by law.
DISTRIBUTION AND SHAREHOLDER SERVICING ARRANGEMENTS -- REVENUE SHARING
The Adviser and/or its affiliates may pay out of their own assets compensation
to financial intermediaries for the sale and distribution of the Shares and/or
for the servicing of the Shares. These additional cash and non-cash incentives,
sometimes referred to as "revenue sharing arrangements" may take the form of (1)
due diligence payments for a financial intermediary's examination of the Funds
and payments for employee training and education relating to the Funds; (2)
listing fees for the placement of the Funds on a financial intermediary's list
of mutual funds available for purchase by its clients; (3) marketing support
fees for providing assistance in promoting the sale of Shares; (4) payments in
connection with attendance at sales meetings for the promotion of the sale of
Shares; and (5) payments for the sale of shares and/or the maintenance of share
balances. These payments, which may be different for different financial
institutions, will not change the price an investor will pay for Shares or the
amount that a Fund will receive for the sale of Shares.
DIVIDENDS AND DISTRIBUTIONS
All dividends and distributions will be automatically reinvested unless you
request otherwise. There are no sales charges for reinvested distributions.
Income dividends for the Money Market Funds and the Bond Funds are declared
daily and paid monthly. Income dividends for the Large Cap Fund, the Mid Cap
Value Fund, and the Small Cap Fund are declared and paid monthly. The Large Cap
Growth Fund, the Mid Cap Growth Fund, the International Equity Fund, the Special
Opportunities Equity Fund, the Equity Income Fund, and the Funds of Funds
declare and pay income dividends quarterly. Capital gains are distributed at
least annually.
Distributions are made on a per share basis regardless of how long you've owned
your shares. Therefore, if you invest shortly before the distribution date, some
of your investment will be returned to you in the form of a distribution.
AVOID TAX WITHHOLDING
Each Fund is required to withhold a percentage of taxable dividends, capital
gains distributions and redemptions paid to shareholders who have not provided
the Fund with their certified taxpayer identification number or have otherwise
failed to comply with IRS rules. Shareholders are urged to read the additional
information concerning withholding provided in the SAI and provide a correct Tax
Identification Number (Social Security Number for most investors) on the account
application.
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SHAREHOLDER INFORMATION
SELLING YOUR SHARES
You may sell your shares at any time. Your sales price will be the next NAV
after your sell order is received by the Fund, its transfer agent, or your
investment representative. Normally you will receive your proceeds within a week
after your request is received. See section on "General Policies on Selling
Shares below."
WITHDRAWING MONEY FROM YOUR FUND INVESTMENT
As a mutual fund shareholder, you are technically selling shares when you
request a withdrawal in cash. This is also known as redeeming shares or a
redemption of shares.
INSTRUCTIONS FOR SELLING SHARES
If selling your shares through a financial institution or your financial adviser
or broker, ask them for their redemption procedures. Your adviser and/or broker
may have transaction minimums and/or transaction times which will affect your
redemption. For all other sales transactions, follow the instructions below.
BY TELEPHONE (UNLESS YOU HAVE DECLINED TELEPHONE SALES PRIVILEGES)
1. Call 1-800-228-1872 with instructions as to how you wish to receive
your funds (mail, wire, electronic transfer). (See "General Policies
on Selling Shares -- Verifying Telephone Redemptions" below).
BY MAIL
1. Call 1-800-228-1872 to request redemption forms or write a letter of
instruction indicating:
- your Fund and account number
- amount you wish to redeem
- address where your check should be sent
- account owner signature
2. Mail to: BB&T Funds, P.O. Box 182533, Columbus, OH 43218-2533.
BY OVERNIGHT SERVICE (SEE "GENERAL POLICIES ON SELLING SHARES -- REDEMPTIONS IN
WRITING REQUIRED" BELOW)
1. See instruction 1 above.
2. Send to: BB&T Funds, c/o BISYS Fund Services, Attn: T.A. Operations,
3435 Stelzer Road, Columbus, OH 43219.
WIRE TRANSFER
You must indicate this option on your application.
The Fund will charge a $7 wire transfer fee for each wire transfer request. As
of the date of this Prospectus, BB&T Funds has waived the $7 wire transfer fee.
This waiver is voluntary and may be discontinued at any time. Note: Your
financial institution may also charge a separate fee.
Call 1-800-228-1872 to request a wire transfer.
If you call by 4 p.m. Eastern time (3 p.m. for Money Market Funds), your payment
will normally be wired to your bank on the next business day.
ELECTRONIC REDEMPTIONS
Your bank must participate in the Automated Clearing House (ACH) and must be a
U.S. bank.
Your bank may charge for this service.
Call 1-800-228-1872 to request an electronic redemption.
If you call by 4 p.m. Eastern time (3 p.m. for Money Market Funds), the NAV of
your shares will normally be determined on the same day and the proceeds
credited within 7 days.
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SHAREHOLDER INFORMATION
GENERAL POLICIES ON SELLING SHARES
REDEMPTIONS IN WRITING REQUIRED
You must request redemption in writing and obtain a signature guarantee if:
- The check is not being mailed to the address on your account; or
- The check is not being made payable to the owner(s) of the account; or
- Your account address has changed within the last ten business days; or
- The redemption proceeds are being transferred to another Fund account
with a different registration; or
- The redemption proceeds are being wired to bank instructions currently
not on your account.
A signature guarantee can be obtained from a financial institution, such as a
bank, broker-dealer, or credit union, or from members of the STAMP (Securities
Transfer Agents Medallion Program), MSP (New York Stock Exchange Medallion
Signature Program) or SEMP (Stock Exchanges Medallion Program). Members are
subject to dollar limitations which must be considered when requesting their
guarantee. The Transfer Agent may reject any signature guarantee if it believes
the transaction would otherwise be improper.
VERIFYING TELEPHONE REDEMPTIONS
The Fund makes every effort to insure that telephone redemptions are only made
by authorized shareholders. All telephone calls are recorded for your protection
and you will be asked for information to verify your identity. Given these
precautions, unless you have specifically indicated on your application that you
do not want the telephone redemption feature, you may be responsible for any
fraudulent telephone orders. If appropriate precautions have not been taken, the
Transfer Agent may be liable for losses due to unauthorized transactions.
REDEMPTIONS WITHIN 15 BUSINESS DAYS OF INVESTMENT
When you have made an investment by check, the proceeds of your redemption may
be held up to 15 business days until the Transfer Agent is satisfied that the
check has cleared.
REDEMPTION FEES
The BB&T Funds will assess a redemption fee of 2.00% of the total redemption
amount if you sell your shares (of any class), including exchanging your shares
for shares of another BB&T Fund, after holding them for less than 7 calendar
days subject to certain exceptions or limitations described below. The
redemption fee will not be assessed on sales of shares or exchanges out of the
BB&T Money Market Funds. The redemption fee is paid directly to the BB&T Funds
and is designed to offset brokerage commissions, market impact and other costs
associated with short-term trading of Fund shares. For purposes of determining
whether the redemption fee applies, the shares what were held the longest will
be redeemed first. This redemption fee is in addition to any contingent deferred
sales charges that may be applicable at the time of sale. Although the BB&T
Funds will attempt to assess the redemption fee on applicable redemptions, there
can be no guarantee that the Funds will be successful in doing so, including
instances when omnibus accounts or retirement plans will not or cannot collect
the redemption fee from their underlying accounts. Further, the Funds will not
apply the redemption fee to certain types of redemptions that do not indicate
market timing strategies, such as redemptions of shares through automatic
non-discretionary rebalancing programs or systematic withdrawal plans,
redemptions requested within 7 calendar days following the death or disability
of the shareholder (or, if a trust, its beneficiary), redemptions requested
pursuant to minimum required distributions from retirement plans or redemptions
initiated by the Funds. If you reinvest a dividend or capital gain and purchase
more shares (in the same fund) those shares will not be subject to the
redemption fee upon the sale of those shares or the exchange of those shares for
shares of another fund.
REFUSAL OF REDEMPTION REQUEST
Payment for shares may be delayed under extraordinary circumstances or as
permitted by the Securities and Exchange Commission in order to protect
remaining shareholders.
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SHAREHOLDER INFORMATION
GENERAL POLICIES ON SELLING SHARES
CONTINUED
REDEMPTION IN KIND
Each Fund reserves the right to make payment in securities rather than cash,
known as "redemption in kind." This could occur under extraordinary
circumstances, such as a very large redemption that could affect Fund operations
(for example, more than 1% of the Fund's net assets). If the Fund deems it
advisable for the benefit of all shareholders, redemption in kind will consist
of securities equal in market value to your shares. When you convert these
securities to cash, you will pay brokerage charges.
UNDELIVERABLE DISTRIBUTION CHECKS
For any shareholder who chooses to receive distributions in cash:
If distribution checks (1) are returned and marked as "undeliverable" or (2)
remain uncashed for six months, your account will be changed automatically so
that all future distributions are reinvested in your account. Checks that remain
uncashed for six months will be canceled and the money reinvested in the
appropriate Fund at the current NAV.
104
SHAREHOLDER INFORMATION
EXCHANGING YOUR SHARES
You can exchange your shares in one Fund for shares of the same class of another
BB&T Fund, usually without paying additional sales charges (see "Notes" below).
You must meet the minimum investment requirements for the Fund into which you
are exchanging. Exchanges from one Fund to another are taxable. Institutional
Shares may also be exchanged for Class A Shares of the same Fund if you cease to
be eligible to purchase Institutional Shares. Institutional Shares of each Fund
may not be exchanged for Class B Shares or Class C Shares. No transaction fees
are currently charged for exchanges. However, the 2.00% redemption fee is
charged on exchanges made within 7 calendar days at a purchase or exchange
transaction. Furthermore, the exchange of Institutional Shares for Class A
Shares will require payment of the sales charge unless the sales charge is
waived. Please consult the Class A, Class B, and Class C Shares prospectus for
more information.
INSTRUCTIONS FOR EXCHANGING SHARES
Exchanges may be made by sending a written request to BB&T Funds, P.O. Box
182533, Columbus OH 43218-2533, or by calling 1-800-228-1872. Please provide the
following information:
- Your name and telephone number.
- The exact name on your account and account number.
- Taxpayer identification number (usually your Social Security number).
- Dollar value or number of shares to be exchanged.
- The name of the Fund from which the exchange is to be made.
- The name of the Fund into which the exchange is being made.
See "Selling your Shares" for important information about telephone
transactions.
MARKET TIMING
Excessive short-term trading or other abusive trading practices may disrupt
portfolio management strategies and hurt Fund performance. Such practices may
dilute the value of Fund shares, interfere with the efficient management of a
Fund's investments, and increase brokerage and administrative costs. To prevent
disruption in the management of the Funds due to market timing strategies, we
have adopted certain policies and procedures. To deter market timing, the Funds
impose redemption fees on shares sold within seven calendar days of purchase.
The redemption fees are in addition to any applicable contingent deferred sales
charges. Because money market funds are designed to accommodate frequent
trading, the redemption fee will not be assessed on sales of shares or exchanges
out of the money market funds. Redemption fees are also not charged on specified
types of redemptions that do not indicate market timing strategies, such as
redemptions of shares through automatic non-discretionary rebalancing programs
or systematic withdrawal plans. Further exceptions and information are found in
this prospectus under "Shareholder Information -- Redemption Fees."
We also reserve the right to close any account in which we have identified a
pattern of excessive or abusive trading.
We cannot guarantee that we will detect every market timer due to the
limitations inherent in our technological systems. In addition, although we will
attempt to assess the redemption fee on all applicable redemptions, we cannot
guarantee that we will succeed in doing so. For example, certain omnibus
accounts or retirement plans may be unable or unwilling to collect the
redemption fee from their underlying accounts. These types of accounts generally
include multiple investors and typically provide the Fund with a net purchase or
redemption request on any given day where purchasers of Fund shares and
redeemers of Fund shares are netted against one another and the identity of
individual purchasers and redeemers whose orders are aggregated are not known by
the Funds. The netting effect often makes it more difficult to apply redemption
fees and to identify market timing activity.
We will apply our policies and procedures consistently to all fund shareholders.
We reserve the right to modify our policies and procedures at any time without
prior notice as we deem in our sole discretion to be in the best interests of
fund shareholders, or to comply with state or Federal legal requirements.
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SHAREHOLDER INFORMATION
NOTES ON EXCHANGES
- When exchanging from a Fund that has no sales charge or a lower sales
charge to a Fund with a higher sales charge, you will pay the
difference.
- The registration and tax identification numbers of the two accounts
must be identical.
- The Exchange Privilege (including automatic exchanges) may be changed
or eliminated at any time upon a 60-day notice to shareholders.
- Be sure to read carefully the Prospectus of any Fund into which you
wish to exchange shares.
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SHAREHOLDER INFORMATION
DIVIDENDS, DISTRIBUTIONS AND TAXES
Please consult your tax adviser regarding your specific questions about federal,
state and local income taxes. Below we have summarized some important tax issues
that affect the Funds and their shareholders. This summary is based on current
tax laws, which may change.
Generally, for federal income tax purposes, Fund distributions are taxable as
ordinary income, except that distributions of long-term capital gains will be
taxed as such regardless of how long you have held your shares. Additionally,
distributions of investment income designated by the Fund as derived from
"qualified dividend income" will be taxed at the rates applicable to long-term
capital gains, provided holding period and other requirements are met at both
the Shareholder and Fund level. Long-term capital gains rates applicable to
individuals have been reduced to 15%, with lower rates applicable to taxpayers
in the 10% and 15% rates, through December 31, 2008. Distributions are taxable
whether you received them in cash or in additional shares. Distributions are
also taxable to you even if they are paid from income or gains earned by the
Fund before your investment (and thus were included in the price you paid). The
Money Market Funds do not expect a significant portion of Fund distributions to
be derived from qualified dividend income.
For the Tax-Free Bond Funds, the income dividends that you receive are expected
to be exempt from federal income taxes but may be subject to state and local
taxes. In the case of the Kentucky Intermediate Tax-Free Fund, Maryland
Intermediate Tax-Free Fund, North Carolina Intermediate Tax-Free Fund, South
Carolina Intermediate Tax-Free Fund, Virginia Intermediate Tax-Free Fund, and
West Virginia Intermediate Tax-Free Fund, dividend income is expected to be
exempt from Kentucky, Maryland, North Carolina, South Carolina, Virginia, and
West Virginia income taxes, respectively. However, if you receive Social
Security or railroad retirement benefits, you should consult your tax adviser to
determine what effect, if any, an investment in the Tax-Free Bond Funds may have
on the federal taxation of your benefits. In addition, an investment in the
Tax-Free Bond Funds may result in liability for federal alternative minimum tax,
both for individual and corporate shareholders. Investments held in a Tax-Free
Bond Fund which do not conform to the Fund's primary goal of investing in
securities which are exempt from federal and state income taxes, whether for
defensive reasons or otherwise, may result in federal and/or state income or
other taxes.
A Fund of Funds will not be able to offset gains realized by one Fund in which
it invests against losses realized by another Fund in which it invests. The use
of a fund of funds structure could therefore affect the amount, timing and
character of distributions to Shareholders, and may increase the amount of taxes
payable by Shareholders.
A Fund's investments in foreign securities may be subject to foreign withholding
taxes. In that case, a Fund's yield on those securities would be decreased.
Except with respect to the International Equity Fund, shareholders generally
will not be entitled to claim a credit or deduction with respect to foreign
taxes. In addition, a Fund's investments in foreign securities or foreign
currencies may increase or accelerate a Fund's recognition of ordinary income
and may affect the timing or amount of a Fund's distributions.
Any gain resulting from the sale or exchange of your Fund Shares (even if the
income from which is tax exempt) will generally be subject to tax. You should
consult your tax adviser for more information on your own tax situation,
including possible state and local taxes.
BB&T Funds will send you a statement each year showing the tax status of all
your distributions.
- For each Fund, other than the Tax-Free Bond Funds, the dividends and
short-term capital gains that you receive are considered ordinary
income for tax purposes. For the Tax-Free Bond Funds, any short-term
capital gains that you receive are taxable to you as ordinary dividend
income for federal income tax purposes.
- Any distributions of net long-term capital gains by a Fund are taxable
to you as long-term capital gains for tax purposes, no matter how long
you've owned shares in the Fund.
- Generally, the Funds' advisers do not consider taxes when deciding to
buy or sell securities. Capital gains are realized from time to time
as by-products of ordinary investment activities. Distributions may
vary considerably from year to year.
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SHAREHOLDER INFORMATION
- If you sell or exchange shares, any gain or loss you have is a taxable
event. This means that you may have a capital gain to report as
income, or a capital loss to report as a deduction, when you complete
your federal income tax return.
- Distributions of dividends or capital gains, and capital gains or
losses from your sale or exchange of Fund shares, may be subject to
state and local income taxes as well.
SPECIAL CONSIDERATIONS FOR NON-U.S. SHAREHOLDERS
Capital gain dividends will not be subject to withholding. In general, dividends
(other than capital gain dividends) paid to a shareholder that is not a "U.S.
person" within the meaning of the Code (such shareholder, a "foreign person")
are subject to withholding of U.S. federal income tax at a rate of 30% (or lower
applicable treaty rate). However, effective for taxable years of a Fund
beginning after December 31, 2004 and before January 1, 2008, a Fund will not be
required to withhold any amounts with respect to distributions of (i)
U.S.-source interest income that, in general would not be subject to U.S.
federal income tax if earned directly by an individual foreign person, and (ii)
net short-term capital gains in excess of net long-term capital losses, in each
case to the extent such distributions are properly designated by the Fund. If a
Fund of Funds invests in an Underlying Fund that pays distributions from such
sources to the Fund of Funds, such distributions will retain their character as
not subject to withholding when paid by the Fund of Funds to its foreign
shareholders. This provision will first apply to each Fund in its taxable year
beginning October 1, 2005.
Recent legislation modifies the tax treatment of distributions from a Fund that
are paid to a foreign person and are attributable to gain from "U.S. real
property interests" ("USRPIs"), which the Code defines to include direct
holdings of U.S. real property and interests (other than solely as a creditor)
in "U.S. real property holding corporations" such as REITs. Effective for
dividends paid or deemed paid on or before December 31, 2007, distributions to
foreign persons attributable to gains from the sale or exchange of USRPIs
("USRPI Distributions") will give rise to an obligation for those foreign
persons to file a U.S. tax return and pay tax, and may well be subject to
withholding under future regulations. A Fund of Funds will not, under current
law, receive or pass through USRPI Distributions as a result of its investment
in an underlying Fund; this result may be changed by future regulations.
The tax information in this prospectus is provided as general information and
will not apply to you if you are investing through a tax-deferred account such
as an IRA or a qualified employee benefit plan. (Non-U.S. investors may be
subject to U.S. withholding and estate tax).
MORE INFORMATION ABOUT TAXES IS IN OUR SAI.
ADDITIONAL INFORMATION ABOUT THE FUNDS
FAIR VALUE PRICING POLICIES
A Fund will fair value price its securities when market quotations are not
readily available. Generally, this would include securities for which trading
has been halted, securities whose value has been materially affected by the
occurrence of a significant event (as defined below), securities whose price has
become stale (i.e., the market price has remained unchanged for five business
days), and other securities where a market price is not available from either a
national pricing service or a broker. In addition, the Pricing Committee will
review exception priced securities (i.e., securities for which the market value
is provided by a quote from a single broker rather than a national pricing
service) on a quarterly basis. In these situations, the Funds' Pricing Committee
will employ certain Board-approved methodologies to determine a fair value for
the securities. Fair valuations will be reviewed by the Board of Trustees on a
quarterly basis. Fair value pricing should result in a more accurate
determination of a Fund's net asset value price, which should eliminate the
potential for arbitrage in a Fund.
A "significant event" is one that occurred prior to a Fund's valuation time, is
not reflected in the most recent market price of a security, and materially
affects the value of a security. Generally, such "significant events" relate to
developments in foreign securities that occur after the close of trading in
their respective markets. The Fund's accounting agent may obtain fair value
prices of foreign securities through utilization of a Fair Value Pricing Service
previously approved by the Board where a movement in the U.S. equities market is
sufficiently large to constitute a trigger established by the Pricing Committee.
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SHAREHOLDER INFORMATION
DISCLOSURE OF PORTFOLIO HOLDINGS
Information regarding the Funds' policies and procedures regarding the
disclosure of portfolio holdings is contained in our Statement of Additional
Information.
INVESTMENT IN EXCHANGE-TRADED FUNDS
The Capital Manager Conservative Growth Fund, Capital Manager Moderate Growth
Fund, Capital Manager Growth Fund, Capital Manager Equity Fund, Prime Money
Market Fund, Total Return Bond Fund, Large Cap Growth Fund, Large Cap Fund,
Small Cap Fund, International Equity Fund, Mid Cap Growth Fund, Mid Cap Value
Fund, Special Opportunities Fund, Equity Income Fund, Short U.S. Government
Fund, Intermediate U.S. Government Fund, Kentucky Intermediate Tax-Free Fund,
Maryland Intermediate Tax-Free Fund, North Carolina Intermediate Tax-Free Fund,
South Carolina Intermediate Tax-Free Fund, Virginia Intermediate Tax-Free Fund,
and West Virginia Intermediate Tax-Free Fund may each invest in index-based
exchange-traded funds, such as iShares(R) Trust and iShares(R), Inc.
("iShares(R)*").
* iShares(R) is a registered trademark of Barclays Global Investors, N.A.
("BGI"). Neither BGI nor the iShares(R) Funds make any representations
regarding the advisability of investing in an iShares(R) fund.
iShares(R) is a registered investment company unaffiliated with the Funds that
offers several series of securities, each of which seeks to replicate the
performance of a stock market index or a group of stock markets in a particular
geographic area. Thus, investment in iShares(R) offers, among other things, an
efficient means to achieve diversification to a particular industry that would
otherwise only be possible through a series of transactions and numerous
holdings. Although similar diversification benefits may be achieved through an
investment in another investment company, exchange-traded funds generally offer
greater liquidity and lower expenses. Because an exchange-traded fund charges
its own fees and expenses, fund shareholders will indirectly bear these costs.
The Funds will also incur brokerage commissions and related charges when
purchasing shares in an exchange-traded fund in secondary market transactions.
Unlike typical investment company shares, which are valued once daily, shares in
an exchange-traded fund may be purchased or sold on a listed securities exchange
throughout the trading day at market prices that are generally close to net
asset value. See "Additional Investment Strategies and Risks" for information
regarding the risks associated with investment in an exchange-traded fund.
Because exchange-traded funds are investment companies, investment in such funds
would, absent exemptive relief, be limited under applicable Federal statutory
provisions. Those provisions restrict a fund's investment in the shares of
another investment company to up to 5% of its assets (which may represent no
more than 3% of the securities of such other investment company) and limit
aggregate investments in all investment companies to 10% of assets. The Funds
may invest in iShares(R) in excess of the statutory limit in reliance on an
exemptive order issued to that entity, provided that certain conditions are met.
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OTHER INFORMATION ABOUT THE FUNDS
FINANCIAL HIGHLIGHTS
The Financial Highlights Table is intended to help you understand the Funds'
financial performance for the past 5 years or, if shorter, the period of the
Funds' operations. Certain information reflects financial results for a single
fund share. The total returns in the table represent the rate that an investor
would have earned [or lost] on an investment in the fund (assuming reinvestment
of all dividends and distributions). This information has been audited by KPMG
LLP, whose report, along with the Fund's financial statements, is incorporated
by reference in the SAI, which is available upon request.
The Financial Highlights for the Mid Cap Growth Fund, Mid Cap Value Fund and
West Virginia Intermediate Tax-Free Fund for the periods ended January 31, 2001
and prior were audited by other auditors whose report thereon dated March 14,
2001 expressed an unqualified opinion on those financial highlights.
111
OTHER INFORMATION ABOUT THE FUNDS
FINANCIAL HIGHLIGHTS
CONTINUED
INVESTMENT ACTIVITIES DIVIDENDS
----------------------------------- -----------------------------------
NET
REALIZED/
UNREALIZED
GAINS NET REALIZED
NET ASSET NET (LOSSES) ON GAINS ON
VALUE, INVESTMENT INVESTMENTS TOTAL FROM NET INVESTMENTS
BEGINNING INCOME AND FOREIGN INVESTMENT INVESTMENT AND FOREIGN TOTAL
OF PERIOD (LOSS) CURRENCIES ACTIVITIES INCOME CURRENCIES DIVIDENDS
---------- ---------- ----------- ---------- ---------- ------------ ---------
LARGE CAP FUND
(formerly known as the Large Company
Value Fund)
Year Ended September 30, 2005 ............ $17.29 0.34 2.22 2.56 (0.34) -- (0.34)
Year Ended September 30, 2004 ............ $14.90 0.26 2.39 2.65 (0.26) -- (0.26)
Year Ended September 30, 2003 ............ $12.87 0.27 2.03 2.30 (0.27) -- (0.27)
Year Ended September 30, 2002 ............ $16.82 0.22 (3.47) (3.25) (0.22) (0.48) (0.70)
Year Ended September 30, 2001 ............ $18.60 0.26 (0.89) (0.63) (0.26) (0.89) (1.15)
LARGE CAP GROWTH FUND
(formerly known as the Large Company
Growth Fund)
Year Ended September 30, 2005 ............ $ 8.35 0.06(c) 0.77 0.83 (0.06) -- (0.06)
Year Ended September 30, 2004 ............ $ 7.79 (0.01) 0.57 0.56 -- -- --
Year Ended September 30, 2003 ............ $ 6.67 (0.01)(c) 1.13 1.12 -- -- --
Year Ended September 30, 2002 ............ $ 8.23 (0.03) (1.53) (1.56) -- -- --
Year Ended September 30, 2001 ............ $14.84 (0.03) (5.60) (5.63) -- (0.98) (0.98)
MID CAP VALUE FUND
Year Ended September 30, 2005 ............ $15.41 0.17(c) 3.05 3.22 (0.16) (5.09) (5.25)
Year Ended September 30, 2004 ............ $12.98 0.22(c) 2.42 2.64 (0.21) -- (0.21)
Year Ended September 30, 2003 ............ $10.93 0.19(c) 2.04 2.23 (0.18) -- (0.18)
Year Ended September 30, 2002 ............ $13.12 0.20 (1.04) (0.84) (0.20) (1.15) (1.35)
February 1, 2001 to September 30,
2001 (a) .............................. $14.26 0.15 (1.13) (0.98) (0.16) -- (0.16)
Year Ended January 31, 2001 .............. $14.10 0.25 0.95 1.20 (0.25) (0.79) (1.04)
MID CAP GROWTH FUND
Year Ended September 30, 2005 ............ $11.40 (0.06)(c) 3.31 3.25 -- (0.14) (0.14)
Year Ended September 30, 2004 ............ $10.22 (0.08) 1.26 1.18 -- -- --
Year Ended September 30, 2003 ............ $ 8.36 (0.06) 1.92 1.86 -- -- --
Year Ended September 30, 2002 ............ $10.10 (0.06) (1.05) (1.11) -- (0.63) (0.63)
February 1, 2001 to September 30,
2001 (a) .............................. $14.84 (0.02) (4.72) (4.74) -- -- --
Year Ended January 31, 2001 .............. $20.78 (0.04) (2.08) (2.12) -- (3.82) (3.82)
SMALL CAP FUND
(formerly known as the Small Company
Value Fund)
Year Ended September 30, 2005 ............ $14.23 0.16(c) 2.62 2.78 (0.15) (0.42) (0.57)
Year Ended September 30, 2004 ............ $11.44 0.02 2.91 2.93 (0.02) (0.12) (0.14)
May 19, 2003 to September 30, 2003 (b) ... $10.00 (0.01)(c) 1.45 1.44 --(g) -- --(g)
INTERNATIONAL EQUITY FUND
Year Ended September 30, 2005 ............ $ 8.24 0.12(c) 1.49 1.61 (0.13) -- (0.13)
Year Ended September 30, 2004 ............ $ 6.98 0.10(c) 1.26 1.36 (0.10) -- (0.10)
Year Ended September 30, 2003 ............ $ 6.41 0.05(c) 0.57 0.62 (0.05) -- (0.05)
Year Ended September 30, 2002 ............ $ 7.53 -- (1.12) (1.12) --(g) -- --(g)
Year Ended September 30, 2001 ............ $12.60 (0.05) (3.00) (3.05) -- (2.02) (2.02)
SPECIAL OPPORTUNITIES EQUITY FUND
Year Ended September 30, 2005 ............ $13.12 (0.03) 2.68 2.65 -- (0.12) (0.12)
Year Ended September 30, 2004 ............ $10.53 (0.05) 2.72 2.67 -- (0.08) (0.08)
June 2, 2003 to September 30, 2003 (b) ... $10.00 --(g) 0.53 0.53 --(g) -- --(g)
EQUITY INCOME FUND
Year Ended September 30, 2005 ............ $10.35 0.28 1.76 2.04 (0.27) (0.02) (0.29)
June 30, 2004 to September 30, 2004 (b) .. $10.00 0.05(c) 0.34 0.39 (0.04) -- (0.04)
SHORT U.S. GOVERNMENT FUND
Year Ended September 30, 2005 ............ $ 9.71 0.25 (0.13) 0.12 (0.32) -- (0.32)
Year Ended September 30, 2004 ............ $ 9.90 0.20 (0.11) 0.09 (0.28) -- (0.28)
Year Ended September 30, 2003 ............ $10.09 0.29 (0.11) 0.18 (0.37) -- (0.37)
Year Ended September 30, 2002 ............ $10.05 0.45(d) 0.06(d) 0.51 (0.47) -- (0.47)
Year Ended September 30, 2001 ............ $ 9.64 0.53 0.41 0.94 (0.53) -- (0.53)
INTERMEDIATE U.S. GOVERNMENT FUND
Year Ended September 30, 2005 ............ $10.25 0.37(c) (0.13) 0.24 (0.41) (0.05) (0.46)
Year Ended September 30, 2004 ............ $10.58 0.34 (0.18) 0.16 (0.36) (0.13) (0.49)
Year Ended September 30, 2003 ............ $10.78 0.37 (0.07) 0.30 (0.41) (0.09) (0.50)
Year Ended September 30, 2002 ............ $10.39 0.49(e) 0.42(e) 0.91 (0.52) -- (0.52)
Year Ended September 30, 2001 ............ $ 9.73 0.54 0.66 1.20 (0.54) -- (0.54)
TOTAL RETURN BOND FUND
(formerly known as the Intermediate Corporate
Bond Fund)
Year Ended September 30, 2005 ............ $10.59 0.39(c) (0.16) 0.23 (0.47) (0.03) (0.50)
Year Ended September 30, 2004 ............ $10.72 0.44 (0.08) 0.36 (0.49) -- (0.49)
Year Ended September 30, 2003 ............ $10.33 0.49 0.41 0.90 (0.51) -- (0.51)
Year Ended September 30, 2002 ............ $10.56 0.55(f) (0.04)(f) 0.51 (0.57) (0.17) (0.74)
Year Ended September 30, 2001 ............ $ 9.98 0.62 0.58 1.20 (0.62) -- (0.62)
----------
* During the period certain fees were reduced. If such reductions had not
occurred, the ratios would have been as indicated.
** Portfolio turnover rate is calculated on the basis of the Fund as a whole
without distinguishing between classes of shares issued.
(a) For the period from February 1, 2001 to September 30, 2001. Upon
reorganizing as Funds of the BB&T Funds, the Mid Cap Value Fund and Mid Cap
Growth Fund changed their fiscal year end from January 31 to September 30,
2001. The Financial Highlights for the periods prior to February 1, 2001
represent the OVB Equity Income Portfolio and OVB Capital Appreciation
Portfolio, respectively.
(b) Period from commencement of operations.
(c) Per share net investment income (loss) has been calculated using the
average daily shares method.
(d) Without the adoption of the change in amortization method as required by
the November 2000 revised version of the AICPA Audit and Accounting Guide
for Investment Companies, the amounts for net investment income, net
realized/unrealized gains (losses), and the net investment income ratio
would have been: $0.49, $0.02, and 4.65%, respectively.
112
INSTITUTIONAL SHARES
RATIOS/SUPPLEMENTARY DATA
----------------------------------------------------------
RATIO RATIO OF
NET OF NET RATIO OF
ASSETS, EXPENSES INVESTMENT EXPENSES
NET ASSET END OF TO AVERAGE INCOME (LOSS) TO AVERAGE PORTFOLIO
VALUE, END TOTAL PERIOD NET TO AVERAGE NET TURNOVER
OF PERIOD RETURN(H) (000) ASSETS(I) NET ASSETS(I) ASSETS*(I) RATE**
---------- --------- -------- ---------- ------------- ---------- ---------
LARGE CAP FUND
(formerly known as the Large Company
Value Fund)
Year Ended September 30, 2005 ............ $19.51 14.92% $605,493 0.89% 1.82% 0.99% 19.50%
Year Ended September 30, 2004 ............ $17.29 17.86% $620,186 0.95% 1.58% 1.06% 16.40%
Year Ended September 30, 2003 ............ $14.90 17.98% $475,289 0.92% 1.90% 1.06% 18.89%
Year Ended September 30, 2002 ............ $12.87 (20.33)% $319,971 0.98% 1.37% 1.12% 23.02%
Year Ended September 30, 2001 ............ $16.82 (3.53)% $360,847 0.99% 1.48% 1.13% 24.20%
LARGE CAP GROWTH FUND
(formerly known as the Large Company
Growth Fund)
Year Ended September 30, 2005 ............ $ 9.12 9.92% $336,103 0.89% 0.63% 0.99% 62.78%
Year Ended September 30, 2004 ............ $ 8.35 7.19% $346,061 0.97% (0.08)% 1.08% 127.47%
Year Ended September 30, 2003 ............ $ 7.79 16.79% $272,961 0.93% (0.11)% 1.07% 91.73%
Year Ended September 30, 2002 ............ $ 6.67 (18.96)% $160,933 1.02% (0.30)% 1.16% 100.46%
Year Ended September 30, 2001 ............ $ 8.23 (40.24)% $151,601 1.05% (0.25)% 1.19% 96.41%
MID CAP VALUE FUND
Year Ended September 30, 2005 ............ $13.38 21.14% $172,295 0.89% 1.02% 0.99% 126.99%
Year Ended September 30, 2004 ............ $15.41 20.44% $182,791 0.98% 1.47% 1.10% 19.17%
Year Ended September 30, 2003 ............ $12.98 20.06% $142,280 0.95% 1.57% 1.10% 18.28%
Year Ended September 30, 2002 ............ $10.93 (8.01)% $ 85,013 0.90% 1.54% 1.13% 18.20%
February 1, 2001 to September 30,
2001 (a) .............................. $13.12 (6.93)% $ 74,070 0.94% 1.75% 1.12% 27.04%
Year Ended January 31, 2001 .............. $14.26 9.03% $ 64,423 0.96% 1.79% 1.11% 59.00%
MID CAP GROWTH FUND
Year Ended September 30, 2005 ............ $14.51 28.73% $126,785 0.91% (0.46)% 1.01% 92.74%
Year Ended September 30, 2004 ............ $11.40 11.55% $118,012 1.00% (0.65)% 1.11% 138.61%
Year Ended September 30, 2003 ............ $10.22 22.25% $100,226 0.95% (0.72)% 1.12% 125.97%
Year Ended September 30, 2002 ............ $ 8.36 (12.26)% $ 69,975 0.89% (0.62)% 1.17% 117.06%
February 1, 2001 to September 30,
2001 (a) .............................. $10.10 (31.94)% $ 90,424 1.02% (0.32)% 1.25% 90.11%
Year Ended January 31, 2001 .............. $14.84 (10.61)% $129,433 1.02% (0.16)% 1.23% 63.00%
SMALL CAP FUND
(formerly known as the Small Company
Value Fund)
Year Ended September 30, 2005 ............ $16.44 19.99% $ 61,046 1.05% 1.07% 1.28% 8.39%
Year Ended September 30, 2004 ............ $14.23 25.78% $ 66,802 1.26% 0.15% 1.42% 11.25%
May 19, 2003 to September 30, 2003 (b) ... $11.44 14.43% $ 43,462 1.69% (0.17)% 1.69% 48.84%
INTERNATIONAL EQUITY FUND
Year Ended September 30, 2005 ............ $ 9.72 19.61% $229,406 1.20% 1.34% 1.33% 44.96%
Year Ended September 30, 2004 ............ $ 8.24 19.48% $233,275 1.32% 1.30% 1.42% 50.68%
Year Ended September 30, 2003 ............ $ 6.98 9.72% $187,315 1.40% 0.78% 1.41% 199.78%
Year Ended September 30, 2002 ............ $ 6.41 (14.85)% $123,330 1.43% 0.03% 1.43% 95.86%
Year Ended September 30, 2001 ............ $ 7.53 (28.33)% $115,405 1.48% (0.14)% 1.48% 144.35%
SPECIAL OPPORTUNITIES EQUITY FUND
Year Ended September 30, 2005 ............ $15.65 20.29% $ 60,823 1.06% (0.18)% 1.08% 30.38%
Year Ended September 30, 2004 ............ $13.12 25.44% $ 39,816 1.12% (0.49)% 1.32% 32.06%
June 2, 2003 to September 30, 2003 (b) ... $10.53 5.31% $ 26,360 0.82% (0.11)% 1.64% 13.24%
EQUITY INCOME FUND
Year Ended September 30, 2005 ............ $12.10 19.88% $ 30,588 0.90% 2.62% 1.12% 39.65%
June 30, 2004 to September 30, 2004 (b) .. $10.35 3.94% $ 21,128 1.29% 1.91% 1.63% 1.65%
SHORT U.S. GOVERNMENT FUND
Year Ended September 30, 2005 ............ $ 9.51 1.21% $155,786 0.66% 2.64% 0.84% 33.67%
Year Ended September 30, 2004 ............ $ 9.71 0.96% $195,920 0.74% 2.10% 0.91% 62.59%
Year Ended September 30, 2003 ............ $ 9.90 1.78% $199,980 0.76% 2.81% 0.91% 93.86%
Year Ended September 30, 2002 ............ $10.09 5.27% $181,797 0.78% 4.30%(d) 0.93% 73.93%
Year Ended September 30, 2001 ............ $10.05 9.99% $169,839 0.78% 5.38% 0.93% 101.28%
INTERMEDIATE U.S. GOVERNMENT FUND
Year Ended September 30, 2005 ............ $10.03 2.34% $539,038 0.70% 3.67% 0.83% 107.04%
Year Ended September 30, 2004 ............ $10.25 1.56% $534,682 0.80% 3.15% 0.92% 98.35%
Year Ended September 30, 2003 ............ $10.58 2.88% $447,665 0.82% 3.43% 0.92% 209.07%
Year Ended September 30, 2002 ............ $10.78 9.11% $340,231 0.85% 4.81%(e) 0.95% 79.36%
Year Ended September 30, 2001 ............ $10.39 12.68% $279,046 0.85% 5.38% 0.95% 84.76%
TOTAL RETURN BOND FUND
(formerly known as the Intermediate
Corporate Bond Fund)
Year Ended September 30, 2005 ............ $10.32 2.23% $461,749 0.71% 3.87% 0.83% 173.74%
Year Ended September 30, 2004 ............ $10.59 3.47% $272,749 0.82% 4.09% 0.94% 31.95%
Year Ended September 30, 2003 ............ $10.72 8.95% $215,000 0.83% 4.61% 0.94% 43.98%
Year Ended September 30, 2002 ............ $10.33 5.19% $142,509 0.83% 5.42%(f) 0.98% 69.15%
Year Ended September 30, 2001 ............ $10.56 12.34% $120,361 0.81% 6.03% 0.96% 142.35%
----------
(e) Without the adoption of the change in amortization method as required by
the November 2000 revised version of the AICPA Audit and Accounting Guide
for Investment Companies, the amounts for net investment income, net
realized/unrealized gains (losses), and the net investment income ratio
would have been: $0.51, $0.40, and 4.99%, respectively.
(f) Without the adoption of the change in amortization method as required by
the November 2000 revised version of the AICPA Audit and Accounting Guide
for Investment Companies, the amounts for net investment income, net
realized/unrealized gains (losses), and the net investment income ratio
would have been: $0.56, $(0.05), and 5.54%, respectively.
(g) Amount is less then $0.005.
(h) Not Annualized for periods less than one year.
(i) Annualized for periods less than one year.
113
OTHER INFORMATION ABOUT THE FUNDS
FINANCIAL HIGHLIGHTS
CONTINUED
INVESTMENT ACTIVITIES
-----------------------------------
NET DIVIDENDS
NET REALIZED/ ----------------------------------
ASSET NET UNREALIZED NET
VALUE, INVESTMENT GAIN TOTAL FROM NET REALIZED
BEGINNING INCOME (LOSSES) ON INVESTMENT INVESTMENT GAINS ON TOTAL
OF PERIOD (LOSS) INVESTMENTS ACTIVITIES INCOME INVESTMENTS DIVIDENDS
--------- ---------- ----------- ---------- ---------- ----------- ---------
KENTUCKY INTERMEDIATE TAX-FREE FUND
Year Ended September 30, 2005............... $10.20 0.29(c) (0.16) 0.13 (0.29) -- (0.29)
Year Ended September 30, 2004............... $10.22 0.28(c) (0.02) 0.26 (0.28) -- (0.28)
February 24, 2003 to September 30,
2003 (a)................................. $10.00 0.16(c) 0.20 0.36 (0.14) -- (0.14)
MARYLAND INTERMEDIATE TAX-FREE FUND
Year Ended September 30, 2005............... $10.16 0.28(c) (0.12) 0.16 (0.28) -- (0.28)
Year Ended September 30, 2004............... $10.16 0.25 0.00(d) 0.25 (0.25) -- (0.25)
February 24, 2003 to September 30,
2003 (a)................................. $10.00 0.13 0.16 0.29 (0.13) -- (0.13)
NORTH CAROLINA INTERMEDIATE TAX-FREE FUND
Year Ended September 30, 2005............... $10.66 0.38 (0.19) 0.19 (0.37) (0.02) (0.39)
Year Ended September 30, 2004............... $10.81 0.35 (0.12) 0.23 (0.34) (0.04) (0.38)
Year Ended September 30, 2003............... $10.86 0.35 (0.01) 0.34 (0.35) (0.04) (0.39)
Year Ended September 30, 2002............... $10.54 0.38 0.39 0.77 (0.37) (0.08) (0.45)
Year Ended September 30, 2001............... $ 9.98 0.40 0.56 0.96 (0.40) -- (0.40)
SOUTH CAROLINA INTERMEDIATE TAX-FREE FUND
Year Ended September 30, 2005............... $10.74 0.36 (0.19) 0.17 (0.36) (0.08) (0.44)
Year Ended September 30, 2004............... $10.81 0.35 (0.06) 0.29 (0.35) (0.01) (0.36)
Year Ended September 30, 2003............... $10.81 0.35 --(d) 0.35 (0.35) -- (0.35)
Year Ended September 30, 2002............... $10.39 0.39 0.41 0.80 (0.38) -- (0.38)
Year Ended September 30, 2001............... $ 9.84 0.40 0.55 0.95 (0.40) -- (0.40)
VIRGINIA INTERMEDIATE TAX-FREE FUND
Year Ended September 30, 2005............... $11.74 0.42 (0.23) 0.19 (0.42) (0.02) (0.44)
Year Ended September 30, 2004............... $11.95 0.40 (0.13) 0.27 (0.40) (0.08) (0.48)
Year Ended September 30, 2003............... $11.99 0.39 --(d) 0.39 (0.39) (0.04) (0.43)
Year Ended September 30, 2002............... $11.57 0.43 0.41 0.84 (0.42) -- (0.42)
Year Ended September 30, 2001............... $10.96 0.44 0.61 1.05 (0.44) -- (0.44)
WEST VIRGINIA INTERMEDIATE TAX-FREE FUND
Year Ended September 30, 2005............... $10.09 0.37(c) (0.15) 0.22 (0.37) (0.08) (0.45)
Year Ended September 30, 2004............... $10.21 0.36 (0.09) 0.27 (0.35) (0.04) (0.39)
Year Ended September 30, 2003............... $10.35 0.35 0.02 0.37 (0.35) (0.16) (0.51)
Year Ended September 30, 2002............... $10.02 0.41 0.34 0.75 (0.40) (0.02) (0.42)
February 1, 2001 to September 30, 2001 (b).. $ 9.93 0.30 0.09 0.39 (0.30) -- (0.30)
Year Ended January 31, 2001................. $ 9.20 0.49 0.73 1.22 (0.49) -- (0.49)
PRIME MONEY MARKET FUND
Year Ended September 30, 2005............... $ 1.00 0.02 --(d) 0.02 (0.02) -- (0.02)
Year Ended September 30, 2004............... $ 1.00 0.01 -- 0.01 (0.01) -- (0.01)
Year Ended September 30, 2003............... $ 1.00 0.01 -- 0.01 (0.01) -- (0.01)
Year Ended September 30, 2002............... $ 1.00 0.02 --(d) 0.02 (0.02) -- (0.02)
Year Ended September 30, 2001............... $ 1.00 0.05 -- 0.05 (0.05) -- (0.05)
U.S. TREASURY MONEY MARKET FUND
Year Ended September 30, 2005............... $ 1.00 0.02 -- 0.02 (0.02) -- (0.02)
Year Ended September 30, 2004............... $ 1.00 0.01 -- 0.01 (0.01) -- (0.01)
Year Ended September 30, 2003............... $ 1.00 0.01 -- 0.01 (0.01) -- (0.01)
Year Ended September 30, 2002............... $ 1.00 0.02 -- 0.02 (0.02) -- (0.02)
Year Ended September 30, 2001............... $ 1.00 0.05 -- 0.05 (0.05) -- (0.05)
CAPITAL MANAGER CONSERVATIVE GROWTH FUND
Year Ended September 30, 2005............... $ 9.36 0.26 0.46 0.72 (0.25) -- (0.25)
Year Ended September 30, 2004............... $ 8.90 0.18(c) 0.46 0.64 (0.18) -- (0.18)
Year Ended September 30, 2003............... $ 8.33 0.18 0.61 0.79 (0.18) (0.04) (0.22)
Year Ended September 30, 2002............... $ 9.17 0.22 (0.66) (0.44) (0.22) (0.18) (0.40)
Year Ended September 30, 2001............... $10.75 0.32 (1.00) (0.68) (0.32) (0.58) (0.90)
CAPITAL MANAGER MODERATE GROWTH FUND
Year Ended September 30, 2005............... $ 9.04 0.19(c) 0.77 0.96 (0.17) -- (0.17)
Year Ended September 30, 2004............... $ 8.30 0.10(c) 0.74 0.84 (0.10) -- (0.10)
Year Ended September 30, 2003............... $ 7.47 0.10 0.82 0.92 (0.08) (0.01) (0.09)
Year Ended September 30, 2002............... $ 8.82 0.14 (0.99) (0.85) (0.13) (0.37) (0.50)
Year Ended September 30, 2001............... $11.25 0.26 (1.71) (1.45) (0.26) (0.72) (0.98)
CAPITAL MANAGER GROWTH FUND
Year Ended September 30, 2005............... $ 8.70 0.15(c) 0.97 1.12 (0.13) -- (0.13)
Year Ended September 30, 2004............... $ 7.81 0.07(c) 0.88 0.95 (0.06) -- (0.06)
Year Ended September 30, 2003............... $ 6.87 0.06(c) 0.93 0.99 (0.05) -- (0.05)
Year Ended September 30, 2002............... $ 8.46 0.05 (1.20) (1.15) (0.04) (0.40) (0.44)
Year Ended September 30, 2001............... $11.66 0.18 (2.43) (2.25) (0.18) (0.77) (0.95)
CAPITAL MANAGER EQUITY FUND
Year Ended September 30, 2005............... $ 9.64 0.12(c) 1.34 1.46 (0.08) -- (0.08)
Year Ended September 30, 2004............... $ 8.49 0.04(c) 1.14 1.18 (0.03) -- (0.03)
Year Ended September 30, 2003............... $ 7.39 0.02(c) 1.15 1.17 (0.02) (0.05) (0.07)
Year Ended September 30, 2002............... $ 8.97 (0.01) (1.57) (1.58) --(d) -- --(d)
March 19, 2001 to September 30, 2001 (a).... $10.00 0.01 (1.03) (1.02) (0.01) --(d) (0.01)
----------
* During the period certain fees were reduced. If such reductions had not
occurred, the ratios would have been as indicated.
** Portfolio turnover rate is calculated on the basis of the Fund as a whole
without distinguishing between classes of shares issued.
(a) Period from commencement of operations.
(b) For the period from February 1, 2001 to September 30, 2001. Upon
reorganizing as a Fund of the BB&T Funds, the West Virginia Intermediate
Tax-Free Fund changed its fiscal year end from January 31 to September 30,
2001. The Financial Highlights for the periods prior to February 1, 2001
represent the OVB West Virginia-Tax Exempt Income Portfolio.
(c) Per share net investment income (loss) has been calculated using the
average daily shares method.
114
INSTITUTIONAL SHARES
RATIOS/SUPPLEMENTARY DATA
------------------------------------------------------------------
RATIO OF
NET EXPENSES
ASSET RATIO OF RATIO OF NET TO
VALUE, NET ASSETS, EXPENSES TO INVESTMENT INCOME AVERAGE PORTFOLIO
END OF TOTAL END OF AVERAGE NET (LOSS) TO AVERAGE NET TURNOVER
PERIOD RETURN(E) PERIOD (000) ASSETS(F) NET ASSETS(F) ASSETS*(F) RATE**
------ --------- ------------ ----------- ----------------- ---------- ---------
KENTUCKY INTERMEDIATE TAX-FREE FUND
Year Ended September 30, 2005........... $10.04 1.28% $ 15,569 0.68% 2.87% 0.97% 37.50%
Year Ended September 30, 2004........... $10.20 2.61% $ 13,441 0.63% 2.78% 1.07% 24.78%
February.24, 2003 to September 30,
2003 (a)............................. $10.22 3.63% $ 14,759 0.53% 2.56% 1.23% 42.87%
MARYLAND INTERMEDIATE TAX-FREE FUND
Year Ended September 30, 2005........... $10.04 1.60% $ 10,084 0.58% 2.78% 1.03% 44.67%
Year Ended September 30, 2004........... $10.16 2.52% $ 9,108 0.60% 2.47% 1.23% 55.18%
February 24, 2003 to September 30,
2003 (a)............................. $10.16 2.93% $ 4,897 0.61% 2.27% 1.65% 40.16%
NORTH CAROLINA INTERMEDIATE TAX-FREE FUND
Year Ended September 30, 2005........... $10.46 1.80% $ 93,418 0.68% 3.51% 0.86% 60.84%
Year Ended September 30, 2004........... $10.66 2.15% $ 96,738 0.75% 3.18% 0.92% 67.80%
Year Ended September 30, 2003........... $10.81 3.19% $ 95,613 0.77% 3.26% 0.92% 44.56%
Year Ended September 30, 2002........... $10.86 7.62% $ 93,856 0.78% 3.57% 0.93% 20.39%
Year Ended September 30, 2001........... $10.54 9.73% $ 90,679 0.79% 3.84% 0.93% 47.35%
SOUTH CAROLINA INTERMEDIATE TAX-FREE FUND
Year Ended September 30, 2005........... $10.47 1.62% $ 16,468 0.71% 3.44% 0.93% 56.03%
Year Ended September 30, 2004........... $10.74 2.77% $ 17,488 0.75% 3.26% 0.94% 32.63%
Year Ended September 30, 2003........... $10.81 3.35% $ 18,297 0.72% 3.31% 0.93% 32.04%
Year Ended September 30, 2002........... $10.81 7.94% $ 17,960 0.67% 3.70% 0.97% 21.81%
Year Ended September 30, 2001........... $10.39 9.76% $ 15,411 0.73% 3.89% 1.03% 36.67%
VIRGINIA INTERMEDIATE TAX-FREE FUND
Year Ended September 30, 2005........... $11.49 1.66% $ 67,579 0.68% 3.60% 0.86% 48.04%
Year Ended September 30, 2004........... $11.74 2.29% $ 68,786 0.76% 3.37% 0.93% 45.07%
Year Ended September 30, 2003........... $11.95 3.31% $ 77,577 0.78% 3.28% 0.92% 34.17%
Year Ended September 30, 2002........... $11.99 7.48% $ 81,683 0.78% 3.66% 0.93% 13.12%
Year Ended September 30, 2001........... $11.57 9.72% $ 76,284 0.78% 3.87% 0.93% 31.28%
WEST VIRGINIA INTERMEDIATE TAX-FREE FUND
Year Ended September 30, 2005........... $ 9.86 2.22% $ 55,662 0.68% 3.74% 0.72% 32.10%
Year Ended September 30, 2004........... $10.09 2.76% $ 63,518 0.76% 3.49% 0.78% 16.24%
Year Ended September 30, 2003........... $10.21 3.77% $ 79,361 0.73% 3.48% 0.76% 25.59%
Year Ended September 30, 2002........... $10.35 7.78% $ 78,170 0.72% 4.04% 0.82% 61.44%
February 1, 2001 to September 30,
2001 (b)............................. $10.02 4.03% $ 75,332 0.62% 4.60% 0.79% 15.75%
Year Ended January 31, 2001............. $ 9.93 13.57% $ 72,553 0.72% 5.11% 0.83% 7.00%
PRIME MONEY MARKET FUND
Year Ended September 30, 2005........... $ 1.00 2.34% $510,941 0.49% 2.31% 0.63% --
Year Ended September 30, 2004........... $ 1.00 0.70% $529,849 0.57% 0.69% 0.70% --
Year Ended September 30, 2003........... $ 1.00 0.87% $667,534 0.60% 0.86% 0.69% --
Year Ended September 30, 2002........... $ 1.00 1.61% $532,465 0.64% 1.54% 0.71% --
Year Ended September 30, 2001........... $ 1.00 4.84% $265,472 0.61% 4.34% 0.75% --
U.S. TREASURY MONEY MARKET FUND
Year Ended September 30, 2005........... $ 1.00 2.11% $592,736 0.48% 2.02% 0.64% --
Year Ended September 30, 2004........... $ 1.00 0.54% $926,162 0.57% 0.53% 0.71% --
Year Ended September 30, 2003........... $ 1.00 0.67% $838,022 0.61% 0.67% 0.70% --
Year Ended September 30, 2002........... $ 1.00 1.40% $915,013 0.65% 1.35% 0.72% --
Year Ended September 30, 2001........... $ 1.00 4.59% $494,773 0.63% 4.46% 0.73% --
CAPITAL MANAGER CONSERVATIVE GROWTH FUND
Year Ended September 30, 2005........... $ 9.83 7.70% $ 71,796 0.20% 2.64% 0.51% 52.50%
Year Ended September 30, 2004........... $ 9.36 7.16% $ 67,925 0.44% 1.93% 0.64% 2.47%
Year Ended September 30, 2003........... $ 8.90 9.55% $ 31,748 0.53% 2.09% 0.73% 33.03%
Year Ended September 30, 2002........... $ 8.33 (5.05)% $ 26,347 0.54% 2.47% 0.74% 6.29%
Year Ended September 30, 2001........... $ 9.17 (6.77)% $ 27,691 0.51% 3.26% 0.71% 35.75%
CAPITAL MANAGER MODERATE GROWTH FUND
Year Ended September 30, 2005........... $ 9.83 10.69% $ 43,353 0.23% 2.01% 0.56% 37.83%
Year Ended September 30, 2004........... $ 9.04 10.12% $ 33,971 0.49% 1.17% 0.69% 0.17%
Year Ended September 30, 2003........... $ 8.30 12.40% $ 26,168 0.50% 1.35% 0.70% 21.46%
Year Ended September 30, 2002........... $ 7.47 (10.55)% $ 20,977 0.58% 1.48% 0.78% 14.56%
Year Ended September 30, 2001........... $ 8.82 (13.81)% $ 25,040 0.51% 2.67% 0.71% 24.24%
CAPITAL MANAGER GROWTH FUND
Year Ended September 30, 2005........... $ 9.69 12.89% $ 37,546 0.23% 1.60% 0.57% 26.22%
Year Ended September 30, 2004........... $ 8.70 12.10% $ 28,660 0.50% 0.77% 0.73% 0.19%
Year Ended September 30, 2003........... $ 7.81 14.49% $ 21,484 0.56% 0.82% 0.76% 17.80%
Year Ended September 30, 2002........... $ 6.87 (14.61)% $ 17,981 0.62% 0.63% 0.82% 8.38%
Year Ended September 30, 2001........... $ 8.46 (20.68)% $ 20,855 0.57% 1.93% 0.77% 27.33%
CAPITAL MANAGER EQUITY FUND
Year Ended September 30, 2005........... $11.02 15.23% $ 25,802 0.22% 1.10% 0.58% 2.14%
Year Ended September 30, 2004........... $ 9.64 13.87% $ 21,051 0.52% 0.42% 0.81% 3.10%
Year Ended September 30, 2003........... $ 8.49 15.82% $ 16,077 0.70% 0.29% 0.90% 8.30%
Year Ended September 30, 2002........... $ 7.39 (17.61)% $ 11,352 0.83% (0.15)% 1.03% 5.75%
March.19, 2001 to September 30,
2001 (a)............................. $ 8.97 (10.22)% $ 13,464 0.72% 0.08% 0.92% 10.10%
----------
(d) Amount is less than $0.005.
(e) Not Annualized for periods less than one year.
(f) Annualized for periods less than one year.
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For more information about the Funds, the following documents are available free
upon request:
ANNUAL/SEMI-ANNUAL REPORTS (REPORTS):
The Fund's annual and semi-annual reports to shareholders contain additional
information on the Fund's investments. In the annual report, you will find a
discussion of the market conditions and investment strategies that significantly
affected the Fund's performance during its last fiscal year.
STATEMENT OF ADDITIONAL INFORMATION (SAI):
The SAI provides more detailed information about the Funds, including its
operations and investment policies. It is incorporated by reference and is
legally considered a part of this prospectus.
You can get free copies of annual and semi-annual reports and the SAI,
prospectuses of other members of the BB&T Funds Family, or request other
information and discuss your questions about the Fund by contacting a
broker or bank that sells the Fund. Or contact the Fund at:
BB&T Funds
3435 Stelzer Road
Columbus, Ohio 43219
Telephone: 1-800-228-1872
Internet: http://www.bbtfunds.com*
* The Funds' website is not a part of this Prospectus.
You can review the Fund's annual and semi-annual reports and SAIs at the Public
Reference Room of the Securities and Exchange Commission. You can get text-only
copies:
- For a fee, by writing the Public Reference Section of the Commission,
Washington, D.C. 20549-6009 or calling 1-800-SEC-0330.
- Free from the Commission's Website at http://www.sec.gov.
Investment Company Act file no. 811-06719.