PROSPECTUS Cusip Number 012688701
THE NORTH CAROLINA TAX
FREE BOND FUND
a NO-LOAD Series of the Albemarle Investment Trust
The investment objectives of The North Carolina Tax Free Bond Fund (the "Fund")
are to provide current income exempt from federal income taxes and from the
personal income taxes of North Carolina, to preserve capital, and to protect the
value of the portfolio against the effects of inflation. Capital appreciation
will be of secondary importance. While there is no assurance that the Fund will
achieve its investment objectives, it endeavors to do so by following the
investment policies described in this Prospectus.
INVESTMENT ADVISOR
LOGO GOES HERE
The Fund is a NO-LOAD non-diversified series of the Albemarle Investment Trust,
a registered open-end management investment company. This Prospectus provides
you with the basic information you should know before investing in the Fund. The
Prospectus should be read and kept for future reference.
A Statement of Additional Information containing additional information about
the Fund has been filed with the Securities and Exchange Commission and is
incorporated by reference in this Prospectus in its entirety. The Fund's
address is Post Office Drawer 69, Rocky Mount, North Carolina 27802-0069, and
its telephone number is 1-800-525-3863. A copy of the Statement of Additional
Information may be obtained at no charge by calling the Fund.
Shares of the Fund are not deposits or obligations of, or guaranteed or endorsed
by, any financial institution, and Fund shares are not federally insured by the
Federal Deposit Insurance Corporation, the Federal Reserve Board, or any other
agency. Investment in the Fund involves risks, including the possible loss of
principal.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS
A CRIMINAL OFFENSE.
The date of this Prospectus and the Statement of Additional Information is
January 1, 1996.
TABLE OF CONTENTS
PROSPECTUS SUMMARY . . . . . . . . . . . . . . . . . . . . . . . . 1
SYNOPSIS OF COSTS AND EXPENSES . . . . . . . . . . . . . . . . . . 2
FINANCIAL HIGHLIGHTS . . . . . . . . . . . . . . . . . . . . . . . 3
INVESTMENT OBJECTIVES AND POLICIES . . . . . . . . . . . . . . . . 3
RISK FACTORS . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
INVESTMENT LIMITATIONS . . . . . . . . . . . . . . . . . . . . . . 7
TAXES. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
DIVIDENDS AND DISTRIBUTIONS. . . . . . . . . . . . . . . . . . . . 10
HOW SHARES ARE VALUED. . . . . . . . . . . . . . . . . . . . . . . 10
HOW SHARES MAY BE PURCHASED. . . . . . . . . . . . . . . . . . . . 10
HOW SHARES MAY BE REDEEMED . . . . . . . . . . . . . . . . . . . . 12
MANAGEMENT OF THE FUND . . . . . . . . . . . . . . . . . . . . . . 13
OTHER INFORMATION. . . . . . . . . . . . . . . . . . . . . . . . . 15
APPENDIX A - Description of Municipal Obligations. . . . . . . . . 16
This Prospectus is not an offering of the securities herein described in any
state in which the offering is unauthorized. No sales representative, dealer or
other person is authorized to give any information or make any representations
other than those contained in this Prospectus.
PROSPECTUS SUMMARY
The Fund The North Carolina Tax Free Bond Fund (the "Fund") is a NO-LOAD
non-diversified series of the Albemarle Investment Trust (the
"Trust"), a registered open-end management investment company
organized as a Massachusetts business trust. See "Other
Information - Description of Shares."
Offering Shares in the Fund are offered at net asset value without a sales
Price charge. The minimum initial investment is $1,000. The minimum
subsequent investment is $250. See "How Shares May be Purchased."
Investment The investment objectives of the Fund are to provide current income
Objectives exempt from federal income taxes and from the personal income taxes
of North Carolina, to preserve capital, and to protect the value of
the portfolio against the effects of inflation. Capital
appreciation will be of secondary importance. See "Investment
Objectives and Policies."
Manager Subject to the general supervision of the Trust's Board of Trustees
and in accordance with the Fund's investment policies, Boys, Arnold
& Company, Inc. of Asheville, North Carolina (the "Advisor"),
manages the Fund's investments. The Advisor manages over $380
million in 125 client accounts for individuals and organizations in
8 states, mainly in the Southeast. For its advisory services, the
Advisor receives a monthly fee based on the Fund's daily net assets
at the annual rate of 0.35%. See "Management of the Fund -The
Advisor."
Dividends Income dividends, if any, are paid monthly; capital gains, if any,
are paid at least once each year. Dividends and capital gains
distributions are automatically reinvested in additional shares at
net asset value unless the shareholder elects to receive cash. See
"Dividends and Distributions."
Redemption There is no charge for redemptions. Shares may be redeemed at any
of Shares time at the net asset value next determined after receipt of a
redemption request by the Fund. A shareholder who submits
appropriate written authorization may redeem shares by telephone.
See "How Shares May Be Redeemed."
Investment The Fund will invest primarily in intermediate term municipal bonds
Policies and notes and other debt instruments, the interest on which is
and Risks exempt from federal income taxes and from the personal income taxes
of North Carolina. Some of the Fund's investments may be subject
to an alternative minimum tax. The Fund's assets will generally be
of investment grade or comparable quality, with at least two-thirds
of the Fund's assets being "A" rated or better (or comparable
unrated securities). Some of the securities purchased for the
portfolio of the Fund may be purchased on a "when-issued" basis,
which may involve certain risks. The Fund has registered as a non-
diversified investment company so that it will be able to invest
more than 5% of its assets in obligations of each of one or more
issuers. Prospective investors should also be aware that the net
asset value of the shares of the Fund will change as the general
levels of interest rates fluctuate. When interest rates decline,
the value of a portfolio invested at higher yields can be expected
to rise. Conversely, when interest rates rise, the value of a
portfolio invested at lower yields can be expected to decline. See
"Investment Objectives and Policies," "Risk Factors," "Investment
Limitations," and "Taxes."
SYNOPSIS OF COSTS AND EXPENSES
The following tables set forth certain information in connection with the
expenses of the Fund for the current fiscal year. The information is intended
to assist the investor in understanding the various costs and expenses borne by
the Fund, and therefore indirectly by its investors, the payment of which will
reduce an investor's return on an annual basis.
Shareholder Transaction Expenses
Maximum sales load imposed on purchases
(as a percentage of offering price) . . . . . . . . . . . . . . . . . .NONE
Sales load imposed on reinvested dividends . . . . . . . . . . . . . . . . .NONE
Deferred sales load. . . . . . . . . . . . . . . . . . . . . . . . . . . . .NONE
Redemption fee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .NONE
Exchange fee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .NONE
Annual Fund Operating Expenses -
After Fee Waivers and Expense Reimbursements1
(as a percentage of average net assets)
Investment Advisory Fees1. . . . . . . . . . . . . . . . . . . . . . . . . 0.00%
12b-1 Fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .NONE
Total Other Expenses
Administrator's Fees1 . . . . . . . . . . . . . . . . . . . . . . . . 0.00%
Other Expenses. . . . . . . . . . . . . . . . . . . . . . . . . . . . 0.85%
Total Fund Operating Expenses1. . . . . . . . . . . . . . . . . . 0.85%
EXAMPLE: You would pay the following expenses on a $1,000 investment in the
Fund, whether or not you redeem at the end of the period, assuming 5% annual
return:
1 Year 3 Years 5 Years 10 Years
$9 $27 $47 $105
THE FOREGOING SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE
EXPENSES. ACTUAL EXPENSES MAY BE GREATER OR LESS THAN THOSE SHOWN.
1 The Total Fund Operating Expenses shown above are based upon actual operating
expenses incurred by the Fund for the fiscal year ended August 31, 1995,
which, after fee waivers and expense reimbursements, were 0.85% of average net
assets. Absent such waivers and reimbursements, the percentages shown above
under Investment Advisory Fees, Administrator's Fees, and Total Fund Operating
Expenses would have been 0.35%, 0.15%, and 2.76%, respectively, for the fiscal
year ended August 31, 1995. The Advisor and the Administrator have
voluntarily agreed to waive all or a portion of their advisory and
administrative fees, respectively, and the Advisor has voluntarily agreed to
reimburse other expenses of the Fund, if necessary, in an amount that limits
Total Fund Operating Expenses (exclusive of interest, taxes, brokerage fees
and commissions, and extraordinary expenses) to not more than 0.85% of the
average daily net assets of the Fund. There can be no assurance that the
foregoing voluntary fee waivers and expense reimbursements will continue.
See "Management of the Fund" below for more information about the fees and costs
of operating the Fund. The example assumes a 5% annual return pursuant to the
requirements of the Securities and Exchange Commission. The hypothetical rate
of return is not intended to be representative of past or future performance of
the Fund. The annual rate of return may be greater or lesser than 5%.
FINANCIAL HIGHLIGHTS
The financial data included in the table below has been derived from audited
financial statements of the Fund. The financial data for the fiscal years ended
August 31, 1995 and 1994 has been derived from financial statements audited by
KPMG Peat Marwick LLP, independent auditors, whose reports covering such periods
are included in the Statement of Additional Information. The financial data for
the prior fiscal period was derived from financial statements audited by another
firm of independent auditors. This information should be read in conjunction
with the Fund's latest audited annual financial statements and notes thereto,
which are also included in the Statement of Additional Information, a copy of
which may be obtained at no charge by calling the Fund. Further information
about the performance of the Fund is contained in the Annual Report of the Fund,
a copy of which may be obtained at no charge by calling the Fund.
(For a Share Outstanding Throughout each Period Represented)
Year Year Period
ended ended ended
August August August
31, 31, 31,
1995 1994 1993*
Net Asset Value, Beginning of Period $10.02 $10.40 $10.00
Income (loss) from investment operations
Net investment income 0.45 0.42 0.24
Net realized and unrealized gain (loss)
on investments 0.34 (0.38) 0.40
Total from investment operations 0.79 0.04 0.64
Less distributions from
Net investment income (0.45) (0.42) (0.24)
Net Asset Value, End of Period $10.36 $10.02 $10.40
Total return 8.16% 0.38% 10.43%(a)
Ratios/supplemental data
Net Assets, End of Period $4,183,149 $3,929,053 $2,423,995
Ratio of expenses to average net assets
Before expense reimbursements
and waived fees 2.76% 3.26% 3.50%(a)
After expense reimbursements
and waived fees 0.85% 0.84% 0.77%(a)
Ratio of net investment income to
average net assets
Before expense reimbursements
and waived fees 2.65% 1.67% 1.25%(a)
After expense reimbursements
and waived fees 4.56% 4.09% 3.98%(a)
Portfolio turnover rate 83.12% 22.82% 0.00%
* For the period from January 13, 1993 (commencement of operations) to August
31, 1993.
(a) Annualized.
INVESTMENT OBJECTIVES AND POLICIES
Investment Objectives. The investment objectives of the Fund are to provide
current income exempt from federal income taxes and from the personal income
taxes of North Carolina, to preserve capital, and to protect the value of the
portfolio against the effects of inflation. Capital appreciation will be of
secondary importance. Any investment involves risk, and there can be no
assurance that the Fund will achieve any of its investment objectives. The
Fund's investment objectives and fundamental investment limitations discussed
herein may not be altered without the prior approval of a majority of the Fund's
shareholders.
Investment Policies. As a fundamental policy, the Advisor seeks to achieve the
investment objectives of the Fund by investing the assets of the Fund primarily
(i.e., at least 80% of its assets under normal conditions) in municipal bonds
and notes and other debt instruments, the interest on which is exempt from
federal income taxes and from the personal income taxes of North Carolina. These
obligations are issued primarily by North Carolina, its political subdivisions,
municipalities, agencies, instrumentalities, or public authorities and other
qualifying issuers (including Puerto Rico, the U.S. Virgin Islands, and Guam).
Under normal circumstances, the Fund's average maturity is expected to be of an
intermediate term average maturity.
Although the Advisor seeks to invest all the assets of the Fund in the
obligations described in the preceding paragraph, market conditions may from
time to time limit the availability of such obligations. During periods when
the Advisor is unable to purchase obligations described in the preceding
paragraph for the portfolio of the Fund, the Advisor will seek to invest the
assets of the Fund in Municipal Obligations (as defined below), the interest on
which would be exempt from federal income taxes, but which would be subject to
the personal income taxes of North Carolina. Also, as a temporary defensive
measure during times of adverse market conditions, up to 50% of the assets of
the Fund may be held in cash or invested in the short-term obligations described
in paragraphs 4 and 5 below. All of the investments of the Fund will be made
in:
(1) Tax-exempt securities that are rated AAA, AA, or A by Standard & Poor's
Ratings Group ("S&P") or are rated Aaa, Aa, or A by Moody's Investors
Service, Inc. ("Moody's") (or of equivalent rating by any of the
nationally recognized statistical rating organizations) or which are
unrated but are considered by the Advisor to have essentially the same
characteristics and quality as securities having such ratings;
(2) Tax-exempt securities that are rated BBB by S&P or are rated Baa by
Moody's (or of equivalent rating by any of the nationally recognized
statistical rating organizations) or which are unrated but are
considered by the Advisor to have essentially the same characteristics
and quality as securities having such ratings. However, not more than
one-third of the Fund's total assets will be invested in such
securities;
(3) Notes of issuers having an issue of outstanding Municipal Obligations
rated AAA, AA or A by S&P or Aaa, Aa or A by Moody's (or of equivalent
rating by any of the nationally recognized statistical rating
organizations) or which are guaranteed by the U.S. Government or which
are rated MIG-1 or MIG-2 by Moody's (or of equivalent rating by any of
the nationally recognized statistical rating organizations);
(4) Obligations issued or guaranteed by the U.S. Government or its agencies
or instrumentalities (collectively, "U.S. Government Securities")
(including U.S. Government Securities subject to repurchase agreements);
and
(5) Commercial paper that is rated A-1 or A-2 by S&P or P-1 or P-2 by
Moody's (or of equivalent rating by any of the nationally recognized
statistical rating organizations) (or which is unrated but which is
considered by the Advisor to have essentially the same characteristics
and qualities as commercial paper having such ratings), obligations
(including certificates of deposit and bankers' acceptances) of domestic
branches of U.S. banks with at least $1 billion of assets, and cash.
Interest income from the short-term obligations described in paragraphs 4 and 5
above may be taxable to shareholders as ordinary income for federal and state
income tax purposes. The Fund may purchase Municipal Obligations the interest
on which may be subject to an alternative minimum tax (for purposes of this
Prospectus, the interest thereon is nonetheless considered to be tax-exempt).
For a general discussion of Municipal Obligations, and the risks associated with
an investment therein, see Appendix A hereto. For a description of the ratings
of S&P and Moody's of Municipal Obligations and short-term obligations permitted
as investments, see Appendix B to the Statement of Additional Information. As
used in this Prospectus, the terms "Municipal Obligations" and "tax-exempt
securities" are used interchangeably to refer to debt instruments issued by or
on behalf of states, territories and possessions of the United States and the
District of Columbia and their political subdivisions, agencies or
instrumentalities, the interest on which is exempt from federal income taxes
(without regard to whether the interest thereon is also exempt from the personal
income taxes of any State). The term "North Carolina Municipal Obligations" is
used to refer to Municipal Obligations, the interest on which is exempt from
both federal income taxes and the personal income taxes of North Carolina. In
determining to invest in a particular Municipal Obligation, the Advisor will
rely on the opinion of bond counsel for the issuer as to the validity of the
security and the exemption of interest on such security from federal and
relevant state income taxes, and the Advisor will not make an independent
investigation of the basis for any such opinion.
The Fund's assets will generally be invested in securities of "investment grade"
or comparable quality, with at least two-thirds of the assets being invested in
securities rated in the three highest grades used by the nationally recognized
statistical rating agencies (or comparable unrated securities). The remaining
one-third of the Fund's assets may be invested in securities rated in the fourth
highest grade used by the nationally statistical securities rating agencies
(generally, BBB by S&P or Baa by Moody's) or comparable unrated securities.
Although considered to be of "investment grade" quality, securities rated BBB by
S&P or Baa by Moody's (or comparable unrated securities), while normally
exhibiting adequate protection parameters, have speculative characteristics, and
changes in economic conditions and other circumstances are more likely to lead
to a weakened capacity to make principal and interest payments than in the case
of higher grade Municipal Obligations. Securities rated lower than BBB by S&P
or Baa by Moody's (or comparable unrated securities) are considered speculative
and will not be purchased by the Fund.
While the Advisor may refer to ratings issued by established credit rating
agencies, it is not a policy of the Fund to rely exclusively on ratings issued
by these agencies, but rather to supplement such ratings with the Advisor's own
independent and ongoing review of credit quality. With respect to those
Municipal Obligations which are not rated by a major rating agency, the Fund
will be more reliant on the Advisor's judgment, analysis and experience than
would be the case if such Municipal Obligations were rated. In evaluating the
creditworthiness of an issue, whether rated or unrated, the Advisor may take
into consideration, among other things, the issuer's financial resources, its
sensitivity to economic conditions and trends, the operating history of and the
community support for the facility financed by the issue, the ability of the
issuer's management and regulatory matters.
Although higher quality tax-exempt securities may produce lower yields, they are
generally more marketable. To protect the capital of shareholders of the Fund
under adverse market conditions, the Fund may from time to time deem it prudent
to hold cash or to purchase higher quality securities or taxable short-term
obligations for the Fund with a resultant decrease in yield or increase in the
proportion of taxable income.
The net asset value of the shares of the Fund changes as the general levels of
interest rates fluctuate. When interest rates decline, the value of a portfolio
invested at higher yields can be expected to rise. Conversely, when interest
rates rise, the value of a portfolio invested at lower yields can be expected to
decline.
The Fund has registered as a non-diversified management investment company so
that more than 5% of the assets of the Fund may be invested in the obligations
of each of one or more issuers. Because a relatively high percentage of the
assets of the Fund may be invested in the obligations of a limited number of
issuers, the value of shares of the Fund may be more sensitive to any single
economic, political or regulatory occurrence than the shares of a diversified
investment company would be.
Certain Municipal Obligations may be entitled to the benefits of letters of
credit or similar credit enhancements issued by financial institutions. In such
instances, the Advisor will take into account in assessing the quality of such
bonds not only the creditworthiness of such bonds but also the creditworthiness
of the financial institution.
The Advisor may invest the assets of the Fund in a relatively high percentage of
municipal bonds issued by entities having similar characteristics. The issuers
may pay their interest obligations from revenue of similar projects such as
multi- family housing, nursing homes, electric utility systems, hospitals or
life care facilities. Additional information about these types of investments
and their special risks is contained in the Statement of Additional Information.
This too may make the Fund more sensitive to economic, political, or regulatory
occurrences, particularly because such issuers would likely be located in the
same State. As the similarity in issuers increases, the potential for
fluctuation of the net asset value of the Fund's shares also increases. The
Advisor will only invest the assets of the Fund in securities of issuers which
it believes will make timely payments of interest and principal.
The Advisor may invest from time to time a portion of the Fund's assets in
industrial revenue bonds (referred to under current tax law as private activity
bonds), and also may invest a portion of the Fund's assets in revenue bonds
issued for housing, including multi-family housing, health care facilities or
electric utilities, at times when the relative value of issues of such a type is
considered, in the judgment of the Advisor, to be more favorable than that of
other available types of issues, taking into consideration the particular
restrictions on investment flexibility arising from the investment objective of
the Fund of providing current income exempt from personal income taxes of North
Carolina (as well as federal income taxes). Therefore, investors should also be
aware of the risks that these investments may entail. Industrial revenue bonds
are issued by various state and local agencies to finance various projects.
Additional information about these types of investments and their special risks
is contained in the Statement of Additional Information.
Municipal Obligations in which the Fund may invest also include zero coupon
bonds and deferred interest bonds. Zero coupon bonds and deferred interest
bonds are debt obligations that are issued at a significant discount from face
value. While zero coupon bonds do not require the periodic payment of interest,
deferred interest bonds provide for a period of delay before the regular payment
of interest begins. The discount approximates the total amount of interest the
bonds will accrue and compound over the period until maturity or the first
interest payment date at a rate of interest reflecting the market rate of the
security at the time of issuance. Zero coupon bonds and deferred interest bonds
benefit the issuer by mitigating its need for cash to meet debt service, but
they also require a higher rate of return to attract investors who are willing
to defer receipt of such cash. Such investments may experience greater
volatility in market value than debt obligations that make regular payments of
interest. The Fund will accrue income on such investments for tax and
accounting purposes, which is distributable to shareholders.
The Fund may invest in municipal lease obligations, installment purchase
contract obligations, and certificates of participation in such obligations
(collectively, "lease obligations"). A lease obligation does not constitute a
general obligation of the municipality for which the municipality's taxing power
is pledged, although the lease obligation is ordinarily backed by the
municipality's covenant to budget for the payments due under the lease
obligation. Certain lease obligations contain "non-appropriation" clauses which
provide that the municipality has no obligation to make lease obligation
payments in future years unless money is appropriated for such purpose on a
yearly basis. Although "non-appropriation" lease obligations are secured by the
leased property, disposition of the property in the event of foreclosure might
prove difficult. The Advisor will seek to minimize these risks by not investing
more than 10% of the total assets of the Fund in lease obligations that contain
"non-appropriation" clauses. In evaluating a potential investment in such a
lease obligation, the Advisor will consider: (1) the credit quality of the
obligor, (2) whether the underlying property is essential to a government
function, and (3) whether the lease obligation contains covenants prohibiting
the obligor from substituting similar property if the obligor fails to make
appropriations for the lease obligation. Municipal lease obligations may be
determined to be liquid in accordance with the guidelines established by the
Board of Trustees and other factors the Advisor may determine to be relevant to
such determination.
Money Market Instruments. Under normal circumstances, money market or
repurchase agreement instruments will typically represent a portion of the
Fund's portfolio, as funds awaiting investment, to accumulate cash for
anticipated purchases of portfolio securities and to provide for shareholder
redemptions and operational expenses of the Fund. Money market instruments
mature in thirteen months or less from the date of purchase and may include U.S.
Government Securities (including those subject to repurchase agreements),
bankers acceptances and certificates of deposit of domestic branches of U.S.
banks, and commercial paper (including variable amount demand master notes)
rated in one of the two highest rating categories by any of the nationally
recognized statistical rating organizations or, if not rated, of equivalent
quality in the Advisor's opinion. See the Statement of Additional Information
for a more detailed description of money market instruments.
U.S. Government Securities. The Fund may invest a portion of the portfolio in
U.S. Government Securities, defined to be U.S. Government obligations such as
U.S. Treasury notes, U.S. Treasury bonds, and U.S. Treasury bills, obligations
guaranteed by the U.S. Government such as Government National Mortgage
Association ("GNMA") as well as obligations of U.S. Government authorities,
agencies and instrumentalities such as Federal National Mortgage Association
("FNMA"), Federal Home Loan Mortgage Corporation ("FHLMC"), Federal Home
Administration ("FHA"), Federal Farm Credit Bank ("FFCB"), Federal Home Loan
Bank ("FHLB"), Student Loan Marketing Association ("SLMA"), Resolution Trust
Corporation, and The Tennessee Valley Authority. U.S. Government Securities may
be acquired subject to a repurchase agreement. While obligations of some U.S.
Government sponsored entities are supported by the full faith and credit of the
U.S. Government (e.g. GNMA), several are supported by the right of the issuer to
borrow from the U.S. Government (e.g. FNMA, FHLMC), and still others are
supported only by the credit of the issuer itself (e.g. SLMA, FFCB). The
guarantee of the U.S. Government does not extend to the yield or value of the
Fund's shares. No assurance can be given that the U.S. Government will provide
financial support to U.S. Government agencies or instrumentalities in the
future, since it is not obligated to do so by law.
Repurchase Agreements. The Fund may acquire U.S. Government Securities or
corporate debt securities subject to repurchase agreements. A repurchase
agreement transaction occurs when the Fund acquires a security and
simultaneously resells it to the vendor (normally a member bank of the Federal
Reserve or a registered Government Securities dealer) for delivery on an agreed
upon future date. The repurchase price exceeds the purchase price by an amount
which reflects an agreed upon market interest rate earned by the Fund effective
for the period of time during which the repurchase agreement is in effect.
Delivery pursuant to the resale typically will occur within one to five days of
the purchase. The Fund will not enter into a repurchase agreement which will
cause more than 10% of its net assets to be invested in repurchase agreements
which extend beyond seven days. In the event of the bankruptcy of the other
party to a repurchase agreement, the Fund could experience delays in recovering
its cash or the securities lent. To the extent that in the interim the value of
the securities purchased may have declined, the Fund could experience a loss. In
all cases, the creditworthiness of the other party to a transaction is reviewed
and found satisfactory by the Advisor. Repurchase agreements are, in effect,
loans of Fund assets. The Fund will not engage in reverse repurchase
transactions, which are considered to be borrowings under the Investment Company
Act of 1940 (the "1940 Act").
Investment Companies. In order to achieve its investment objectives, the Fund
may invest up to 10% of the value of its total assets in securities of other
investment companies whose investment objectives are consistent with the Fund's
investment objectives. The Fund will not acquire securities of any one
investment company if, immediately thereafter, the Fund would own more than 3%
of such company's total outstanding voting securities, securities issued by such
company would have an aggregate value in excess of 5% of the Fund's total
assets, or securities issued by such company and securities held by the Fund
issued by other investment companies would have an aggregate value in excess of
10% of the Fund's total assets. To the extent the Fund invests in other
investment companies, the shareholders of the Fund would indirectly pay a
portion of the operating costs of the underlying investment companies. These
costs include management, advisory, brokerage, shareholder servicing and other
operational expenses. Shareholders of the Fund would then indirectly pay higher
operational costs than if they owned shares of the underlying investment
companies directly.
RISK FACTORS
Investment Policies. Reference should be made to "Investment Objectives and
Policies" above for a description of special risks presented by the investment
policies of the Fund and the specific securities and investment techniques that
may be employed by the Fund. Additional information on these securities and
investment techniques and their associated risks is contained in Appendix A
hereto and in the Statement of Additional Information. Reference should also be
made to "Investment Objectives and Policies" above and "Investment Limitations"
below for a description of the implications and special risks associated with
the non- diversified status of the Fund. Because there is risk in any
investment, there can be no assurance that the Fund will meet its investment
objectives.
Fluctuation in Value. The Fund will be subject to market fluctuation based on
fluctuation in market interest rates. The value of the Fund's portfolio will
generally vary inversely with the direction of prevailing interest rate
movements. Should interest rates rise, the value of the Fund's portfolio would
decrease in value, which would have a depressing influence on the Fund's net
asset value. Fluctuation in value of the Fund may also be based on changes in
the creditworthiness of issuers, which may result from adverse business and
economic developments or other factors.
Additional Factors to Consider. Yields on North Carolina Municipal Obligations
depend on a variety of factors, including: the general conditions of the
municipal bond market; the size of the particular offering; the maturity of the
obligations; and the rating of the issue. Further, any adverse economic
conditions or developments affecting North Carolina or its municipalities could
impact the Fund's portfolio. The ability of the Fund to achieve its investment
objectives also depends on the continuing ability of the issuers of North
Carolina Municipal Obligations and participation interests, or the guarantors of
either, to meet their obligations for the payment of interest and principal when
due. Certain North Carolina constitutional amendments, legislative measures,
executive orders, administrative regulations and voter initiatives could result
in adverse consequences affecting North Carolina Municipal Obligations. See
Appendix A of the Statement of Additional Information entitled "Special
Considerations Regarding Investment in North Carolina Municipal Obligations."
Borrowing. The Fund may borrow, temporarily, up to 5% of its total assets for
extraordinary purposes and may increase this limit to 15% of total assets to
meet redemption requests that might otherwise require untimely disposition of
portfolio holdings. To the extent the Fund borrows for these purposes, the
effects of market price fluctuations on portfolio net asset value will be
exaggerated. If while such borrowing is in effect the value of the Fund's
assets declines, the Fund could be forced to liquidate portfolio securities when
it is disadvantageous to do so. The Fund would incur interest and other
transaction costs in connection with borrowing.
Portfolio Turnover. The Fund sells portfolio securities without regard to the
length of time they have been held in order to take advantage of investment
opportunities. Nevertheless, by utilizing the approach to investing described
herein, portfolio turnover in the Fund will generally not exceed 100% annually.
The degree of portfolio activity affects transaction costs of the Fund. The
degree of portfolio activity may also have an effect on the tax consequences of
any capital gain distributions. See "Financial Highlights" for the Fund's
portfolio turnover rate for prior fiscal periods.
Illiquid Investments. The Fund may invest up to 10% of its net assets in
illiquid securities. Illiquid securities are those that may not be sold or
disposed of in the ordinary course of business within seven days at
approximately the price at which they are valued. Under the supervision of the
Board of Trustees, the Advisor determines the liquidity of the Fund's
investments. The absence of a trading market can make it difficult to ascertain
a market value for illiquid investments. Disposing of illiquid securities
before maturity may be time consuming and expensive, and it may be difficult or
impossible for the Fund to sell illiquid investments promptly at an acceptable
price. The Fund will not invest in restricted securities, which generally
cannot be sold to the public without registration under the federal securities
laws.
Forward Commitments and When-Issued Securities. The Fund may purchase
when-issued securities and commit to purchase securities for a fixed price at a
future date beyond customary settlement time. The Fund is required to hold and
maintain in a segregated account until the settlement date, cash, U.S.
Government Securities or high-grade debt obligations in an amount sufficient to
meet the purchase price. Purchasing securities on a when-issued or forward
commitment basis involves a risk of loss if the value of the security to be
purchased declines prior to the settlement date, which risk is in addition to
the risk of decline in value of the Fund's other assets. Although the Fund
would generally purchase securities on a when-issued or forward commitment basis
with the intention of acquiring securities for its portfolio, the Fund may
dispose of a when-issued security or forward commitment prior to settlement if
the Advisor deems it appropriate to do so. The Fund may realize short-term
gains or losses upon such sales.
INVESTMENT LIMITATIONS
To limit the Fund's exposure to risk, the Fund has adopted certain fundamental
investment limitations which, together with its investment objectives, are
fundamental policies which may not be changed without shareholder approval.
Some of these restrictions are that the Fund will not: (1) issue senior
securities, borrow money or pledge its assets, except that it may borrow from
banks as a temporary measure (a) for extraordinary or emergency purposes, in
amounts not exceeding 5% of the Fund's total assets or, (b) in order to meet
redemption requests which might otherwise require untimely disposition of
portfolio securities in amounts not exceeding 15% of its total assets. The Fund
will not make any investments if borrowing exceeds 5% of its total assets; (2)
make loans of money or securities, except that the Fund may invest in repurchase
agreements (but repurchase agreements having a maturity of longer than seven
days, together with other illiquid securities, are limited to 10% of the Fund's
net assets); (3) invest in securities of issuers which have a record of less
than three years continuous operation (including predecessors and, in the case
of bonds, guarantors), if more than 5% of its total assets would be invested in
such securities; (4) write, purchase or sell commodities, commodities contracts,
futures contracts or related options; (5) invest in oil, gas or mineral leases
or exploration or development programs, or real estate or real estate mortgage
loans (except the Fund may invest in readily marketable securities of companies
that own or deal in such things); (6) invest in restricted securities; and (7)
invest more than 10% of its total assets in the securities of one or more
investment companies. See "Investment Limitations" in the Fund's Statement of
Additional Information for a complete list of investment limitations.
If the Board of Trustees of the Trust determines that the Fund's investment
objectives can best be achieved by a substantive change in a non-fundamental
investment limitation, the Board can make such change without shareholder
approval and will disclose any such material changes in the then current
Prospectus. Any limitation that is not specified in the Fund's Prospectus, or
in the Statement of Additional Information, as being fundamental, is
non-fundamental. If a percentage limitation is satisfied at the time of
investment, a later increase or decrease in such percentage resulting from a
change in the value of the Fund's portfolio securities will not constitute a
violation of such limitation. In order to permit the sale of the Fund's shares
in certain states, the Fund may make commitments that are more restrictive than
the investment policies and limitations described above and in the Statement of
Additional Information. Such commitments may have an effect on the investment
performance of the Fund. Should the Fund determine that any such commitment is
no longer in the best interests of the Fund, it may revoke the commitment and
terminate sales of its shares in the state involved.
The Fund is classified as non-diversified within the meaning of the 1940 Act,
which means that the Fund is not limited by the 1940 Act in the proportion of
its assets that it may invest in obligations of a single issuer. However, the
Fund's investments will be limited so as to qualify as a "regulated investment
company" for purposes of the Internal Revenue Code of 1986, as amended (the
"Code"). See "Taxes". To qualify, among other requirements, the Trust will
limit the Fund's investments so that, at the close of each quarter of the
taxable year, (i) not more than 25% of the market value of the Fund's total
assets will be invested in the securities of a single issuer, and (ii) with
respect to 50% of the market value of its total assets, not more than 5% of the
market value of its total assets will be invested in the securities of a single
issuer, and the Fund will not own more than 10% of the outstanding voting
securities of a single issuer. For purposes of this restriction, the Fund will
regard each state and each political subdivision, agency or instrumentality of
such state and each multi- state agency of which such state is a member and each
public authority that issues securities on behalf of a private entity, as a
separate issuer, except that if the security is backed only by the assets and
revenues of a non-government entity, then the entity with the ultimate
responsibility for the payment of interest and principal may be regarded as the
sole issuer. These tax-related limitations may be changed by the Trustees of
the Trust to the extent necessary to comply with changes to the Federal tax
requirements. A fund that elects to be classified as "diversified" under the
1940 Act must satisfy the foregoing 5% and 10% requirements with respect to 75%
of its total assets. To the extent that the Fund assumes large positions in the
obligations of a small number of issuers, the Fund's total return may fluctuate
to a greater extent than that of a diversified company as a result of changes in
the financial condition or in the market's assessment of the issuers.
TAXES
Taxation of the Fund. The Internal Revenue Code of 1986, as amended (the
"Code"), treats each series in the Trust, including the Fund, as a separate
regulated investment company. Each series of the Trust, including the Fund,
intends to qualify or remain qualified as a regulated investment company under
the Code by distributing substantially all of its "net investment income" to
shareholders and meeting other requirements of the Code. For the purpose of
calculating dividends, net investment income consists of income accrued on
portfolio assets, less accrued expenses. Upon qualification, the Fund will not
be liable for Federal income taxes to the extent earnings are distributed. The
Board of Trustees retains the right for any series of the Trust, including the
Fund, to determine for any particular year if it is advantageous not to qualify
as a regulated investment company. Regulated investment companies, such as each
series of the Trust, are subject to a non-deductible 4% excise tax to the extent
they do not distribute the statutorily required amount of investment income,
determined on a calendar year basis, and capital gain net income, using an
October 31 year end measuring period. The Fund intends to declare or distribute
dividends during the calendar year in an amount sufficient to prevent imposition
of the 4% excise tax.
Taxation of Shareholders. To the extent that the dividends distributed to the
Fund's shareholders are derived from interest income exempt from Federal tax
under Code Section 103(a) and are properly designated as "exempt-interest
dividends" by the Trust, they will be excludable from a shareholder's gross
income for Federal income tax purposes. Exempt-interest dividends are included,
however, in determining the portion, if any, of a person's social security and
railroad retirement benefits subject to Federal income taxes. The portion of
exempt- interest dividends paid from interest received by the Fund from North
Carolina Municipal Obligations or from direct obligations of the U.S. Government
is excluded from the North Carolina taxable net income of individuals,
corporations, estates and trusts. Shareholders subject to income taxation by
states other than North Carolina will realize a lower after-tax rate of return
than North Carolina shareholders since the dividends distributed by the Fund
generally will not be exempt, to any significant degree, from income taxation by
such other states. The Trust will inform shareholders annually of the portion
of the Fund's distributions that constitutes exempt-interest dividends and the
portion that is exempt from North Carolina income taxes. Interest on
indebtedness incurred or continued to purchase or carry Fund shares is not
deductible for Federal or North Carolina income tax purposes. Persons who may
be "substantial users" (or "related persons" of substantial users) of facilities
financed by industrial development bonds or private activity bonds held by the
Fund should consult their tax advisers before purchasing Fund shares.
An investment in the Fund by a corporate shareholder would be included in the
capital stock, surplus and undivided profits base in computing the North
Carolina franchise tax.
To the extent that the Fund's distributions are derived from interest on its
taxable investments (including, for North Carolina income tax purposes, interest
on Municipal Obligations of other states) or from an excess of net short-term
capital gains over net long-term capital losses ("ordinary income dividends"),
such distributions are considered ordinary income for Federal and North Carolina
income tax purposes, except, in the case of North Carolina income tax, for
dividends that are directly attributable to interest on obligations of the U.S.
Government or to gains from certain obligations of the State of North Carolina
and its political subdivisions that were issued before July 1, 1995. The Fund's
distributions are not eligible for the dividends-received deduction for
corporations. Distributions, if any, of net long-term capital gains from the
sale of securities ("capital gain dividends") are taxable as long-term capital
gains for Federal income tax purposes, regardless of the length of time the
shareholder has owned Fund shares. Such capital gain dividends are also subject
to North Carolina income taxes, except to the extent attributable to gains from
certain obligations of the State of North Carolina and its political
subdivisions that were issued before July 1, 1995. All or a portion of the
Fund's gain from the sale or redemption of tax-exempt obligations purchased at a
market discount will be treated as ordinary income rather than capital gain.
This rule may increase the amount of ordinary income dividends received by
shareholders. Distributions in excess of the Fund's earnings and profits will
first reduce the adjusted tax basis of a holder's shares and, after such
adjusted tax basis is reduced to zero, will constitute capital gains (assuming
such shares are held as a capital asset). Any loss upon the sale or exchange of
Fund shares held for six months or less will be treated as long-term capital
loss to the extent of any capital gain dividends received by the shareholder. In
addition, such loss will be disallowed for both Federal and North Carolina
income tax purposes to the extent of any exempt- interest dividends received by
the shareholder, even, in the case of North Carolina, where all or a portion of
such dividends is not excluded from North Carolina taxable income. If the Fund
pays a dividend in January that was declared in the previous October, November
or December to shareholders of record on a specified date in one of such months,
then such dividend will be treated for tax purposes as being paid by the Fund
and received by its shareholders on December 31 of the year in which such
dividend was declared.
The Code subjects interest received on certain otherwise tax-exempt securities
to an alternative minimum tax. This alternative minimum tax applies to interest
received on certain "private activity bonds" issued after August 7, 1986.
Private activity bonds are bonds which, although tax-exempt, are used for
purposes other than those generally performed by governmental units and which
benefit non- governmental entities (e.g., bonds used for industrial development
or housing purposes). Income received on such bonds is classified as an item of
"tax preference," which could subject investors in such bonds, including
shareholders of the Fund, to an alternative minimum tax. The Fund may purchase
such "private activity bonds," and the Trust will report to shareholders within
60 days after the Fund's taxable year-end the portion of the Fund's dividends
declared during the year that constitutes an item of tax preference for
alternative minimum tax purposes. The Code further provides that corporations
are subject to an alternative minimum tax based, in part, on certain differences
between taxable income as adjusted for other tax preferences and the
corporation's "adjusted current earnings" (which more closely reflect a
corporation's economic income). Because an exempt-interest dividend paid by the
Fund will be included in adjusted current earnings, a corporate shareholder may
be required to pay alternative minimum tax on exempt-interest dividends paid by
the Fund.
A loss realized on a sale or exchange of shares of the Fund will be disallowed
if other Fund shares are acquired (whether through the automatic reinvestment of
dividends or otherwise) within a 61-day period beginning 30 days before and
ending 30 days after the date that the shares are disposed. In such a case, the
basis of the shares acquired will be adjusted to reflect the disallowed loss.
Under certain provisions of the Code, some shareholders may be subject to a 31%
withholding tax on certain ordinary income dividends and on capital gain
dividends and redemption payments ("backup withholding"). Generally,
shareholders subject to backup withholding will be those for whom no certified
taxpayer identification number is on file with the Fund or who, to the Fund's
knowledge, have furnished an incorrect number. When establishing an account, an
investor must certify under penalty of perjury that such number is correct and
that such investor is not otherwise subject to backup withholding.
The Code provides that every person required to file a tax return must include
for information purposes on such return the amount of exempt-interest dividends
received from all sources (including the Fund) during the taxable year.
The foregoing is a general and abbreviated summary of the applicable provisions
of the Code, Treasury regulations and North Carolina tax laws presently in
effect. For the complete provisions, reference should be made to the pertinent
Code sections, the Treasury regulations promulgated thereunder and the
applicable North Carolina income tax laws. The Code and the Treasury
regulations, as well as the North Carolina income tax laws, are subject to
change by legislative, judicial or administrative action either prospectively or
retroactively.
Shareholders are urged to consult their tax advisers regarding the availability
of any exemptions from state or local taxes (other than those imposed by North
Carolina) and with specific questions as to Federal, foreign, state or local
taxes.
DIVIDENDS AND DISTRIBUTIONS
The Fund distributes substantially all of its net investment income, if any, in
the form of dividends. The Fund will pay income dividends, if any, monthly, and
will distribute net realized capital gains, if any, at least annually.
Unless a shareholder elects to receive cash, dividends and capital gains will be
automatically reinvested in additional full and fractional shares of the Fund at
the net asset value per share next determined. Shareholders wishing to receive
their dividends or capital gains in cash may make their request in writing to
the Fund at 105 North Washington Street, Post Office Drawer 69, Rocky Mount,
North Carolina 27802-0069. If cash payment is requested, checks will be mailed
within five business days after the last day of each month or the Fund's fiscal
year end, as applicable. Each shareholder of the Fund will receive a quarterly
summary of his or her account, including information as to reinvested dividends
from the Fund. Tax consequences to shareholders of dividends and distributions
are the same if received in cash or in additional shares of the Fund.
In order to satisfy certain requirements of the Code, the Fund may declare
special year-end dividend and capital gains distribution during December. Such
distributions, if received by shareholders by January 31, are deemed to have
been paid by the Fund and received by shareholders on December 31 of the prior
year.
There is no fixed dividend rate, and there can be no assurance regarding the
payment of any dividends or the realization of any gains.
HOW SHARES ARE VALUED
Net asset value is determined at 4:00 p.m., New York Time, Monday through
Friday, except on business holidays when the New York Stock Exchange is closed.
The net asset value of the shares of the Fund for purposes of pricing sales and
redemptions is equal to the total market value of its investments, less all of
its liabilities, divided by the number of its outstanding shares.
Securities that are listed on a securities exchange are valued at the last
quoted sales price at the time the valuation is made. Price information on
listed securities is taken from the exchange where the security is primarily
traded by the Fund. Securities that are listed on an exchange and which are not
traded on the valuation date are valued at the mean of the bid and asked prices.
Unlisted securities for which market quotations are readily available are valued
at the latest quoted sales price, if available, at the time of valuation,
otherwise, at the latest quoted bid price. Municipal fixed income securities
will ordinarily be traded on the over-the-counter market and will not be listed.
Temporary cash investments with maturities of 60 days or less will be valued at
amortized cost, which approximates market value. Securities for which no
current quotations are readily available are valued at fair value as determined
in good faith using methods approved by the Board of Trustees of the Trust.
Securities may be valued on the basis of prices provided by a pricing service
when such prices are believed to reflect the fair market value of such
securities.
HOW SHARES MAY BE PURCHASED
Assistance in opening accounts and a purchase application may be obtained from
the Fund by calling 1-800-525-FUND, or by writing to the address shown below for
purchases by mail. Assistance is also available through any broker-dealer
authorized to sell shares in the Fund. Payment for shares purchased may also be
made through your account at the broker-dealer processing your application and
order to purchase. Your investment will purchase shares at the Fund's net asset
value next determined after your order is received by the Fund in proper form as
indicated herein.
The minimum initial investment is $1,000. The minimum subsequent investment is
$250. The Fund may, in the Advisor's sole discretion, accept certain accounts
with less than the stated minimum initial investment. You may invest in the
following ways:
Purchases by Mail. Shares may be purchased initially by completing the
application accompanying this Prospectus and mailing it, together with a check
payable to the Fund, to The North Carolina Tax Free Bond Fund, 105 North
Washington Street, Post Office Drawer 69, Rocky Mount, North Carolina
27802-0069.
Subsequent investments in an existing account in the Fund may be made at any
time in minimum amounts of $250 by sending a check payable to the Fund, to The
North Carolina Tax Free Bond Fund, 105 North Washington Street, Post Office
Drawer 69, Rocky Mount, North Carolina 27802-0069. Please enclose the stub of
your account statement and include the amount of the investment, the name of the
account for which the investment is to be made and the account number.
Purchases by Wire. To purchase shares by wiring federal funds, the Fund must
first be notified by calling 1-800-525-FUND to request an account number and
furnish the Fund with your tax identification number. Following notification to
the Fund, federal funds and registration instructions should be wired through
the Federal Reserve System to:
Wachovia Bank of North Carolina, N.A.
Winston-Salem, North Carolina
ABA # 053100494
For credit to the Rocky Mount Office
For The North Carolina Tax Free Bond Fund
Acct #6769-020777
For further credit to (shareholder's name and SS# or EIN#)
It is important that the wire contain all the information and that the Fund
receive prior telephone notification to ensure proper credit. A completed
application with signature(s) of registrant(s) must be mailed to the Fund
immediately after the initial wire as described under "Purchases by Mail" above.
Investors should be aware that some banks may impose a wire service fee.
General. All purchases of shares are subject to acceptance and are not binding
until accepted. The Fund reserves the right to reject any application or
investment. Orders become effective, and shares are purchased at, the next
determined public offering price per share after an investment has been received
by the Fund, which is as of 4:00 p.m., New York time, Monday through Friday,
exclusive of business holidays. Orders received by the Fund and effective prior
to 4:00 p.m. New York time will purchase shares at the public offering price
determined as of that time. Otherwise, your order will purchase shares as of
4:00 p.m. New York time on the next business day. For orders placed through a
qualified broker-dealer, such firm is responsible for promptly transmitting
purchase orders to the Fund. The public offering price of shares of the Fund
equals net asset value without a sales charge.
If checks are returned unpaid due to nonsufficient funds, stop payment or other
reasons, the Trust will charge $20. To recover any such loss or charge, the
Trust reserves the right, without further notice, to redeem shares of any Fund
of the Trust already owned by any purchaser whose order is cancelled, and such a
purchaser may be prohibited from placing further orders unless investments are
accompanied by full payment by wire or cashier's check.
Payment must be made by check or money order drawn on a U.S. bank and payable in
U.S. dollars. Under certain circumstances the Fund, at its sole discretion, may
allow payment in kind for Fund shares purchased by accepting securities in lieu
of cash. Any securities so accepted would be valued on the date received and
included in the calculation of the net asset value of the Fund. See the
Statement of Additional Information for additional information on purchases in
kind.
The Fund is required by federal law to withhold and remit to the IRS 31% of the
dividends, capital gains distributions and, in certain cases, proceeds of
redemptions paid to any shareholder who fails to furnish the Fund with a correct
taxpayer identification number, who under-reports dividend or interest income or
who fails to provide certification of tax identification number. Instructions
to exchange or transfer shares held in established accounts will be refused
until the certification has been provided. In order to avoid this withholding
requirement, you must certify on your application, or on a separate W-9 Form
supplied by the Administrator, that your taxpayer identification number is
correct and that you are not currently subject to backup withholding or you are
exempt from backup withholding. For individuals, your taxpayer identification
number is your social security number.
Employees and Affiliates of the Fund. The minimum purchase requirement is not
applicable to accounts of Trustees, officers or employees of the Fund or certain
parties related thereto. The minimum initial investment for such accounts is
$100. See the Statement of Additional Information for further details.
Automatic Investment Plan. The automatic investment plan enables shareholders
to make regular monthly or quarterly investments in shares through automatic
charges to their checking account. With shareholder authorization and bank
approval, the Administrator will automatically charge the checking account for
the amount specified ($100 minimum), which will be automatically invested in
shares at the net asset value on or about the 21st day of the month. The
shareholder may change the amount of the investment or discontinue the plan at
any time by writing to the Administrator.
Stock Certificates. Stock certificates will not be issued for your shares.
Evidence of ownership will be given by issuance of periodic account statements
which will show the number of shares owned.
HOW SHARES MAY BE REDEEMED
Shares of the Fund may be redeemed (the Fund will repurchase them from
shareholders) by mail or telephone. Any redemption may be more or less than the
purchase price of your shares depending on the market value of the Fund's
portfolio securities. All redemption orders received in proper form, as
indicated herein, by the Fund, whether by mail or telephone, prior to 4:00 p.m.
New York time, Monday through Friday, except for business holidays, will redeem
shares at the net asset value determined as of that time. Otherwise, your order
will redeem shares as of 4:00 p.m. New York time on the next business day. There
is no charge for redemptions from the Fund. You may also redeem your shares
through a broker- dealer or other institution, who may charge you a fee for its
services.
The Board of Trustees reserves the right to involuntarily redeem any account
having a net asset value of less than $1,000 (due to redemptions, exchanges or
transfers, and not due to market action) upon 30 days written notice. If the
shareholder brings his account net asset value up to $1,000 or more during the
notice period, the account will not be redeemed.
If you are uncertain of the requirements for redemption, please contact the
Fund, at 1-800-525-FUND, or write to the address shown below.
Regular Mail Redemptions. Your request should be addressed to The North
Carolina Tax Free Bond Fund, 105 North Washington Street, Post Office Drawer 69,
Rocky Mount, North Carolina 27802-0069. Your request for redemption must
include:
1) Your letter of instruction specifying the account number, and the number
of shares or dollar amount to be redeemed. This request must be signed by
all registered shareholders in the exact names in which they are
registered;
2) Any required signature guarantees (see "Signature Guarantees" below); and
3) Other supporting legal documents, if required in the case of estates,
trusts, guardianships, custodianships, corporations, partnerships, pension
or profit sharing plans, and other organizations.
Your redemption proceeds will be sent to you within seven days after receipt of
your redemption request. However, the Fund may delay forwarding a redemption
check for recently purchased shares while it determines whether the purchase
payment will be honored. Such delay (which may take up to 15 days from the date
of purchase) may be reduced or avoided if the purchase is made by certified
check or wire transfer. In all cases the net asset value next determined after
the receipt of the request for redemption will be used in processing the
redemption. The Fund may suspend redemption privileges or postpone the date of
payment (i) during any period that the New York Stock Exchange is closed, or
trading on the New York Stock Exchange is restricted as determined by the
Securities and Exchange Commission (the "Commission"), (ii) during any period
when an emergency exists as defined by the rules of the Commission as a result
of which it is not reasonably practicable for the Fund to dispose of securities
owned by it, or to fairly determine the value of its assets, and (iii) for such
other periods as the Commission may permit.
Telephone and Bank Wire Redemptions. The Fund offers shareholders the option of
redeeming shares by telephone under certain limited conditions. The Fund will
redeem shares when requested by the shareholder if, and only if, the shareholder
confirms redemption instructions in writing.
The Fund may rely upon confirmation of redemption requests transmitted via
facsimile (FAX# 919-972-1908). The confirmation instructions must include:
1) Shareholder name and account number;
2) Number of shares or dollar amount to be redeemed;
3) Instructions for transmittal of redemption funds to the shareholder; and
4) Shareholder signature as it appears on the application then on file with
the Fund.
The net asset value used in processing the redemption will be the net asset
value next determined after the telephone request is received. Redemption
proceeds will not be distributed until written confirmation of the redemption
request is received, per the instructions above. You can choose to have
redemption proceeds mailed to you at your address of record, your bank, or to
any other authorized person, or you can have the proceeds sent by bank wire to
your bank ($5,000 minimum). Shares of the Fund may not be redeemed by wire on
days in which your bank is not open for business. You can change your
redemption instructions anytime you wish by filing a letter including your new
redemption instructions with the Fund. See "Signature Guarantees" below. The
Fund reserves the right to restrict or cancel telephone and bank wire redemption
privileges for shareholders, without notice, if the Fund believes it to be in
the best interest of the shareholders to do so.
There is currently no charge by the Administrator for wire redemptions.
However, the Administrator reserves the right, upon thirty days' written notice,
to make reasonable charges for wire redemptions. All charges will be deducted
from your account by redemption of shares in your account. Your bank or
brokerage firm may also impose a charge for processing the wire. If wire
transfer of funds is impossible or impractical, the redemption proceeds will be
sent by mail to the designated account.
You may redeem shares, subject to the procedures outlined above, by calling the
Fund at 1-800-525-FUND. Redemption proceeds will only be sent to the bank
account or person named in your Fund Shares Application currently on file with
the Fund. Telephone redemption privileges authorize the Fund to act on telephone
instructions from any person representing himself or herself to be the investor
and reasonably believed by the Fund to be genuine. The Fund will employ
reasonable procedures, such as requiring a form of personal identification, to
confirm that instructions are genuine, and, if it does not follow such
procedures, the Fund will be liable for any losses due to fraudulent or
unauthorized instructions. The Fund will not be liable for following telephone
instructions reasonably believed to be genuine.
Systematic Withdrawal Plan. A shareholder who owns shares of the Fund valued at
$10,000 or more at current net asset value may establish a Systematic Withdrawal
Plan to receive a monthly or quarterly check in a stated amount not less than
$100. Each month or quarter as specified, the Fund will automatically redeem
sufficient shares from your account to meet the specified withdrawal amount.
Call or write the Fund for an application form. See the Statement of Additional
Information for further details.
Signature Guarantees. To protect your account and the Fund from fraud,
signature guarantees are required to be sure that you are the person who has
authorized a change in registration, or standing instructions, for your account.
Signature guarantees are required for (1) change of registration requests, (2)
requests to establish or change exchange privileges or telephone redemption
service other than through your initial account application, and (3) requests
for redemptions in excess of $50,000. Signature guarantees are acceptable from
a member bank of the Federal Reserve System, a savings and loan institution,
credit union (if authorized under state law), registered broker-dealer,
securities exchange or association clearing agency, and must appear on the
written request for redemption, establishment or change in exchange privileges,
or change of registration.
MANAGEMENT OF THE FUND
Trustees and Officers. The Fund is a series of the Albemarle Investment Trust
(the "Trust"), an investment company organized as a Massachusetts business trust
in 1992. The Board of Trustees of the Trust is responsible for the management
of the business and affairs of the Trust. The Trustees and executive officers
of the Trust and their principal occupations for the last five years are set
forth in the Statement of Additional Information under "Management of the Fund -
Trustees and Officers." The Board of Trustees of the Trust is primarily
responsible for overseeing the conduct of the Trust's business. The Board of
Trustees elects the officers of the Trust who are responsible for its and the
Fund's day-to-day operations.
The Advisor. Subject to the authority of the Board of Trustees, Boys, Arnold &
Company, Inc. (the "Advisor") provides the Fund with a continuous program of
supervision of the Fund's assets, including the composition of its portfolio,
and furnishes advice and recommendations with respect to investments, investment
policies and the purchase and sale of securities, pursuant to an Investment
Advisory Agreement (the "Advisory Agreement") with the Trust. An investment
committee has been primarily responsible for the day-to-day management of the
Fund's portfolio since the Advisor entered into the Advisory Agreement,
effective April 1, 1994.
The Advisor is registered under the Investment Advisors Act of 1940.
Registration of the Advisor does not involve any supervision of management or
investment practices or policies by the Securities and Exchange Commission. The
Advisor was founded in 1977 as the G. Waring Boys Company. In 1983, Thomas C.
Arnold joined the firm, and in 1989, the name was changed to Boys, Arnold &
Company. It is currently controlled by Thomas C. Arnold. In addition to acting
as Advisor to the Fund, the Advisor focuses on management of balanced, equity
and fixed income portfolios for a limited number of retirement plan sponsors,
non-profit organizations, and high-net worth individuals. While it has no
prior experience advising an investment company other than the Fund, the Advisor
has been rendering investment counsel utilizing investment strategies similar to
that of the Fund, to numerous other clients since inception. The Advisor's
address is 1272 Hendersonville Road, Post Office Drawer 5255, Asheville, North
Carolina 28813.
Under the Advisory Agreement with the Fund, the Advisor receives a monthly
management fee equal to an annual rate of 0.35% of the average daily net asset
value of the Fund. The Advisor may periodically voluntarily waive or reduce its
advisory fee and reimburse expenses of the Fund to increase the net income of
the Fund. The Advisor voluntarily waived its advisory fee in the amount of
$10,321 for the fiscal year ended August 31, 1995. The Advisor also voluntarily
reimbursed the Fund the amount of $41,501 for expenses of the Fund incurred
during the fiscal year.
The Advisor supervises and implements the investment activities of the Fund,
including the making of specific decisions as to the purchase and sale of
portfolio investments. Among the responsibilities of the Advisor under the
Advisory Agreement is the selection of brokers and dealers through whom
transactions in the Fund's portfolio investments will be effected. The Advisor
attempts to obtain the best execution for all such transactions. If it is
believed that more than one broker is able to provide the best execution, the
Advisor will consider the receipt of quotations and other market services and of
research, statistical and other data and the sale of shares of the Fund in
selecting a broker. The Advisor may also utilize a brokerage firm affiliated
with the Trust or the Advisor if it believes it can obtain the best execution of
transactions from such broker. For further information, see "Investment
Objectives and Policies - Investment Transactions" in the Statement of
Additional Information. It is anticipated that most securities transactions of
the Fund will be handled on a principal, rather than agency, basis. Municipal
Obligations, including North Carolina Municipal Obligations, are normally traded
on a net basis (without commission) through broker-dealers and banks acting for
their own account. Such firms attempt to profit from buying at the bid price
and selling at the higher asked price of the market, the difference being
referred to as the spread. The cost of portfolio securities transactions of the
Fund primarily consists of dealer or underwriter spreads.
The Administrator. The Trust has entered into an Administration Agreement with
The Nottingham Company (the "Administrator"), 105 North Washington Street, Post
Office Drawer 69, Rocky Mount, North Carolina 27802-0069, pursuant to which the
Administrator receives a fee at the annual rate of 0.15% of the average daily
net value of the Fund. In addition, the Administrator currently receives a base
monthly fee of $1,750 for accounting and recordkeeping services for the Fund.
The Administrator also charges the Fund for certain costs involved with the
daily valuation of investment securities and is reimbursed for out-of-pocket
expenses.
Subject to the authority of the Board of Trustees, the services the
Administrator provides to the Fund include coordinating and monitoring any third
parties furnishing services to the Fund; providing the necessary office space,
equipment and personnel to perform administrative and clerical functions for the
Fund; preparing, filing and distributing proxy materials, periodic reports to
shareholders, registration statements and other documents; and responding to
shareholder inquiries.
The Administrator was incorporated as a North Carolina corporation in 1988 and
converted to a North Carolina limited liability company in 1995. With its
predecessors and affiliates, the Administrator has been operating as a financial
services firm since 1985. Frank P. Meadows III, Trustee, Treasurer, and
Chairman of the Trust, is the firm's Managing Director and controlling member.
The Custodian, Transfer Agent and Fund Accounting/Pricing Agent. Wachovia Bank
of North Carolina, N.A. (the "Custodian"), 301 North Main Street, Winston-Salem,
North Carolina 27102, serves as Custodian of the Fund's assets. The Custodian
acts as the depository for the Fund, safekeeps its portfolio securities,
collects all income and other payments with respect to portfolio securities,
disburses monies at the Fund's request and maintains records in connection with
its duties.
The Administrator also serves as the Fund's transfer agent. As transfer agent,
it maintains the records of each shareholder's account, answers shareholder
inquiries concerning accounts, processes purchases and redemptions of the Fund's
shares, acts as dividend and distribution disbursing agent and performs other
shareholder services functions.
The Administrator also performs certain accounting and pricing services for the
Fund as pricing agent, including the daily calculation of the Fund's net asset
value.
Shareholder Serving Plan. The Trust has adopted a Shareholder Servicing Plan
(the "Plan") with respect to the Fund pursuant to which the Trust may compensate
individuals, firms, banks, or investment advisors directly or indirectly for
personal services and/or the maintenance of accounts of shareholders of the Fund
and other shareholder liaison services not otherwise provided by the
Administrator or the Custodian, including but not limited to responding to
shareholder inquiries, providing information on shareholders' investments in the
Fund, and providing such other shareholder services as the Trust may reasonably
request. The expenditures to be made under the Plan and the basis for payment of
such expenditures must be approved by the Board of Trustees of the Trust and may
not exceed 0.25% of the Fund's average annual net assets. In addition, in no
event may such expenditures paid to any person who sells Fund shares exceed
0.25% of the average annual net asset value of such shares. During the fiscal
year ended August 31, 1995, the Fund paid service fees of $1,574 pursuant to the
Plan.
Other Expenses. The Fund is responsible for the payment of its expenses. These
include, for example, the fees payable to the Advisor, or expenses otherwise
incurred in connection with the management of the investment of the Fund's
assets, the fees and expenses of the Custodian, the fees and expenses of the
Administrator, the fees and expenses of Trustees, outside auditing and legal
expenses, all taxes and corporate fees payable by the Fund, Securities and
Exchange Commission fees, state securities qualification fees, costs of
preparing and printing prospectuses for regulatory purposes and for distribution
to shareholders, costs of shareholder reports and shareholder meetings, and any
extraordinary expenses. The Fund also pays for brokerage commissions and
transfer taxes (if any) in connection with the purchase and sale of portfolio
securities. Expenses attributable to a particular series of the Trust, including
the Fund, will be charged to that series, and expenses not readily identifiable
as belonging to a particular series will be allocated by or under procedures
approved by the Board of Trustees among one or more series in such a manner as
it deems fair and equitable. For the fiscal year ended August 31, 1995, the
expense ratio of the Fund was 0.85% of the average daily net assets of the Fund
after expense reimbursements and waived fees.
OTHER INFORMATION
Description of Shares. The Trust was organized as a Massachusetts business
trust in 1992 under a Declaration of Trust. The Declaration of Trust permits
the Board of Trustees to issue an unlimited number of full and fractional shares
and to create an unlimited number of series of shares. The Trust currently has
the number of authorized series of shares, including the Fund, described in the
Statement of Additional Information under "Description of the Trust." When
issued, the shares of each series of the Trust, including the Fund, will be
fully paid, nonassessable and redeemable. The Trust does not intend to hold
annual shareholder meetings; it may, however, hold special shareholder meetings
for purposes such as changing fundamental policies or electing Trustees. The
Board of Trustees shall promptly call a meeting for the purpose of electing or
removing Trustees when requested in writing to do so by the record holders of a
least 10% of the outstanding shares of the Trust. The term of office of each
Trustee is of unlimited duration. The holders of at least two-thirds of the
outstanding shares of the Trust may remove a Trustee from that position either
by declaration in writing filed with the Custodian or by votes cast in person or
by proxy at a meeting called for that purpose.
Shareholders of the Trust will vote by series except as otherwise required by
the 1940 Act. Matters affecting an individual series, such as the Fund,
include, but are not limited to, the investment objectives, policies and
restrictions of that series. Shares have no subscription, preemptive or
conversion rights. Share certificates will not be issued. Each share is
entitled to one vote (and fractional shares are entitled to proportionate
fractional votes) on all matters submitted for a vote, and shares have equal
voting rights except that only shares of a particular series are entitled to
vote on matters affecting only that series. Shares do not have cumulative voting
rights. Therefore, the holders of more than 50% of the aggregate number of
shares of all series of the Trust may elect all the Trustees.
Under Massachusetts law, shareholders of a business trust may, under certain
circumstances, be held personally liable as partners for the obligations of the
trust. The Declaration of Trust, therefore, contains provisions which are
intended to mitigate such liability. See the Statement of Additional
Information for further information about the Trust and its shares.
Reporting to Shareholders. The Fund will send to its shareholders annual and
semi-annual reports; the financial statements appearing in annual reports for
the Fund will be audited by independent accountants. In addition, the
Administrator, as transfer agent, will send to each shareholder having an
account directly with the Fund a monthly statement showing transactions in the
account, the total number of shares owned and any dividends or distributions
paid. Inquiries regarding the Fund may be directed in writing to 105 North
Washington Street, Post Office Drawer 69, Rocky Mount, North Carolina 27802-0069
or by calling 1-800-525-FUND.
Calculation of Performance Data. From time to time the Fund may advertise its
yield, tax equivalent yield and average annual total return. The Fund's
quotations may be used in advertisements, sales literature, shareholder reports,
or other communications. Yield and total return figures are based on historical
earnings and are not intended to indicate future performance. Such figures
could be increased to the extent the Advisor or the Administrator may waive all
or a portion of their fees or may reimburse all or a portion of the Fund's
expenses. For further information, see "Additional Information on Performance"
in the Statement of Additional Information.
The "average annual total return" of the Fund refers to the average annual
compounded rates of return over 1, 5 and 10 year periods that would equate an
initial amount invested at the beginning of a stated period to the ending
redeemable value of the investment. The calculation assumes the reinvestment of
all dividends and distributions, includes all recurring fees that are charged to
all shareholder accounts and deducts all nonrecurring charges at the end of each
period. The calculation further assumes the maximum sales load is deducted from
the initial payment. If the Fund has been operating less than 1, 5 or 10 years,
the time period during which the Fund has been operating is substituted.
The "yield" of the Fund is computed by dividing the net investment income per
share earned during the most recent practicable period stated in the
advertisement by the maximum offering price per share on the last day of the
period (using the average number of shares entitled to receive dividends). For
the purpose of determining net investment income, the calculation includes among
expenses of the Fund all recurring fees that are charged to all shareholder
accounts and any nonrecurring charges for the period stated. A "tax equivalent
yield" is computed by using the tax-exempt yield figure and dividing by 1 minus
the tax rate. Tax equivalent yield demonstrates the yield from a taxable
investment necessary to produce an after-tax yield equivalent to that of a fund
that invests in tax-exempt obligations.
In addition, a Fund may advertise other total return performance data. This
data shows as a percentage rate of return encompassing all elements of return
(i.e. income and capital appreciation or depreciation); it assumes reinvestment
of all dividends and capital gain distributions. Such other total return data
may be quoted for the same or different periods as those for which the average
annual total return is quoted. This data may consist of a cumulative percentage
rate of return, actual year-by-year rates or any combination thereof. Cumulative
total return represents the cumulative change in value of an investment in the
Fund for various periods.
APPENDIX A
Description of Municipal Obligations
Municipal Obligations include bonds, notes and commercial paper issued by or on
behalf of states, territories and possessions of the United States and the
District of Columbia and their political subdivisions, agencies or
instrumentalities, the interest on which is exempt from federal income taxes
(without regard to whether the interest thereon is also exempt from the personal
income taxes of any state). Municipal Obligation bonds are issued to obtain
funds for various public purposes, including the construction of a wide range of
public facilities such as bridges, highways, housing, hospitals, mass
transportation, schools, streets and water and sewer works. Other public
purposes for which Municipal Obligation bonds may be issued include refunding
outstanding obligations, obtaining funds for general operating expenses, and
obtaining funds to loan to other public institutions and facilities. In
addition, certain types of industrial development bonds, are issued by or on
behalf of public authorities to obtain funds to provide privately-operated
housing facilities, airport, mass transit or port facilities, sewage disposal,
solid waste disposal or hazardous waste treatment or disposal facilities and
certain local facilities for water supply, gas or electricity. Such obligations
are included within the term Municipal Obligations if the interest paid thereon
qualifies as exempt from federal income tax. Other types of industrial
development bonds, the proceeds of which are used for the construction,
equipment, repair or improvement of privately operated industrial or commercial
facilities, may constitute Municipal Obligations, although the current federal
tax laws place substantial limitations on the size of such issues.
The two principal classifications of Municipal Obligation bonds are "general
obligation" and "revenue" bonds. General obligation bonds are secured by the
issuer's pledge of its good faith, credit and taxing power for the payment of
principal and interest. The payment of the principal of and interest on such
bonds may be dependent upon an appropriation by the issuer's legislative body.
The characteristics and enforcement of general obligation bonds vary according
to the law applicable to the particular issuer. Revenue bonds are payable only
from the revenues derived from a particular facility or class of facilities or,
in some cases, from the proceeds of a special excise or other specific revenue
source. Industrial development bonds which are Municipal Obligations are in most
cases revenue bonds and do not generally constitute the pledge of the credit of
the issuer of such bonds.
Municipal Obligations also include participations in municipal leases. These
are undivided interests in a portion of an obligation in the form of a lease or
installment purchase which is issued by state and local governments to acquire
equipment and facilities. Municipal leases frequently have special risks not
normally associated with general obligation or revenue bonds. Leases and
installment purchase or conditional sale contracts (which normally provide for
title to the leased asset to pass eventually to the governmental issuer) have
evolved as a means for governmental issuers to acquire property and equipment
without meeting the constitutional and statutory requirements for the issuance
of debt. The debt-issuance limitations are deemed to be inapplicable because of
the inclusion in many leases or contracts of "non-appropriation" clauses that
provide that the governmental issuer has no obligation to make future payments
under the lease or contract unless money is appropriated for such purpose by the
appropriate legislative body on a yearly or other periodic basis. Accordingly,
a risk peculiar to these municipal lease obligations is the possibility that a
government issuer will not appropriate funds for lease payments. Although the
obligations will be secured by the leased equipment or facilities, the
disposition of the property in the event of non-appropriation or foreclosure
might, in some cases, prove difficult. There are, of course, variations in the
security of Municipal Obligations, both within a particular classification and
between classifications, depending on numerous factors.
Municipal Obligation notes generally are used to provide for short-term capital
needs and generally have maturities of one year or less. Municipal Obligation
notes include:
1. Tax Anticipation Notes. Tax Anticipation Notes are issued to finance
working capital needs of municipalities. Generally, they are issued in
anticipation of various tax revenues, such as income, sales, use and
business taxes, and are payable from these specific future taxes.
2. Revenue Anticipation Notes. Revenue Anticipation Notes are issued in
expectation of receipt of other kinds of revenue, such as federal revenues
available under Federal Revenue Sharing Programs.
3. Bond Anticipation Notes. Bond Anticipation Notes are issued to provide
interim financing until long-term bond financing can be arranged. In most
cases, the long-term bonds then provide the money for the repayment of the
Notes.
Issues of commercial paper typically represent short-term, unsecured, negotiable
promissory notes. These obligations are issued by agencies of state and local
governments to finance seasonal working capital needs of municipalities or to
provide interim construction financing and are paid from general revenues of
municipalities or are refinanced with long term debt. In most cases, Municipal
Obligation commercial paper is backed by letters of credit, lending agreements,
note repurchase agreements or other credit facility agreements offered by banks
or other institutions.
The yields on Municipal Obligations are dependent on a variety of factors,
including general market conditions, supply and demand and general conditions of
the Municipal Obligation market, size of a particular offering, the maturity of
the obligation and rating (if any) of the issue.
THE NORTH CAROLINA
TAX FREE BOND FUND
A No-Load Fund
Prospectus
January 1, 1996
The North Carolina Tax Free Bond Fund
105 North Washington Street
Post Office Drawer 69
Rocky Mount, North Carolina 27802-0069
1-800-525-3863
Investment Advisor
Boys, Arnold & Company, Inc.
1272 Hendersonville Road
Post Office Drawer 5255
Asheville, North Carolina 28813
1-800-286-8038
Custodian
Wachovia Bank of North Carolina, N.A.
301 N. Main Street
Winston-Salem, North Carolina 27102
Administrator, Fund Accountant and
Dividend Disbursing and Transfer Agent
The Nottingham Company
Post Office Drawer 69
Rocky Mount, North Carolina 27802-0069
Independent Auditors
KPMG Peat Marwick LLP
1021 East Cary Street, Suite 1900
Richmond, Virginia 23219-4023
STATEMENT OF ADDITIONAL INFORMATION
THE NORTH CAROLINA TAX FREE BOND FUND
January 1, 1996
A series of
THE ALBEMARLE INVESTMENT TRUST
105 North Washington Street, P.O. Box 69
Rocky Mount, NC 27802-0069
Telephone 1-800-525-3863
Table of Contents
INVESTMENT OBJECTIVES AND POLICIES . . . . . . . . . . . . . . . . . . . . . 2
INVESTMENT LIMITATIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
NET ASSET VALUE. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
ADDITIONAL PURCHASE AND REDEMPTION INFORMATION . . . . . . . . . . . . . . . 7
DESCRIPTION OF THE TRUST . . . . . . . . . . . . . . . . . . . . . . . . . . 7
ADDITIONAL INFORMATION CONCERNING TAXES. . . . . . . . . . . . . . . . . . . 8
MANAGEMENT OF THE FUND . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
SPECIAL SHAREHOLDER SERVICES . . . . . . . . . . . . . . . . . . . . . . . . 14
ADDITIONAL INFORMATION ON PERFORMANCE. . . . . . . . . . . . . . . . . . . . 15
APPENDIX A - SPECIAL CONSIDERATIONS REGARDING
INVESTMENT IN NORTH CAROLINA MUNICIPAL OBLIGATIONS. . . . . . . . . . . . . 19
APPENDIX B - DESCRIPTION OF MUNICIPAL BOND RATINGS . . . . . . . . . . . . . 21
ANNUAL REPORT OF THE FUND FOR THE FISCAL YEAR ENDED AUGUST 31, 1995. . ATTACHED
This Statement of Additional Information (the "Additional Statement") is meant
to be read in conjunction with the Prospectus dated January 1, 1995 for The
North Carolina Tax Free Bond Fund (the "Fund"), and is incorporated by reference
in its entirety into the Prospectus. Because this Additional Statement is not
itself a prospectus, no investment in shares of the Fund should be made solely
upon the information contained herein. Copies of the Fund's Prospectus may be
obtained at no charge by writing or calling the Fund at the address and phone
number shown above. Capitalized terms used but not defined herein have the same
meanings as in the Prospectus.
INVESTMENT OBJECTIVES AND POLICIES
The following policies supplement the Fund's investment objectives and policies
as set forth in the Prospectus. The Fund, organized in 1993, has no prior
history.
Additional Information on North Carolina Investments. Attached to this
Additional Statement is Appendix A, "Special Considerations Regarding Investment
in North Carolina Municipal Obligations," which contains a discussion of
investment considerations associated with North Carolina Municipal Obligations.
Additional information on various types of Municipal Obligations that may be
acquired by the Fund and the special risks associated with these types of
investments is set forth below.
The Advisor may invest the assets of the Fund in a relatively high percentage of
municipal bonds issued by entities having similar characteristics. The issuers
may pay their interest obligations from revenue of similar projects such as
multi- family housing, nursing homes, electric utility systems, hospitals or
life care facilities.
Housing revenue bonds typically are issued by a state, county or local housing
authority and are secured only by the revenues of mortgages originated by the
authority using the proceeds of the bond issue. Because of the impossibility of
precisely predicting demand for mortgages from the proceeds of such an issue,
there is a risk that the proceeds of the issue will be in excess of demand,
which would result in early retirement of the bonds by the issuer. Moreover,
such housing revenue bonds depend for their repayment upon the cash flow from
the underlying mortgages, which cannot be precisely predicted when the bonds are
issued. Any difference in the actual cash flow from such mortgages from the
assumed cash flow could have an adverse impact upon the ability of the issuer to
make scheduled payments of principal and interest on the bonds, or could result
in early retirement of the bonds. Additionally, such bonds depend in part for
scheduled payments of principal and interest upon reserve funds established from
the proceeds of the bonds, assuming certain rates of return on investment of
such reserve funds. If the assumed rates of return are not realized because of
changes in interest rate levels or for other reasons, the actual cash flow for
scheduled payments of principal and interest on the bonds may be inadequate. The
financing of multi-family housing projects is affected by a variety of factors,
including satisfactory completion of construction within cost constraints, the
achievement and maintenance of a sufficient level of occupancy, sound management
of the developments, timely and adequate increases in rents to cover increases
in operating expenses, including taxes, utility rates and maintenance costs,
changes in applicable laws and governmental regulations and social and economic
trends.
Electric utilities face problems in financing large construction programs in an
inflationary period, cost increases and delay occasioned by environmental
considerations (particularly with respect to nuclear facilities), difficulty in
obtaining fuel at reasonable prices, the cost of competing fuel sources,
difficulty in obtaining sufficient rate increases and other regulatory problems,
the effect of energy conservation and difficulty of the capital market to absorb
utility debt.
Healthcare facilities include life care facilities, nursing homes and hospitals.
Life care facilities are alternative forms of long-term housing for the elderly
which offer residents the independence of condominium life style and, if needed,
the comprehensive care of nursing home services. Bonds to finance these
facilities have been issued by various state industrial development authorities.
Because the bonds are secured only by the revenues of each facility, and not by
state or local government tax payments, they are subject to a wide variety of
risks. Primarily, the projects must maintain adequate occupancy levels to be
able to provide revenues adequate to maintain debt service payments. Moreover,
in the case of life care facilities, because a portion of housing, medical care
and other services may be financed by an initial deposit, there may be risk if
the facility does not maintain adequate financial reserves to secure estimated
actuarial liabilities. The ability of management to accurately forecast
inflationary cost pressures weighs importantly in this process. The facilities
may also be affected by regulatory cost restrictions applied to health care
delivery in general, particularly state regulations or changes in Medicare and
Medicaid payments or qualifications, or restrictions imposed by medical
insurance companies. They may also face competition from alternative health
care or conventional housing facilities in the private or public sector.
Hospital bond ratings are often based on feasibility studies which contain
projections of expenses, revenues and occupancy levels. A hospital's gross
receipts and net income available to service its debt are influenced by demand
for hospital services, the ability of the hospital to provide the services
required, management capabilities, economic developments in the service area,
efforts by insurers and government agencies to limit rates and expenses,
confidence in the hospital, service area economic developments, competition,
availability and expense of malpractice insurance, Medicaid and Medicare
funding, and possible federal legislation limiting the rates of increase of
hospital charges.
The Fund may also invest in bonds for industrial and other projects, such as
sewage or solid waste disposal or hazardous waste treatment facilities.
Financing for such projects will be subject to inflation and other general
economic factors as well as construction risks including labor problems,
difficulties with construction sites and the ability of contractors to meet
specifications in a timely manner. Because some of the materials, processes and
wastes involved in these projects may include hazardous components, there are
risks associated with their production, handling and disposal.
Investment Transactions. Subject to the general supervision of the Trust's
Board of Trustees, the Advisor is responsible for, makes decisions with respect
to, and places orders for all purchases and sales of portfolio securities for
the Fund.
The annualized portfolio turnover rate for the Fund is calculated by dividing
the lesser of purchases or sales of portfolio securities for the reporting
period by the monthly average value of the portfolio securities owned during the
reporting period. The calculation excludes all securities whose maturities or
expiration dates at the time of acquisition are one year or less. Portfolio
turnover of the Fund may vary greatly from year to year as well as within a
particular year, and may be affected by cash requirements for redemption of
shares and by requirements that enable the Fund to receive favorable tax
treatment. Portfolio turnover will not be a limiting factor in making Fund
decisions, and the Fund may engage in short term trading to achieve its
investment objectives.
Purchases of money market instruments by the Fund are made from dealers,
underwriters and issuers. The Fund currently does not expect to incur any
brokerage commission expense on such transactions because money market
instruments are generally traded on a "net" basis by a dealer acting as
principal for its own account without a stated commission. The price of the
security, however, usually includes a profit to the dealer. Securities
purchased in underwritten offerings include a fixed amount of compensation to
the underwriter, generally referred to as the underwriter's concession or
discount. When securities are purchased directly from or sold directly to an
issuer, no commissions or discounts are paid.
Transactions on U.S. stock exchanges involve the payment of negotiated brokerage
commissions. On exchanges on which commissions are negotiated, the cost of
transactions may vary among different brokers. Transactions in the
over-the-counter market are generally on a net basis (i.e., without commission)
through dealers, or otherwise involve transactions directly with the issuer of
an instrument. The Fund's portfolio transactions will normally be municipal
transactions executed in over-the-counter markets and will be executed on a
"net" basis, which may include a dealer markup.
The Fund may participate, if and when practicable, in bidding for the purchase
of Fund securities directly from an issuer in order to take advantage of the
lower purchase price available to members of a bidding group. The Fund will
engage in this practice, however, only when the Advisor, in its sole discretion,
believes such practice to be otherwise in the Fund's interest.
In executing Fund transactions and selecting brokers or dealers, the Advisor
will seek to obtain the best overall terms available for the Fund. In assessing
the best overall terms available for any transaction, the Advisor shall consider
factors it deems relevant, including the breadth of the market in the security,
the price of the security, the financial condition and execution capability of
the broker or dealer, and the reasonableness of the commission, if any, both for
the specific transaction and on a continuing basis. The sale of Fund shares may
be considered when determining firms that are to execute brokerage transactions
for the Fund. In addition, the Advisor is authorized to cause the Fund to pay a
broker-dealer which furnishes brokerage and research services a higher spread or
commission than that which might be charged by another broker-dealer for
effecting the same transaction, provided that the Advisor determines in good
faith that such spread or commission is reasonable in relation to the value of
the brokerage and research services provided by such broker-dealer, viewed in
terms of either the particular transaction or the overall responsibilities of
the Advisor to the Fund. Such brokerage and research services might consist of
reports and statistics relating to specific companies or industries, general
summaries of groups of stocks or bonds and their comparative earnings and
yields, or broad overviews of the stock, bond and government securities markets
and the economy.
Supplementary research information so received is in addition to, and not in
lieu of, services required to be performed by the Advisor and does not reduce
the advisory fees payable by the Fund. The Trustees will periodically review
any spread or commissions paid by the Fund to consider whether the spread or
commissions paid over representative periods of time appear to be reasonable in
relation to the benefits inuring to the Fund. It is possible that certain of
the supplementary research or other services received will primarily benefit one
or more other investment companies or other accounts for which investment
discretion is exercised by the Advisor. Conversely, the Fund may be the primary
beneficiary of the research or services received as a result of securities
transactions effected for such other account or investment company.
The Advisor may also utilize a brokerage firm affiliated with the Trust or the
Advisor if it believes it can obtain the best execution of transactions from
such broker. The Fund will not execute portfolio transactions through, acquire
securities issued by, make savings deposits in or enter into repurchase
agreements with the Advisor or an affiliated person of the Advisor (as such term
is defined in the 1940 Act) acting as principal, except to the extent permitted
by the Securities and Exchange Commission ("SEC"). In addition, the Fund will
not purchase securities during the existence of any underwriting or selling
group relating thereto of which the Advisor, or an affiliated person of the
Advisor, is a member, except to the extent permitted by the SEC. Under certain
circumstances, the Fund may be at a disadvantage because of these limitations in
comparison with other investment companies that have similar investment
objectives but are not subject to such limitations.
Investment decisions for the Fund will be made independently from those for any
other series of the Trust, if any, and for any other investment companies and
accounts advised or managed by the Advisor. Such other investment companies and
accounts may also invest in the same securities as the Fund. To the extent
permitted by law, the Advisor may aggregate the securities to be sold or
purchased for the Fund with those to be sold or purchased for other investment
companies or accounts in executing transactions. When a purchase or sale of the
same security is made at substantially the same time on behalf of the Fund and
another investment company or account, the transaction will be averaged as to
price and available investments allocated as to amount, in a manner which the
Advisor believes to be equitable to the Fund and such other investment company
or account. In some instances, this investment procedure may adversely affect
the price paid or received by the Fund or the size of the position obtained or
sold by the Fund.
For the fiscal year ended August 31, 1995 and 1994, and the fiscal period ended
August 31, 1993, no brokerage commissions were paid by the Fund.
Repurchase Agreements. The Fund may acquire U.S. Government Securities or
corporate debt securities subject to repurchase agreements. A repurchase
transaction occurs when, at the time the Fund purchases a security (normally a
U.S. Treasury obligation), it also resells it to the vendor (normally a member
bank of the Federal Reserve or a registered Government Securities dealer) and
must deliver the security (and/or securities substituted for them under the
repurchase agreement) to the vendor on an agreed upon date in the future. The
repurchase price exceeds the purchase price by an amount which reflects an
agreed upon market interest rate effective for the period of time during which
repurchase agreement is in effect. Delivery pursuant to the resale will occur
within one to five days of the purchase.
Repurchase agreements are considered "loans" under the Investment Company Act of
1940 (the "1940 Act"), collateralized by the underlying security. The Trust's
Board of Trustees will implement procedures to monitor on a continuous basis the
value of the collateral serving as security for repurchase obligations.
Additionally, the Advisor to the Fund will consider the creditworthiness of the
vendor. If the vendor fails to pay the agreed upon resale price on the delivery
date, the Fund will retain or attempt to dispose of the collateral. The Fund's
risks in such default may include any decline in value of the collateral to an
amount which is less than 100% of the repurchase price, any costs of disposing
of such collateral, and any loss resulting from any delay in foreclosing on the
collateral. The Fund will not enter into a repurchase agreement which will
caused more than 10% of its assets to be invested in repurchase agreements which
extend beyond seven days and other illiquid securities.
Description of Money Market Instruments. Money market instruments may include
U.S. Government Securities or corporate debt obligations (including those
subject to repurchase agreements) as described herein, provided that they mature
in thirteen months or less from the date of acquisition and are otherwise
eligible for purchase by the Fund. Money market instruments also may include
Banker's Acceptances and Certificates of Deposit of domestic branches of U.S.
banks, Commercial Paper and Variable Amount Demand Master Notes ("Master
Notes"). Banker's Acceptances are time drafts drawn on and "accepted" by a bank.
When a bank "accepts" such a time draft, it assumes liability for its payment.
When the Fund acquires a Banker's Acceptance the bank which "accepted" the time
draft is liable for payment of interest and principal when due. The Banker's
Acceptance carries the full faith and credit of such bank. A Certificate of
Deposit ("CD") is an unsecured interest bearing debt obligation of a bank.
Commercial Paper is an unsecured, short term debt obligation of a bank,
corporation or other borrower. Commercial Paper maturity generally ranges from
two to 270 days and is usually sold on a discounted basis rather than as an
interest bearing instrument. The Fund will invest in Commercial Paper only if
it is rated in one of the two highest rating categories by any of the nationally
recognized securities rating organizations or if not rated, of equivalent
quality in the Advisor's opinion. Commercial Paper may include Master Notes of
the same quality. Master Notes are unsecured obligations which are redeemable
upon demand of the holder and which permit the investment of fluctuating amounts
at varying rates of interest. Master Notes are acquired by the Fund only
through the Master Note program of the Fund's custodian bank, acting as
administrator thereof. The Advisor will monitor, on a continuous basis, the
earnings power, cash flow and other liquidity ratios of the issuer of a Master
Note held by the Fund.
Illiquid Investments. The Fund may invest up to 10% of its net assets in
illiquid securities, which are investments that cannot be sold or disposed of in
the ordinary course of business within seven days at approximately the prices at
which they are valued. Under the supervision of the Board of Trustees, the
Advisor determines the liquidity of the Fund's investments and, through reports
from the Advisor, the Board monitors investments in illiquid instruments. In
determining the liquidity of the Fund's investments, the Advisor may consider
various factors including (1) the frequency of trades and quotations, (2) the
number of dealers and prospective purchasers in the marketplace, (3) dealer
undertakings to make a market, (4) the nature of the security (including any
demand or tender features) and (5) the nature of the marketplace for trades
(including the ability to assign or offset the Fund's rights and obligations
relating to the investment). Investments currently considered by the Fund to be
illiquid include repurchase agreements not entitling the holder to payment of
principal and interest within seven days. If through a change in values, net
assets or other circumstances, the Fund were in a position where more than 10%
of its net assets were invested in illiquid securities, it would seek to take
appropriate steps to protect liquidity.
Certain investments in lease obligations (defined and described in detail in the
Prospectus) may be illiquid. The Fund may not invest in illiquid lease
obligations if such investments, together with all other illiquid investments,
would exceed 10% of the Fund's net assets. The Fund may, however, invest
without regard to such limitation in lease obligations which the Advisor,
pursuant to guidelines adopted by the Board of Trustees and subject to the
supervision of the Board of Trustees, determines to be liquid. In determining
the liquidity of municipal lease obligations, the Advisor will consider a
variety of factors including: (1) the willingness of dealers to bid for the
security; (2) the number of dealers willing to purchase or sell the obligation
and the number of other potential buyers; (3) the frequency of trades and quotes
for the obligation; and (4) the nature of the marketplace trades. In addition,
the Advisor will consider factors unique to particular lease obligations
affecting their marketability. These include the general creditworthiness of the
municipality, the importance of the property covered by the lease to the
municipality, and the likelihood that the marketability of the obligation will
be maintained throughout the time the obligation is held by the Fund. The Board
of Trustees is responsible for determining the credit quality of unrated
municipal lease obligations on an ongoing basis, including as assessment of the
likelihood that the lease will not be cancelled. The Advisor will deem lease
obligations liquid if they are publicly offered and have received an investment
grade rating of Baa or better by Moody's or BBB or better by Standard & Poor's
(or of equivalent rating by any of the nationally recognized securities rating
organizations). Unrated lease obligations will be considered liquid if the
obligations come to the market through an underwritten public offering and at
least two dealers are willing to give competitive bids.
Forward Commitment & When-Issued Securities. The Fund may purchase securities
on a when-issued basis or for settlement at a future date if the Fund holds
sufficient assets to meet the purchase price. In such purchase transactions the
Fund will not accrue interest on the purchased security until the actual
settlement. Similarly if a security is sold for a forward date the Fund will
accrue the interest until the settlement of the sale. When-issued security
purchase and forward commitments have a higher degree of risk of price movement
before settlement due to the extended time period between the execution and
settlement of the purchase or sale. As a result the exposure to the
counterparty of the purchase or sale is increased. Although the Fund would
generally purchase securities on a forward commitment or when-issued basis with
the intention of taking delivery, the Fund may sell such a security prior to the
settlement date if the Advisor felt such action was appropriate. In such a case
the Fund could incur a short term gain or loss.
INVESTMENT LIMITATIONS
The Fund has adopted the following investment limitations, which cannot be
changed without approval by holders of a majority of the outstanding voting
shares of the Fund. A "majority" for this purpose, means the lesser of (i) 67%
of the Fund's outstanding shares represented in person or by proxy at a meeting
at which more than 50% of its outstanding shares are represented, or (ii) more
than 50% of its outstanding shares.
Under these limitations, the Fund may not:
1. Invest in the securities of any issuer if any of the officers or
trustees of the Trust or its Advisor who own beneficially more than 1/2
of 1% of the outstanding securities of such issuer together own more
than 5% of the outstanding securities of such issuer;
2. Invest for the purpose of exercising control or management of another
issuer;
3. Invest in interests in real estate, real estate mortgage loans, oil, gas
or other mineral exploration leases or exploration or development
programs, except that the Fund may invest in the securities of companies
(other than those which are not readily marketable) which own or deal in
such things;
4. Underwrite securities issued by others except to the extent the Fund may
be deemed to be an underwriter under the Federal securities laws, in
connection with the disposition of portfolio securities;
5. Purchase securities on margin (but the Fund may obtain such short-term
credits as may be necessary for the clearance of transactions);
6. Make short sales of securities or maintain a short position, except
short sales "against the box;" (A short sale is made by selling a
security the Fund does not own. A short sale is "against the box" to
the extent that the Fund contemporaneously owns or has the right to
obtain at no additional cost securities identical to those sold short.);
7. Participate on a joint or joint and several basis in any trading account
in securities;
8. Make loans of money or securities, except that the Fund may invest in
repurchase agreements;
9. Invest in securities of issuers which have a record of less than three
years' continuous operation (including predecessors and, in the case of
bonds, guarantors), if more than 5% of its total assets would be
invested in such securities;
10. Issue senior securities, borrow money, or pledge its assets except, that
it may borrow from banks as a temporary measure (a) for extraordinary or
emergency purposes, in amounts not exceeding 5% of the Fund's total
assets or, (b) in order to meet redemption requests which might
otherwise require untimely disposition of portfolio securities in
amounts no exceeding 15% of its total assets. The Fund will not make
any investments if borrowing exceeds 5% of its total assets;
11. Invest more than 10% of its net assets in illiquid securities. For this
purpose, illiquid securities include, among others (a) securities for
which no readily available market exists, (b) fixed time deposits that
are subject to withdrawal penalties and have maturities of more than
seven days, and (c) repurchase agreements not terminable within seven
days;
12. Invest in restricted securities; and
13. Write, purchase or sell commodities, commodities contracts, futures
contracts, or related options.
Percentage restrictions stated as an investment policy or investment limitation
apply at the time of investment; if a later increase or decrease in percentage
beyond the specified limits results from a change in securities values or total
assets, it will not be considered a violation. However, in the case of the
borrowing limitation (limitation number 10, above), the Fund will, to the extent
necessary, reduce its existing borrowing to comply with the limitation.
While the Fund has reserved the right to make short sales "against the box,"
(limitation number 6, above), the Advisor has no present intention of engaging
in such transactions at this time or during the coming year.
NET ASSET VALUE
The net asset value per share of the Fund is determined at 4:00 p.m., New York
time, Monday through Friday, except on business holidays when the New York Stock
Exchange is closed. The New York Stock Exchange recognizes the following
holidays: New Year's Day, President's Day, Good Friday, Memorial Day, Fourth of
July, Labor Day, Thanksgiving Day, and Christmas Day. Any other holiday
recognized by the New York Stock Exchange will be deemed a business holiday on
which the net asset value of the Fund will not be calculated.
The net asset value per share of the Fund is calculated separately by adding the
value of the Fund's securities and other assets belonging to the Fund,
subtracting the liabilities charged to the Fund, and dividing the result by the
number of outstanding shares. "Assets belonging to" the Fund consist of the
consideration received upon the issuance of shares of the Fund together with all
net investment income, realized gains/losses and proceeds derived from the
investment thereof, including any proceeds from the sale of such investments,
any funds or payments derived from any reinvestment of such proceeds, and a
portion of any general assets of the Trust not belonging to a particular
investment Fund. Assets belonging to the Fund are charged with the direct
liabilities of the Fund and with a share of the general liabilities of the
Trust, which are normally allocated in proportion to the number of or the
relative net asset values of all of the Trust's series at the time of allocation
or in accordance with other allocation methods approved by the Board of
Trustees. Subject to the provisions of the Declaration of Trust, determinations
by the Board of Trustees as to the direct and allocable liabilities, and the
allocable portion of any general assets, with respect to the Fund are
conclusive.
For the fiscal years ended August 31, 1995 and 1994, and the fiscal period ended
August 31, 1993, the total expenses of the Fund, after voluntary fee waivers and
expense reimbursements, were $25,065 (0.85% of average daily net assets),
$26,934 (0.84% of average daily net assets), and $7,983 (0.77% of average daily
net assets).
ADDITIONAL PURCHASE AND REDEMPTION INFORMATION
Purchases. Shares of the Fund are offered and sold on a continuous basis and
may be purchased through authorized investment dealers or directly by contacting
the Fund. The minimum for initial investments is $1,000 and for any subsequent
investment is $250. Selling dealers have the responsibility of transmitting
orders promptly to the Fund. The public offering price of shares of the Fund
equals net asset value. See " How Shares May Be Purchased" in the Prospectus.
Redemptions. Under the 1940 Act, the Fund may suspend the right of redemption
or postpone the date of payment for shares during any period when (a) trading on
the New York Stock Exchange is restricted by applicable rules and regulations of
the SEC; (b) the Exchange is closed for other than customary weekend and holiday
closings; (c) the SEC has by order permitted such suspension; or (d) an
emergency exists as determined by the SEC. The Fund may also suspend or
postpone the recordation of the transfer of shares upon the occurrence of any of
the foregoing conditions.
In addition to the situations described in the Prospectus under "How Shares May
Be Redeemed," the Fund may redeem shares involuntarily to reimburse the Fund for
any loss sustained by reason of the failure of a shareholder to make full
payment for shares purchased by the shareholder or to collect any charge
relating to a transaction effected for the benefit of a shareholder which is
applicable to Fund shares as provided in the Prospectus from time to time.
DESCRIPTION OF THE TRUST
The Trust is an unincorporated business trust organized under Massachusetts law
in 1992. The Trust's Declaration of Trust authorizes the Board of Trustees to
divide shares into series, each series relating to a separate portfolio of
investments. The Declaration of Trust currently provides for the shares of one
series, The North Carolina Tax Free Bond Fund (the subject of this Additional
Statement). The number of shares of each series shall be unlimited. The Trust
does not intend to issue share certificates.
In the event of a liquidation or dissolution of the Trust or an individual
series, such as the Fund, shareholders of a particular series would be entitled
to receive the assets available for distribution belonging to such series.
Shareholders of a series are entitled to participate equally in the net
distributable assets of the particular series involved on liquidation, based on
the number of shares of the series that are held by each shareholder. If there
are any assets, income, earnings, proceeds, funds or payments, that are not
readily identifiable as belonging to any particular series, the Trustees shall
allocate them among any one or more of the series as they, in their sole
discretion, deem fair and equitable.
Shareholders of all of the series of the Trust, including the Fund, will vote
together and not separately on a series-by-series basis, except as otherwise
required by law or when the Board of Trustees determines that the matter to be
voted upon affects only the interests of the shareholders of a particular
series. Rule 18f-2 under the 1940 Act provides that any matter required to be
submitted to the holders of the outstanding voting securities of an investment
company such as the Trust shall not be deemed to have been effectively acted
upon unless approved by the holders of a majority of the outstanding shares of
each series affected by the matter. A series is affected by a matter unless it
is clear that the interests of each series in the matter are substantially
identical or that the matter does not affect any interest of the series. Under
Rule 18f-2, the approval of an investment advisory agreement, a Rule 12b-1 plan
or any change in a fundamental investment policy would be effectively acted upon
with respect to a series only if approved by a majority of the outstanding
shares of such series. However, the Rule also provides that the ratification of
the appointment of independent accountants, the approval of principal
underwriting contracts and the election of Trustees may be effectively acted
upon by shareholders of the Trust voting together, without regard to a
particular series.
When used in the Prospectus or this Additional Statement, a "majority" of
shareholders means the vote of the lesser of (1) 67% of the shares of the Trust
or the applicable series present at a meeting if the holders of more than 50% of
the outstanding shares are present in person or by proxy, or (2) more than 50%
of the outstanding shares of the Trust or the applicable series.
When issued for payment as described in the Prospectus and this Additional
Statement, shares of the Fund will be fully paid and non-assessable.
The Declaration of Trust provides that the Trustees of the Trust will not be
liable in any event in connection with the affairs of the Trust, except as such
liability may arise from his or her own bad faith, willful misfeasance, gross
negligence, or reckless disregard of duties. It also provides that all third
parties shall look solely to the Trust property for satisfaction of claims
arising in connection with the affairs of the Trust. With the exceptions
stated, the Declaration of Trust provides that a Trustee or officer is entitled
to be indemnified against all liability in connection with the affairs of the
Trust.
ADDITIONAL INFORMATION CONCERNING TAXES
General Tax Considerations. The following summarizes certain additional tax
considerations generally affecting the Fund and its shareholders that are not
described in the Prospectus. No attempt is made to present a detailed
explanation of the tax treatment of the Fund or its shareholders, and the
discussion here and in the Prospectus is not intended as a substitute for
careful tax planning and is based on tax laws and regulations that are in effect
on the date hereof; such laws and regulations may be changed by legislative,
judicial, or administrative action. Investors are advised to consult their tax
advisors with specific reference to their own tax situations.
Each series of the Trust, including the Fund, will be treated as a separate
corporate entity under the Code and intends to qualify or remain qualified as a
regulated investment company. In order to so qualify, each series must elect to
be a regulated investment company or have made such an election for a previous
year. Each series must also distribute annually at least 90% of its net taxable
income plus 90% of its net tax-exempt interest income. In addition to the
distribution requirement, each series must satisfy certain requirements with
respect to the source of its income for a taxable year. At least 90% of the
gross income of each series must be derived from dividends, interest, payments
with respect to securities loans, gains from the sale or other disposition of
stocks, securities or foreign currencies, and other income derived with respect
to the series' business of investing in such stock, securities or currencies.
Any income derived by a series from a partnership or trust is treated as derived
with respect to the series' business of investing in stock, securities or
currencies only to the extent that such income is attributable to items of
income that would have been qualifying income if realized by the series in the
same manner as by the partnership or trust.
Another requirement for qualification as a regulated investment company under
the Code is that less than 30% of a series' gross income for a taxable year must
be derived from gains realized on the sale or other disposition of the following
investments held for less than three months: (l) stock and securities (as
defined in Section 2(a) (36) of the 1940 Act); (2) options, futures and forward
contracts other than those on foreign currencies; or (3) foreign currencies (or
options, futures or forward contracts on foreign currencies) that are not
directly related to a series' principal business of investing in stocks or
securities (or options and futures with respect to stocks or securities).
Interest (including original issue discount and, with respect to certain debt
securities, accrued market discount) received by a series upon maturity or
disposition of a security held for less than three months will not be treated as
gross income derived from the sale or other disposition of such security within
the meaning of this requirement. However, any other income which is attributable
to realized market appreciation will be treated as gross income from the sale or
other disposition of securities for this purpose.
An investment company may not qualify as a regulated investment company for any
taxable year unless it satisfies certain requirements with respect to the
diversification of its investments at the close of each quarter of the taxable
year. In general, at least 50% of the value of its total assets must be
represented by cash, cash items, government securities, securities of other
regulated investment companies and other securities which, with respect to any
one issuer, do not represent more than 5% of the total assets of the investment
company nor more than 10% of the outstanding voting securities of such issuer.
In addition, not more than 25% of the value of the investment company's total
assets may be invested in the securities (other than government securities or
the securities of other regulated investment companies) of any one issuer. The
Fund intends to satisfy all requirements on an ongoing basis for continued
qualification as a regulated investment company.
Each series of the Trust, including the Fund, will designate any distribution of
long term capital gains as a capital gain dividend in a written notice mailed to
shareholders within 60 days after the close of the series' taxable year.
Shareholders should note that, upon the sale or exchange of series shares, if
the shareholder has not held such shares for at least six months, any loss on
the sale or exchange of those shares will be treated as long term capital loss
to the extent of the capital gain dividends received with respect to the shares.
A 4% nondeductible excise tax is imposed on regulated investment companies that
fail to currently distribute an amount equal to specified percentages of their
ordinary taxable income and capital gain net income (excess of capital gains
over capital losses). Each series of the Trust, including the Fund, intends to
make sufficient distributions or deemed distributions of its ordinary taxable
income and any capital gain net income prior to the end of each calendar year to
avoid liability for this excise tax.
If for any taxable year a series does not qualify for the special federal income
tax treatment afforded regulated investment companies, all of its taxable income
will be subject to federal income tax at regular corporate rates (without any
deduction for distributions to its shareholders). In such event, dividend
distributions (whether or not derived from interest on tax-exempt securities)
would be taxable as ordinary income to shareholders to the extent of the series'
current and accumulated earnings and profits, and would be eligible for the
dividends received deduction for corporations.
Each series of the Trust, including the Fund, will be required in certain cases
to withhold and remit to the U.S. Treasury 31% of taxable dividends or 31% of
gross proceeds realized upon sale paid to shareholders who have failed to
provide a correct tax identification number in the manner required, or who are
subject to withholding by the Internal Revenue Service for failure properly to
include on their return payments of taxable interest or dividends, or who have
failed to certify to the Fund that they are not subject to backup withholding
when required to do so or that they are "exempt recipients."
Depending upon the extent of the Fund's activities in states and localities in
which its offices are maintained, in which its agents or independent contractors
are located or in which it is otherwise deemed to be conducting business, the
Fund may be subject to the tax laws of such states or localities. In addition,
in those states and localities that have income tax laws, the treatment of the
Fund and its shareholders under such laws may differ from their treatment under
federal income tax laws.
Special Tax Considerations. As indicated in the Prospectus, the Fund is
designed to provide North Carolina shareholders with current tax-exempt interest
income. The Fund is not intended to constitute a balanced investment program and
is not designed for investors seeking maximum capital appreciation or maximum
tax-exempt income irrespective of fluctuations in principal. Shares of the Fund
would not be suitable for tax-exempt institutions and may not be suitable for
retirement plans qualified under Section 401 of the Code, so-called Keogh or
H.R. 10 plans, and individual retirement accounts. Such plans and accounts are
generally tax - exempt and, therefore, would not realize any additional benefit
from the dividends of the Fund being tax-exempt, and such dividends would be
ultimately taxable to the beneficiaries when distributed to them.
In addition, the Fund may not be an appropriate investment for shareholders who
are "substantial users" of facilities financed by private activity bonds or
"related persons" thereof. "Substantial user" is defined under U.S. Treasury
Regulations to include a non-exempt person who regularly uses a part of such
facilities in his trade or business, and whose gross revenues derived with
respect to the facilities financed by the issuance of bonds represent more than
5% of the total revenues derived by all users of such facilities, or who
occupies more than 5% of the usable area of such facilities, or for whom such
facilities or a part thereof were specifically constructed, reconstructed, or
acquired. "Related person" includes certain related natural persons, affiliated
corporations, a partnership and its partners, and an S corporation and its
shareholders. Each shareholder who may be considered a "substantial user"
should consult a tax advisor with respect to whether exempt interest dividends
would retain the exclusion under Section 103 of the Code if the shareholder were
treated as a "substantial user" or a "related person."
The Code permits a regulated investment company which invests at least 50% of
its total assets in tax-exempt obligations (obligations exempt from federal
income tax) to pass through to its investors, tax-free, net tax-exempt
obligations interest income. The policy of the Fund is to pay each year as
dividends substantially all of the Fund's tax-exempt obligations interest income
net of certain deductions. An exempt-interest dividend is any dividend or part
thereof (other than a capital gain dividend) paid by the Fund and designated as
an exempt-interest dividend in a written notice mailed to shareholders within
sixty days after the close of the Fund's taxable year, but not to exceed in the
aggregate the net tax-exempt obligations interest received by the Fund during
the taxable year. The percentage of the total dividends paid for any taxable
year that qualifies as federal exempt-interest dividends will be the same for
all shareholders receiving dividends from the Fund during such year, regardless
of the period for which the shares were held. Although exempt interest
dividends are generally excludable from a shareholder's gross income for federal
income tax purposes, they will be included in determining the portion, if any,
of a person's social security benefits and railroad retirement benefits subject
to federal income taxes.
While the Fund does not expect to realize any significant amount of long-term
capital gains, any net realized long-term capital gains will be distributed
annually. The Fund will have no tax liability with respect to such distributed
gains, and the distributions will be taxable to shareholders as long-term
capital gains, regardless of how long a shareholder has held the shares of the
Fund. Such distributions will be designated as a capital gains dividend in a
written notice mailed by the Fund to shareholders within sixty days after the
close of the Fund's taxable year.
While the Fund does not expect to earn any significant amount of investment
company taxable income, taxable income earned by the Fund will be distributed to
shareholders. In general, the investment company taxable income will be the
taxable income of the Fund (for example, short-term capital gains) subject to
certain adjustments and excluding the excess of any net long-term capital gains
for the taxable year over the net short-term capital loss, if any, for such
year. Any such income will be taxable to shareholders as ordinary income
(whether paid in cash or additional shares).
Distributions of exempt-interest dividends, to the extent attributable to
interest on North Carolina Municipal Obligations and to interest on direct
obligations of the United States (including territories thereof), are not
subject to North Carolina individual or corporate income tax. Distributions of
gains attributable to the disposition of certain obligations of the State of
North Carolina and its political subdivisions issued prior to July 1, 1995 are
not subject to North Carolina individual or corporate income tax; however, for
such obligations issued after June 30, 1995, distributions of gains attributable
to disposition will be subject to North Carolina individual or corporate income
tax. Any loss upon the sale or exchange of shares of the Fund held for six
months or less will be disallowed for North Carolina income tax purposes to the
extent of any exempt-interest dividends received by the shareholder, even though
some portion of such dividends actually may have been subject to North Carolina
income tax. Except for income exempted from North Carolina income tax as
described herein, the Fund's distributions will generally constitute taxable
income for taxpayers subject to North Carolina income tax.
An investment in the Fund by a corporate shareholder generally would be included
in the capital stock, surplus and undivided profits base in computing the North
Carolina franchise tax.
An investment in the Fund prior to 1995 was potentially subject to the North
Carolina intangible personal property tax, subject to certain exemptions. This
tax, however, has been repealed by the North Carolina General Assembly,
effective for taxable years beginning on or after January 1, 1995.
The foregoing is only a summary of some of the important tax considerations
generally affecting purchasers of shares of the Fund. No attempt has been made
to present a detailed explanation of the Federal or state income tax treatment
of the Fund or its shareholders, and this discussion is not intended as a
substitute for careful tax planning. Accordingly, potential purchasers of
shares of the Fund are urged to consult their tax advisors with specific
reference to their own tax situation. In addition, the foregoing discussion is
based on tax laws and regulations in effect on the date of this Additional
Statement; such laws and regulations may be changed by legislative, judicial, or
administrative action.
MANAGEMENT OF THE FUND
Trustees and Officers. The Trustees and executive officers of the Trust, their
ages, and their principal occupations for the last five years are as follows:
Name, Age, Position(s) Principal Occupation(s)
and Address during Past 5 Years
Edwin B. Armstrong, 66, Trustee International Management Consultant
2506 Pineway Drive Burlington, North Carolina
Burlington, North Carolina 27215 Field Associate
International Executive Services Corp.
Burlington, North Carolina
Dodie M. Duffy, 32, Secretary Compliance Administrator
105 North Washington Street The Nottingham Company
Rocky Mount, North Carolina 27802 Rocky Mount, North Carolina
since 1993,
previously Paralegal
W. Michael Stemmans
Attorney at Law
Baton Rouge, Louisiana
John B. Kuhns, 41 Senior Vice President
President Boys, Arnold & Company, Inc.
The North Carolina Tax Free Asheville, North Carolina
Bond Fund
1272 Hendersonville Road
Asheville, North Carolina 28813
J. Finley Lee, Jr., 56, Trustee Julian Price Professor of Business
614 Croom Court Administration
Chapel Hill, North Carolina 27514 University of North Carolina
Chapel Hill, North Carolina
Frank P. Meadows III, 34, Trustee* Managing Director
Treasurer and Chairman The Nottingham Company
105 North Washington Street Rocky Mount, North Carolina;
Rocky Mount, North Carolina 27802 Registered Representative and
Limited Securities Principal
Capital Investment Group, Inc.
Raleigh, North Carolina
Jon L. Vannice, 38, Trustee* Vice President
Vice President Boys, Arnold & Company, Inc.
The North Carolina Tax Free Asheville, North Carolina
Bond Fund since 1992, previously Vice President
1272 Hendersonville Road and Trust Officer
Asheville, North Carolina 28813 NationsBank
Nashville, Tennessee
since 1990, previously
Vice President and Trust Officer
First National Bank
Zanesville, Ohio
C. Franklin Watson III, 25 Compliance Administrator
Assistant Secretary The Nottingham Company, Inc.
Assistant Treasurer Rocky Mount, North Carolina,
105 North Washington Street previously, Student
Rocky Mount, North Carolina 27802 University of North Carolina
Chapel Hill, North Carolina
since 1992
_______________________________
* Indicates that Trustee is an Interested Person for purposes of the 1940 Act
because of his position with the Advisor or Administrator to the Trust.
Trustees and Officers of the Trust who are interested persons of the Trust will
receive no salary or fees from the Trust. Trustees of the Trust who are not
interested persons of the Trust will receive $2,000 per year plus $250 per fund
per meeting attended in person and $100 per fund per meeting attended by
telephone. All Trustees are reimbursed for any out-of-pocket expenses incurred
in connection with attendance at meetings.
COMPENSATION TABLE
Pension Total
Retirement Compensation
Aggregate Benefits Estimated from the
Compensation Accrued As Annual Trust
Name of Person, from the Part of Fund Benefits Upon Paid to
Position Trust Expenses Retirement Trustees
Edwin B. Armstrong $2,850 None None $2,850
Trustee
J. Finley Lee, Jr. $2,350 None None $2,350
Trustee
Frank P. Meadows III None None None None
Trustee
Jon L. Vannice None None None None
Trustee
Figures are for the fiscal year ended August 31, 1995.
Messrs. Armstrong and Lee constitute the Trust's Audit Committee. The Audit
Committee reviews annually the nature and cost of the professional services
rendered by the Trust's independent accountants, the results of their year-end
audit and their findings and recommendations as to accounting and financial
matters, including the adequacy of internal controls. On the basis of this
review the Audit Committee makes recommendations to the Trustees as to the
appointment of independent accountants for the following year. The Trustees
have not appointed a compensation committee or a nominating committee.
Principal Holders of Voting Securities. As of December 4, 1995, the Trustees
and Officers of the Trust as a group owned beneficially (i.e., had voting and/or
investment power) less than 1% of the then outstanding shares of the Fund. On
the same date the following shareholders owned or are known by the Fund to
beneficially own (i.e., voting and/or investment power) 5% or more of the
outstanding shares of beneficial interest of the Fund:
Name and Address of Amount and Nature of
Beneficial Owner Beneficial Ownership* Percent
Charles Schwab & Company, Inc. 86,177.853 Shares 20.668%
101 Montgomery Street
San Francisco, California 94104
Wachovia Securities, Inc. 77,037.573 Shares 18.476%
301 North Main Street
Winston-Salem, North Carolina 27102
* The Fund believes the shares indicated are owned of record by the indicated
parties for the benefit of certain of their clients.
Investment Advisor. Boys, Arnold & Company, Inc. (the "Advisor") supervises the
Fund's investments pursuant to an Investment Advisory Agreement (the "Advisory
Agreement") described in the Prospectus. The Advisory Agreement is effective
for a one year term and will be renewed thereafter for periods of one year only
so long as such renewal and continuance is specifically approved at least
annually by the Board of Trustees or by vote of a majority of the Fund's
outstanding voting securities, provided the continuance is also approved by a
majority of the Trustees who are not "interested persons" of the Trust or the
Advisor by vote cast in person at a meeting called for the purpose of voting on
such approval. The Advisory Agreement is terminable by the Fund without penalty
on sixty days notice by the Board of Trustees of the Trust or by the Advisor.
The Advisory Agreement provides that it will terminate automatically in the
event of its assignment.
Compensation of Advisor with regards to the Fund, based upon the Fund's daily
average net assets, is at the annual rate of 0.35%. For the period ended August
31, 1993, the previous investment advisor to the Fund voluntarily waived its
advisory fee in the amount of $2,599. For the fiscal year ended August 31,
1994, the Advisor voluntarily waived its fee from the Fund in the amount of
$9,311 and voluntarily reimbursed a portion of the Fund's operating expenses in
the amount of $27,346. For the fiscal year ended August 31, 1995, the Advisor
voluntarily waived its fee from the Fund in the amount of $10,321 and
voluntarily reimbursed a portion of the Fund's operating expenses in the amount
of $41,501.
Under the Advisory Agreement, the Advisor is not liable for any error of
judgment or mistake of law or for any loss suffered by the Fund in connection
with the performance of such Agreement, except a loss resulting from a breach of
fiduciary duty with respect to the receipt of compensation for services or a
loss resulting from willful misfeasance, bad faith or gross negligence on the
part of the Advisor in the performance of its duties or from its reckless
disregard of its duties and obligations under the Agreement.
Administrator and Transfer Agent. The Trust has entered into a Fund Accounting,
Dividend Disbursing and Transfer Agent and Administration Agreement with The
Nottingham Company, L.L.C. (the "Administrator"), a North Carolina limited
liability company, whose address is 105 North Washington Street, Post Office
Drawer 69, Rocky Mount, North Carolina 27802-0069.
The Administrator will perform the following services for the Fund: (1)
coordinate with the Custodian and monitor the services it provides to the Fund;
(2) coordinate with and monitor any other third parties furnishing services to
the Fund; (3) provide the Fund with necessary office space, telephones and other
communications facilities and personnel competent to perform administrative and
clerical functions for the Fund; (4) supervise the maintenance by third parties
of such books and records of the Fund as may be required by applicable federal
or state law; (5) prepare or supervise the preparation by third parties of all
federal, state and local tax returns and reports of the Fund required by
applicable law; (6) prepare and, after approval by the Trust, file and arrange
for the distribution of proxy materials and periodic reports to shareholders of
the Fund as required by applicable law; (7) prepare and, after approval by the
Trust, arrange for the filing of such registration statements and other
documents with the Securities and Exchange Commission and other federal and
state regulatory authorities as may be required by applicable law; (8) review
and submit to the officers of the Trust for their approval invoices or other
requests for payment of Fund expenses and instruct the Custodian to issue checks
in payment thereof; and (9) take such other action with respect to the Fund as
may be necessary in the opinion of the Administrator to perform its duties under
the agreement.
The Administration Agreement is currently for a one year term and will be
renewed thereafter only so long as such renewal and continuance is specifically
approved at least annually by the Board of Trustees or by vote of a majority of
the Fund's outstanding voting securities and may be terminated at any time
without penalty by the Trust or the Administrator upon 90 days written notice.
Compensation of the Administrator, based upon the average daily net assets of
the Fund, is at the annual rate of 0.15%. For the period ended August 31, 1993
and the fiscal years ended August 31, 1994 and 1995, the Administrator
voluntarily waived its administrative fee for the Fund. In addition, the
Administrator currently receives a monthly fee of $1,750 for accounting and
recordkeeping services for the Fund. For the period ended August 31, 1993 and
the fiscal years ended August 31, 1994 and 1995, the Administrator received
$13,125, $21,000, and $21,000, respectively, for such services for the Fund. The
Administrator, however, voluntarily reimbursed a portion of the Fund's operating
expenses in the amount of $59,075 for the fiscal year ended August 31, 1994. The
Administrator also charges the Fund for certain costs involved with the daily
valuation of investment securities and is reimbursed for out-of-pocket expenses.
Shareholder Servicing Plan. The Trust has adopted a Shareholder Servicing Plan
(the "Plan") with respect to the Fund pursuant to which the Trust may compensate
individuals, firms, banks, or investment advisors directly or indirectly for
personal services and/or the maintenance of accounts of shareholders of the Fund
and other shareholder liaison services not otherwise provided by the
Administrator or the Custodian, including but not limited to responding to
shareholder inquiries, providing information on shareholders' investments in the
Fund, and providing such other shareholder services as the Trust may reasonably
request.
The expenditures to be made under the Plan and the basis for payment of such
expenditures must be approved by the Board of Trustees of the Trust and may not
exceed 0.25% of the Fund's average annual net assets. In addition, in no event
may such expenditures paid to any person who sells Fund shares exceed 0.25% of
the average annual net asset value of such shares. The Plan may not be amended
to increase materially the amount to be spent for service fees pursuant to the
Plan without shareholder approval.
The continuation of the Plan must be considered by the Board of Trustees
annually. At least quarterly the Board of Trustees must review a written report
of amounts expended pursuant to the Plan and the purposes for which such
expenditures were made.
During the fiscal period ended August 31, 1993, and the fiscal years ended
August 31, 1994 and 1995, the Fund paid service fees of $1,084, $5,393, and
$1,574, respectively, pursuant to the Plan.
Custodian. Wachovia Bank of North Carolina, N.A. (the "Custodian"), 301 North
Main Street, Winston-Salem, North Carolina 27102 serves as custodian for the
Fund's assets. The Custodian acts as the depository for the Fund, safekeeps its
portfolio securities, collects all income and other payments with respect to
portfolio securities, disburses monies at the Fund's request and maintains
records in connection with its duties as Custodian. For its services as
Custodian, the Custodian is entitled to receive from the Fund an annual fee
based on the average net assets of the Fund held by the Custodian.
Independent Auditors. The firm of KPMG Peat Marwick LLP, 1021 East Cary Street,
Richmond, Virginia 23219-4023, serves as independent accountants for the Fund,
and will audit the annual financial statements of the Fund and prepare the
Fund's federal and state tax returns.
SPECIAL SHAREHOLDER SERVICES
The Fund offers the following shareholder services:
Regular Account. The regular account allows for voluntary investments to be
made at any time. Available to individuals, custodians, corporations, trusts,
estates, corporate retirement plans and others, investors are free to make
additions and withdrawals to or from their account as often as they wish. When
an investor makes an initial investment in the Fund, a shareholder account is
opened in accordance with the investor's registration instructions. Each time
there is a transaction in a shareholder account, such as an additional
investment or the reinvestment of a dividend or distribution, the shareholder
will receive a confirmation statement showing the current transaction and all
prior transactions in the shareholder account during the calendar year to date,
along with a summary of the status of the account as of the transaction date. As
stated in the Prospectus, shareholder certificates are not issued.
Automatic Investment Plan. The automatic investment plan enables shareholders
to make regular monthly or quarterly investment in shares through automatic
charges to their checking account. With shareholder authorization and bank
approval, the Administrator will automatically charge the checking account for
the amount specified ($100 minimum) which will be automatically invested in
shares at the public offering price on or about the 21st day of the month. The
shareholder may change the amount of the investment or discontinue the plan at
any time by writing to the Administrator.
Systematic Withdrawal Plan. Shareholders owning shares with a value of $10,000
or more may establish a Systematic Withdrawal Plan. A shareholder may receive
monthly or quarterly payments, in amounts of not less than $100 per payment, by
authorizing the Fund to redeem the necessary number of shares periodically (each
month, or quarterly in the months of March, June, September and December) in
order to make the payments requested. The Fund has the capability of
electronically depositing the proceeds of the systematic withdrawal directly to
the shareholders personal bank account ($5,000 minimum per bank wire).
Instructions for establishing this service are included on the Fund Shares
Application, enclosed in the Fund Prospectus, or available by calling the Fund.
If the shareholder prefers to receive his systematic withdrawal proceeds in
cash, or if such proceeds are less than the $5,000 minimum for a bank wire,
checks will be made payable to the designated recipient and mailed within 7 days
of the valuation date. If the designated recipient is other than the registered
shareholder, the signature of each shareholder must be guaranteed on the
application (see "Signature Guarantees"). A corporation (or partnership) must
also submit a "Corporate Resolution" (or "Certification of Partnership")
indicating the names, titles and required number of signatures authorized to act
on its behalf. The application must be signed by a duly authorized officer(s)
and the corporate seal affixed. No redemption fees are charged to shareholders
under this plan. Costs in conjunction with the administration of the plan are
borne by the Fund. Shareholders should be aware that such systematic withdrawals
may deplete or use up entirely their initial investment and may result in
realized long-term or short-term capital gains or losses. The Systematic
Withdrawal Plan may be terminated at any time by the Fund upon sixty day's
written notice or by a shareholder upon written notice to the Fund. Applications
and further details may be obtained by calling the Fund at 1-800-525-3863, or by
writing to:
The North Carolina Tax Free Bond Fund
105 North Washington Street
Post Office Box 69
Rocky Mount, NC 27802-0069
Purchases in Kind. The Fund may accept securities in lieu of cash in payment
for the purchase of shares in the Fund. The acceptance of such securities is at
the sole discretion of the Advisor based upon the suitability of the securities
accepted for inclusion as a long term investment of the Fund, the marketability
of such securities, and other factors which the Advisor may deem appropriate.
If accepted, the securities will be valued using the same criteria and methods
as described in "How Shares are Valued" in the Prospectus. Transactions
involving the issuance of shares in the Fund for securities in lieu of cash will
be limited to acquisitions of securities (except for municipal debt securities
issued by state political subdivisions or their agencies or instrumentalities)
which: (a) meet the investment objective and policies of the Fund; (b) are
acquired for investment and not for resale; (c) are liquid securities which are
not restricted as to transfer either by law or liquidity of market; and (d) have
a value which is readily ascertainable (and not established only by evaluation
procedures) as evidenced by a listing on the American Stock Exchange, the New
York Stock Exchange, or NASDAQ.
Redemptions in Kind. The Fund does not intend, under normal circumstances, to
redeem its securities by payment in kind. It is possible, however, that
conditions may arise in the future which would, in the opinion of the Trustees,
make it undesirable for the Fund to pay for all redemptions in cash. In such
case, the Board of Trustees may authorize payment to be made in readily
marketable portfolio securities of the Fund. Securities delivered in payment of
redemptions would be valued at the same value assigned to them in computing the
net asset value per share. Shareholders receiving them would incur brokerage
costs when these securities are sold. An irrevocable election has been filed
under Rule 18f- 1 of the 1940 Act, wherein the Fund committed itself to pay
redemptions in cash, rather than in kind, to any shareholder of record of the
Fund who redeems during any ninety-day period, the lesser of (a) $250,000 or (b)
one percent (1%) of the Fund's net asset value at the beginning of such period.
Transfer of Registration. To transfer shares to another owner, send a written
request to the Fund at the address shown herein. Your request should include
the following: (1) the Fund name and existing account registration; (2)
signature(s) of the registered owner(s) exactly as the signature(s) appear(s) on
the account registration; (3) the new account registration, address, social
security or taxpayer identification number and how dividends and capital gains
are to be distributed; (4) signature guarantees (See the Prospectus under the
heading "Signature Guarantees"); and (5) any additional documents which are
required for transfer by corporations, administrators, executors, trustees,
guardians, etc. If you have any questions about transferring shares, call or
write the Fund.
ADDITIONAL INFORMATION ON PERFORMANCE
From time to time, the total return and yield of the Fund may be quoted in
advertisements, sales literature, shareholder reports or other communications to
shareholders. The Fund computes its "average annual total return" by
determining the average annual compounded rates of return during specified
periods that equate the initial amount invested to the ending redeemable value
of such investment. This is done by determining the ending redeemable value of a
hypothetical $1,000 initial payment. This calculation is as follows:
P(1+T)n = ERV
Where: T = average annual total return.
ERV = ending redeemable value at the end of the period covered by the
computation of a hypothetical $1,000 payment made at the
beginning of the period.
P = hypothetical initial payment of $1,000 from which the maximum
sales load is deducted.
n = period covered by the computation, expressed in terms of years.
The Fund may also compute its aggregate total return, which is calculated in a
similar manner, except that the results are not annualized.
The calculation of average annual total return and aggregate total return assume
that there is a reinvestment of all dividends and capital gain distributions on
the reinvestment dates during the period. The ending redeemable value is
determined by assuming complete redemption of the hypothetical investment and
the deduction of all nonrecurring charges at the end of the period covered by
the computations.
The yield of the Fund is computed by dividing the net investment income per
share earned during the period stated in the yield quotation by the maximum
offering price per share on the last day of the period. For the purpose of
determining net investment income, the calculation includes, among expenses of
the Fund, all recurring fees that are charged to all shareholder accounts and
any nonrecurring charges for the period stated. In particular, yield is
determined according to the following formula:
Yield = 2[(A - B + 1)6-1]
CD
Where: A equals dividends and interest earned during the period; B equals
expenses accrued for the period (net of reimbursements); C equals average daily
number of shares outstanding during the period that were entitled to receive
dividends; D equals the maximum offering price per share on the last day of the
period. A tax equivalent yield is computed by dividing the tax-exempt yield
figure described above by 1 minus a stated income tax rate and adding the
product to the taxable portion (if any) of the Fund's yield.
The average annual total return for the Fund for the year ended August 31, 1995
was 8.16%. The average annual total return for the Fund since inception
(January 13, 1993) through August 31, 1995 was 5.70%. The cumulative total
return for the Fund since inception through August 31, 1995 and since April 1,
1994 (the effective date of the Advisory Agreement with the Advisor for the
Fund) through August 31, 1995 was 15.69% and 10.24%, respectively. For the
thirty day period ended August 31, 1995, the yield of the Fund was 4.55%. The
yield required of a taxable security that would produce an after tax yield
equivalent to that earned by the Fund of 4.55% (considering both North Carolina
and federal taxes) would be 7.00%, assuming a combined federal and North
Carolina tax rate of 35%. These performance quotations should not be considered
as representative of the Fund's performance for any specified period in the
future.
The Fund's performance may be compared in advertisements, sales literature,
shareholder reports, and other communications to the performance of other mutual
funds having similar objectives or to standardized indices or other measures of
investment performance. In particular, the Fund may compare its performance to
the Lehman Brothers Municipal Bond Index. Comparative performance may also be
expressed by reference to a ranking prepared by a mutual fund monitoring service
or by one or more newspapers, newsletters or financial periodicals. The Fund
may also occasionally cite statistics to reflect its volatility and risk.
Performance comparisons may be useful to investors who wish to compare the
Fund's past performance to that of other mutual funds and investment products.
Of course, past performance is not a guarantee of future results.
The Fund's performance fluctuates on a daily basis largely because net earnings
and net asset value per share fluctuate daily. Both net earnings and net asset
value per share are factors in the computation of total return as described
above.
As indicated, from time to time, the Fund may advertise its performance compared
to similar funds or portfolios using certain indices, reporting services, and
financial publications. These may include the following:
- - Lipper Analytical Services, Inc. ranks funds in various fund categories by
making comparative calculations using total return. Total return assumes
the reinvestment of all capital gains distributions and income dividends
and takes into account any change in net asset value over a specific
period of time.
- - Morningstar, Inc., an independent rating service, is the publisher of the
bi-weekly Mutual Fund Values. Mutual Fund Values rates more than 1,000
NASDAQ-listed mutual funds of all types, according to their risk-adjusted
returns. The maximum rating is five stars, and ratings are effective for
two weeks.
Investors may use such indices in addition to the Fund's Prospectus to obtain a
more complete view of the Fund's performance before investing. Of course, when
comparing the Fund's performance to any index, factors such as composition of
the index and prevailing market conditions should be considered in assessing the
significance of such comparisons. When comparing funds using reporting
services, or total return, investors should take into consideration any relevant
differences in funds such as permitted portfolio compositions and methods used
to value portfolio securities and compute offering price. Advertisements and
other sales literature for the Fund may quote total returns that are calculated
on non- standardized base periods. The total returns represent the historic
change in the value of an investment in the Fund based on monthly reinvestment
of dividends over a specified period of time.
From time to time the Fund may include in advertisements and other
communications information, charts, and illustrations relating to inflation and
the reflects of inflation on the dollar, including the purchasing power of the
dollar at various rates of inflation. The Fund may also disclose from time to
time information about its portfolio allocation and holdings at a particular
date (including ratings of securities assigned by independent rating services
such as S&P and Moody's). The Fund may also depict the historical performance
of the securities in which the Fund may invest over periods reflecting a variety
of market or economic conditions either alone or in comparison with alternative
investments, performance indices of those investments, or economic indicators.
The Fund may also include in advertisements and in materials furnished to
present and prospective shareholders statements or illustrations relating to the
appropriateness of types of securities and/or mutual funds that may be employed
to meet specific financial goals, such as saving for retirement, children's
education, or other future needs.
Comparative information about the yield of the Fund and about average rates of
return on certificates of deposits, bank money market deposit accounts, money
market mutual funds, and other similar types of investments may be included in
Fund communications. A bank certificate of deposit, unlike the Fund's shares,
pays a fixed rate of interest and entitles the depositor to receive the face
amount of the certificate at maturity. A bank money market deposit account is a
form of savings account which pays a variable rate of interest. Unlike the
Fund's shares, bank certificates of deposit and bank money market deposit
accounts are insured by the Federal Deposit Insurance Corporation. A money
market mutual fund is designed to maintain a constant value of $1.00 per share
and, thus, a money market fund's shares are subject to less price fluctuation
than the Fund's shares.
Advertisements and other communications may also compare the tax equivalent
yield of the Fund taking into account federal income tax and North Carolina
income tax to after-tax yields of certificates of deposits, bank money market
accounts, money market mutual funds, and other investments over various combined
federal and state tax brackets.
In addition, the benefits of tax-free investments may be communicated in
advertisements or other communications. For example, the table below presents
the approximate yield that a taxable investment must earn at various income
brackets to produce after-tax yields equivalent to those of tax-exempt
investments yielding from 3% to 6%. The yields below are for illustration
purposes only and are not intended to represent current or future yields for the
Fund, which may be higher or lower than those shown. The rates shown in the
table below are subject to adjustment for the Internal Revenue Service inflation
indexation. Investors should consult their tax advisors with specific reference
to their own tax situation.
<TABLE>
<CAPTION>
APPROXIMATE YIELD TABLE: NORTH CAROLINA TAX FREE
1995 Taxable Tax-Exempt Yield
Income Bracket
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Combined
Federal
North and North
Federal Carolina Carolina
Single Joint Marginal Marginal Marginal
Return Return Tax Rate Tax Rate Tax Rate* 3.0% 3.5% 4.0% 4.5% 5.0% 5.5% 6.0%
0 - 12,750 0 - 21,250 15.0% 6.00% 20.100% 3.755% 4.380% 5.006% 5.632% 6.258% 6.884% 7.509%
12,751 - 23,350 21,251 - 39,000 15.0% 7.00% 20.950% 3.795% 4.428% 5.060% 5.693% 6.325% 6.958% 7.590%
23,351 - 56,550 39,001 - 94,250 28.0% 7.00% 33.040% 4.480% 5.227% 5.974% 6.720% 7.467% 8.214% 8.961%
56,551 - 60,000 94,251 -100,000 31.0% 7.00% 35.830% 4.675% 5.454% 6.233% 7.013% 7.792% 8.571% 9.350%
60,601 -117,950 100,001 -143,600 31.0% 7.75% 36.348% 4.713% 5.499% 6.284% 7.070% 7.855% 8.641% 9.426%
117,951-256,500 143,601 -256,500 36.0% 7.75% 40.960% 5.081% 5.928% 6.775% 7.622% 8.469% 9.316% 10.163%
Over 256,500 Over 256,500 39.6% 7.75% 44.281% 5.384% 6.282% 7.179% 8.076% 8.974% 9.871% 10.768%
</TABLE>
* The taxable income brackets applicable to North Carolina do not correspond to
the Federal taxable income brackets. The taxable income brackets presented in
this table represent the breakpoints for both Federal and North Carolina
marginal tax rate changes. When applying these brackets, Federal taxable income
may be different than North Carolina taxable income. No state tax credits,
exemptions, or local taxes have been taken into account in arriving at the
combined marginal tax rate. The income amount shown is income subject to
Federal income tax reduced by adjustments to income, exemptions, and itemized
deductions (including the deduction for state and local income taxes). If the
standard deduction is taken for Federal income tax purposes, the taxable
equivalent yield required to equal a specified tax-exempt yield is at least as
great as that shown in the table. It is assumed that the investor is not
subject to the alternative minimum tax. Where applicable, investors should
consider that the benefit of certain itemized deductions and the benefit of
personal exemptions are limited in the case of higher-income individuals. For
1995, taxpayers with adjusted gross income in excess of $114,700 are subject to
an overall limitation on certain itemized deductions, requiring a reduction in
such deductions equal to the lesser of (i) 3% of adjusted gross income in excess
of $114,700 or (ii) 80% of the amount of such itemized deductions otherwise
allowable. The benefit of each personal exemption is phased out at a rate of
two percentage points for each $2,500 (or fraction thereof) of adjusted gross
income in the phase-out zone. For single taxpayers the range of adjusted gross
income comprising the phase-out zone for 1995 is from $114,700 to $237,201, and
for married taxpayers filing a joint return the range is from $172,050 to
$294,551. The Federal tax brackets, the threshold amounts at which itemized
deductions are subject to reduction, and the range over which personal
exemptions are phased out will be further adjusted for inflation for each year
after 1995.
APPENDIX A
SPECIAL CONSIDERATIONS
REGARDING INVESTMENT IN NORTH CAROLINA
MUNICIPAL OBLIGATIONS
The concentration of investments in North Carolina Municipal Obligations
by the Fund raises special investment considerations. In particular, changes in
the economic condition and governmental policies of North Carolina and its
political subdivisions, agencies, instrumentalities, and authorities could
adversely affect the value of the Fund and its portfolio securities. This
section briefly describes current economic trends in North Carolina and does not
purport to be a complete description of the economical and financial conditions
in North Carolina. The information set forth below is derived from official
statements prepared in connection with the issuance of North Carolina Municipal
Obligations and other sources that are generally available to investors. It has
not, however, been updated nor will it be updated during the year. The Trust
has not independently verified this information.
The State of North Carolina has two major operating funds: the General
Fund and the Highway Fund. In addition, the 1989 General Assembly created the
Highway Trust Fund to provide funding for a major highway construction program.
North Carolina derives most of its revenue from taxes, including individual
income tax, corporation income tax, sales and use taxes, corporation franchise
tax, alcoholic beverage tax, insurance tax, inheritance tax, tobacco products
tax, and soft drink tax. North Carolina receives other non-tax revenues which
are also deposited in the General Fund. The most important are Federal funds
collected by North Carolina agencies, university fees and tuition, interest
earned by the North Carolina Treasurer on investments of General Fund moneys and
revenues from the judicial branch. The proceeds from the motor fuel tax,
highway use tax and motor vehicle license tax are deposited in the Highway Fund
and the Highway Trust Fund.
During the 1989-92 budget years, growth of North Carolina tax revenues
slowed considerably, requiring tax increases and budget adjustments, including
hiring freezes and restrictions, spending constraints, changes in timing of
certain collections and payments, and other short-term budget adjustments
necessary to comply with North Carolina's constitutional mandate for a balanced
budget. Many areas of North Carolina government were affected. Reductions in
capital spending, local government aid, and the use of the budget stabilization
reserve, combined with other budget adjustments, brought the budget into
balance. Tax increases in the fiscal 1992 budget included a $.01 increase in
the North Carolina sales tax and increases in the personal and corporate income
tax rates, as well as increases in the tax on cigarettes and alcohol, among
other items.
Fiscal year 1992 ended with a positive fund balance of approximately
$164.8 million. By law, $41.2 million of such positive fund balance was
required to be reserved in the General Fund of North Carolina as part of a
"Savings Reserve," leaving an unrestricted General Fund balance at June 30, 1992
of $123.6 million. Fiscal year 1993 ended with a positive General Fund balance
of approximately $537.3 million. Of this amount, $134.3 million was reserved in
the Savings Reserve and $57 million was reserved in a Reserve for Repair and
Renovation of State Facilities, leaving an unrestricted General Fund balance at
June 30, 1993 of $346 million. Fiscal year 1994 ended with a positive General
Fund balance of approximately $444.7 million. An additional $178 million was
available from a reserved fund balance. Of this aggregate amount, $155.7
million was reserved in the Savings Reserve (bringing the total reserve to
$210.6 million after prior withdrawals) and $60 million was reserved in the
Reserve for Repair and Renovation of State Facilities (bringing the total
reserve to $60 million after prior withdrawals), leaving an unrestricted General
Fund balance at June 30, 1994 of $407 million. Fiscal year 1995 ended with a
positive General Fund balance of approximately $343.4 million. An additional
$269.9 million was available from a reserved fund balance. Of this aggregate
amount, $146.3 million was reserved in the Savings Reserve (bringing the total
reserve to $423.6 million after prior contributions) and $146.3 million was
reserved in the Reserve for Repair and Renovation of State Facilities (bringing
the total reserve to $146.3 million after prior withdrawals), leaving an
unrestricted General Fund balance at June 30, 1995 of $320.7 million.
The foregoing results are presented on a budgetary basis. Accounting
principles applied to develop data on a budgetary basis differ significantly
from those principles used to present financial statements in conformity with
generally accepted accounting principles. Based on a modified accrual basis,
the General Fund balance at June 30, 1993 and 1994 was $681.5 million and
$1,240.9 million, respectively. The foregoing results for fiscal year 1995 are
based upon unaudited financial information supplied by the Office of State
Budget and Management. Modified accrual basis results were not available as of
the date this Appendix was prepared.
The 1995-97 biennium budget adopted by the General Assembly authorized
continuation funding from the General Fund of $9,512 million for fiscal 1996 and
$9,763 million for fiscal 1997. Expansion funds of $280 million for fiscal 1996
were approved, along with capital improvements of $114 million for such fiscal
year. For fiscal 1997, $267 million of expansion funds were approved, along
with $157 million of capital improvements. Tax reductions of approximately $363
million for fiscal 1996 and $400 million for fiscal 1997 were authorized,
principally through the repeal of the State's intangible personal property tax
and reductions in the State's unemployment and personal income taxes. The
General Assembly also took several measures that benefitted the State's
Department of Corrections, including a reservation of $33 million to build new
prison beds. State workers generally received a 2% pay increase. The General
Assembly also passed a package of tort reform bills that included a cap on
punitive damage awards.
The North Carolina budget is based upon a number of existing and assumed
State and non-State factors, including State and national economic conditions,
international activity, Federal government policies and legislation and the
activities of the State's General Assembly. Such factors are subject to change
which may be material and affect the budget. The Congress of the United States
is considering a number of matters affecting the Federal Government's
relationship with state governments that, if enacted, could affect fiscal and
economic policies of the states, including North Carolina.
During recent years North Carolina has moved from an agricultural to a
service and goods producing economy. According to the North Carolina Employment
Security Commission (the "Commission"), in November 1994, North Carolina ranked
ninth among the states in non-agricultural employment and eighth in
manufacturing employment. The Commission estimated North Carolina's seasonally
adjusted unemployment rate in October 1995 to be 3.9% of the labor force, as
compared with an unemployment rate of 5.5% nationwide.
The following are certain cases pending in which the State of North
Carolina faces the risk of either a loss of revenue or an unanticipated
expenditure which, in the opinion of the North Carolina Department of State
Treasurer, would not materially adversely affect the State's ability to meet its
financial obligations:
1. Swanson v. State of North Carolina -- State Tax Refunds - Federal
Retirees. In Davis v. Michigan (1989), the United States Supreme Court ruled
that a Michigan income tax statute which taxed federal retirement benefits while
exempting those paid by state and local governments violated the constitutional
doctrine of intergovernmental tax immunity. At the time of the Davis decision,
North Carolina law contained similar exemptions in favor of state and local
retirees. Those exemptions were repealed prospectively, beginning with the 1989
tax year. All public pension and retirement benefits are now entitled to a
$4,000 annual exclusion.
Following Davis, federal retirees filed a class action suit in federal
court in 1989 seeking damages equal to the North Carolina income tax paid on
federal retirement income by the class members. A companion suit was filed in
state court in 1990. The complaints alleged that the amount in controversy
exceeded $140 million. The North Carolina Department of Revenue estimate of
refunds and interest liability is $280.89 million as of June 30, 1994. In 1991,
the North Carolina Supreme Court ruled in favor of the State in the state court
action, concluding that Davis could only be applied prospectively and that the
taxes collected from the federal retirees were thus not improperly collected. In
1993, the United States Supreme Court vacated that decision and remanded the
case back to the North Carolina Supreme Court. The North Carolina Supreme Court
then ruled in favor of the State on the grounds that the federal retirees had
failed to comply with state procedures for challenging unconstitutional taxes.
The United States District Court ruled in favor of the defendants in the
companion federal case, and a petition for reconsideration was denied.
Plaintiffs appealed to the United States Court of Appeals, which concurred with
the lower court's ruling. The United States Supreme court rejected an appeal,
ruling that the lawsuit was a state matter, leaving the North Carolina Supreme
Court's ruling in force.
An additional lawsuit was recently filed in State court by Federal
pensioners to recover State income taxes paid on Federal retirement benefits.
This case grew out of a claim by Federal pensioners in the original Federal
court case in Swanson. In the new lawsuit, the plaintiffs allege that when the
State granted an increase in retirement benefits to State retirees in the same
legislation that equalized tax treatment between state and Federal retirees, the
increased benefits to State retirees constituted an indirect violation of Davis.
The lawsuit seeks a refund of taxes paid by Federal retirees on Federal
retirement benefits received in the years 1989 through 1993 and refunds or
monetary relief sufficient to equalize the alleged on-going discriminatory
treatment for those years. An extension of time to answer the complaint has
been filed by the North Carolina Attorney General, who believes that sound legal
authority and arguments support the denial of this claim.
2. Bailey v. State of North Carolina -- State Tax Refunds - State
Retirees. State and local governmental retirees filed a class action suit in
1990 as a result of the repeal of the income tax exemptions for state and local
government retirement benefits. The original suit was dismissed after the North
Carolina Supreme Court ruled in 1991 that the plaintiffs had failed to comply
with state law requirements for challenging unconstitutional taxes and the
United States Supreme Court denied review. In 1992, many of the same plaintiffs
filed a new lawsuit alleging essentially the same claims, including breach of
contract, unconstitutional impairment of contract rights by the State in taxing
benefits that were allegedly promised to be tax-exempt and violation of several
state constitutional provisions.
On May 31, 1995 the Superior Court issued an order ruling in favor of the
plaintiffs. Under the terms of the order, the Superior Court found that the act
of the General Assembly that repealed the tax exemption on State and local
government retirement benefits is null, void, and unenforceable and that
retirement benefits which were vested before August 1989 are exempt from
taxation. The North Carolina Attorney General intends to pursue an appeal from
this order.
The North Carolina Attorney General's Office estimates that the amount in
controversy is approximately $40-$45 million annually for the tax years 1989
through 1991. In addition, it is anticipated that the decision reached in this
case will govern the resolution of tax refund claims made by retired state and
local government employees for taxes paid on retirement benefit income for tax
years after 1991. Furthermore, if the order of the Superior Court is upheld,
its provisions would apply prospectively to prevent future taxation of State and
local government retirement benefits that were vested before August 1989.
In October, 1993, the State issued a total of $194.7 million general
obligation bonds (consisting of $87.5 million Prison and Youth Services
Facilities Bonds, $61 million Public Improvement Refunding Bonds, $30.2 million
Highway Refunding Bonds, and $16 million Clean Water Refunding Bonds). An
additional $67.5 million general obligation bonds (Prison and Youth Services
Facilities Bonds) were issued in November, 1993. On November 2, 1993, a total
of $740 million general obligation bonds (consisting of $310 million University
Improvement Bonds, $250 million Community College Bonds, $145 million Clean
Water Bonds, and $35 million State Parks Bonds) were approved by the voters of
the State. Pursuant to this authorization, the State issued $400 million
general obligation bonds (Capital Improvement Bonds) in January, 1994. The
proceeds of these Capital Improvement Bonds may be used for any purpose for
which the proceeds of the University Improvement Bonds, Community College Bonds,
and State Parks Bonds may be used (none of such proceeds may be used for Clean
Water purposes). An additional $60 million general obligation bonds (Clean Water
Bonds) were issued in September and October, 1994. The remaining $85 million
general obligation bonds (Clean Water Bonds) were issued in June and July, 1995.
The offering of the remaining $195 million of these authorized bonds is
anticipated to occur over the next two years.
Currently, Moody's Investors Service, Inc., Standard & Poor's Ratings
Group, and Fitch Investors Service, Inc. rate North Carolina general obligation
bonds Aaa, AAA, and AAA, respectively. See Appendix A to the Prospectus.
APPENDIX B
DESCRIPTION OF MUNICIPAL BOND RATINGS
The ratings of the nationally recognized securities rating organizations
(including Moody's Investors Service, Inc., Standard & Poor's Ratings Group,
Fitch Investors Service and Duff & Phelps) represent each firms' opinions as to
the quality of various Municipal Obligations. It should be emphasized, however,
that ratings are not absolute standards of quality. Consequently, Municipal
Obligations with the same maturity, coupon and rating may have different yields
while Municipal Obligations of the same maturity and coupon with different
ratings may have the same yield. The descriptions offered by each individual
rating firm may differ slightly, but the following offers Moody's and S&P's
description of each rating category:
Moody's Investors Service, Inc.
Municipal Bonds
Aaa: Bonds which are rated Aaa are judged to be of the best quality. They carry
the smallest degree of investment risk and are generally referred to as "gilt
edge." Interest payments are protected by a large or by an exceptionally stable
margin and principal is secure. While the various protective elements are
likely to change, such changes as can be visualized are most unlikely to impair
the fundamentally strong position of such issues.
Aa: Bonds which are rated Aa are judged to be of high quality by all standards.
Together with the Aaa group they comprise what are generally known as high grade
bonds. They are rated lower than the best bonds because margins of protection
may not be as large as in Aaa securities or fluctuation of protective elements
may be of greater amplitude or there may be other elements present which make
the long- term risks appear somewhat larger than in Aaa securities.
A: Bonds which are rated A possess many favorable investment attributes and are
to be considered as upper medium grade obligations. Factors giving security to
principal and interest are considered adequate but elements may be present which
suggest a susceptibility to impairment sometime in the future.
Baa: Bonds which are rated Baa are considered as medium grade obligations, i.e.,
they are neither highly protected nor poorly secured. Interest payments and
principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.
Note: Moody's applies numerical modifiers, 1, 2, and 3 in each generic rating
classification from Aa through B in its corporate bond rating system; the
modifier 1 indicates that the security ranks in the higher end of its generic
rating category; the modifier 2 indicates a mid-range ranking; and the modifier
3 indicates that the issue ranks in the lower end of its generic category.
Municipal Short-Term Obligations
Ratings: Moody's ratings for state and municipal short-term obligations will be
designated Moody's Investment Grade or (MIG). Such rating recognizes the
differences between short term credit risk and long term risk. Factors
affecting the liquidity of the borrower and short term cyclical elements are
critical in short term ratings, while other factors of major importance in bond
risk, long term secular trends for example, may be less important over the short
run.
Commercial Paper
Moody's commercial paper ratings are opinions of the ability of issuers to repay
punctually promissory obligations not having an original maturity in excess of
365 days.
Issuers rated Prime-1 or P-1 (or supporting institutions) have a superior
ability for repayment of senior short-term debt obligations. Prime-1 or P-1
repayment ability will often be evidenced by the following characteristics:
- Leading market positions in well established industries.
- High rates of return on funds employed.
- Conservative capitalization structures with moderate reliance on debt and
ample asset protection.
- Broad margins in earnings coverage of fixed financial charges and high
internal cash generation.
- Well established access to a range of financial markets and assured
sources of alternate liquidity.
Prime-2
Issuers (or supporting institutions) rated Prime-2 (P-2) have a strong ability
for repayment of senior short-term obligations. This will normally be evidenced
by many of the characteristics cited above, but to a lesser degree. Earnings
trends and coverage ratios, while sound, may be more subject to variation.
Capitalization characteristics, while still appropriate, may be more affected by
external conditions. Ample alternate liquidity is maintained.
Standard & Poor's Ratings Group
Investment Grade Debt
AAA: Debt rated AAA has the highest rating assigned by S&P. Capacity to pay
interest and repay principal is extremely strong.
AA: Debt rated AA has a very strong capacity to pay interest and repay principal
and differ from the highest rated issues only in small degree.
A: Debt rated A has a strong capacity to pay interest and repay principal
although it is somewhat more susceptible to adverse effects of changes in
circumstances and economic conditions than debt in higher rated categories.
BBB: Debt rated BBB is regarded as having an adequate capacity to pay interest
and repay principal. Whereas it normally exhibits adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay interest and repay principal for
debt in this category than in higher rated categories.
Plus (+) or Minus (-): The foregoing ratings may be modified by the addition of
a plus or minus sign to show relative standing within the major rating
categories.
Commercial Paper
S&P's commercial paper ratings is a current assessment of the likelihood of
timely payment of debts having an original maturity of no more than 365 days.
A: Issues assigned this highest rating are regarded as having the greatest
capacity for timely payment. Issues in this category are delineated with the
numbers 1, 2 and 3 to indicate the relative degree of safety.
A-1: This designation indicates that the degree of safety regarding timely
payments is either overwhelming or very strong. Those issues determined to
possess overwhelming safety characteristics are denoted with a plus (+) sign
designation.
A-2: Capacity for timely payment on issues with this designation is
satisfactory. However, the relative degree of safety is not as high as for
issues designated "A-1".
THE NORTH CAROLINA TAX FREE BOND FUND
PORTFOLIO OF INVESTMENTS
August 31, 1995
Principal Interest Maturity
Amount Rate Date Value
MUNICIPAL OBLIGATIONS - 94.22%
Appalachian State University, North
Carolina Utility System Revenue $150,000 5.90% 05-15-08 $158,145
Buncombe County, North Carolina
Public Improvement General Obligation 100,000 5.80% 02-01-09 104,642
Cary, North Carolina General Obligation 100,000 5.50% 02-01-04 105,194
Catawba County, North Carolina
General Obligation 100,000 4.50% 06-01-01 100,144
Catawba County, North Carolina
Hospital Revenue 100,000 6.20% 10-01-09 105,165
Charlotte-Mecklenburg Hospital,
Authorized North Carolina Health Care
System Revenue 100,000 5.75% 01-01-12 99,572
Charlotte, North Carolina Series A
General Obligation 100,000 5.25% 07-01-03 104,852
Charlotte, North Carolina Water &
Sewer General Obligation 100,000 5.70% 02-01-06 106,694
Charlotte, North Carolina Certificate of
Participation Law Enforcement
Facilities Series A General Obligation 100,000 6.10% 12-01-15 101,959
Cleveland County, North Carolina
General Obligation 100,000 5.10% 06-01-03 103,024
Concord, North Carolina Utilities
System Revenue 100,000 5.75% 12-01-17 101,819
Concord, North Carolina Utilities
System Revenue 125,000 5.50% 12-01-14 122,804
Dare County, North Carolina Utilities
System Revenue 100,000 5.75% 06-01-14 99,422
Durham, North Carolina
General Obligation 100,000 5.10% 12-01-07 100,857
Durham, North Carolina
General Obligation 100,000 5.80% 02-01-12 103,210
East Carolina University, North
Carolina University Revenue 100,000 5.25% 05-01-07 99,132
Fayetteville, North Carolina Public
Works Community Revenue 100,000 4.80% 03-01-07 96,486
Gaston, North Carolina
General Obligation 175,000 5.70% 03-01-11 177,886
Gastonia, North Carolina Combined
Utilities System Revenue 90,000 5.70% 05-01-06 94,544
Gastonia, North Carolina
General Obligation 100,000 5.70% 08-01-15 98,128
Greensboro, North Carolina
General Obligation 100,000 5.80% 04-01-07 106,504
Greenville County, North Carolina
Utilities Revenue 100,000 6.00% 09-01-10 102,921
Hickory, North Carolina
General Obligation 100,000 6.50% 05-01-10 106,778
High Point, North Carolina
General Obligation 100,000 5.60% 03-01-13 100,778
(Continued)
THE NORTH CAROLINA TAX FREE BOND FUND
PORTFOLIO OF INVESTMENTS
August 31, 1995
(Continued)
Principal Interest Maturity
Amount Rate Date Value
Lincoln County, North Carolina
General Obligation $100,000 4.70% 06-01-01 $101,249
Mecklenburg County, North Carolina
Public Improvement General Obligation 150,000 5.40% 04-01-04 158,533
Morganton, North Carolina Water
& Sewer General Obligation 100,000 5.70% 06-01-14 100,678
North Carolina Municipal Power Agency -
Number 1 - Catawba Electric Revenue 100,000 6.00% 01-01-09 105,544
North Carolina State Clean Water
Bonds Series A General Obligation 100,000 5.80% 06-01-16 102,302
Pitt County, North Carolina
General Obligation 100,000 6.10% 06-01-08 107,005
Raleigh, North Carolina
General Obligation 100,000 6.50% 03-01-08 108,257
Rowan County, North Carolina
General Obligation 150,000 5.60% 05-01-10 151,633
Union County, North Carolina
Series A General Obligation 100,000 5.20% 06-01-12 95,054
University of North Carolina at
Chapel Hill Utility System Revenue 100,000 4.70% 08-01-01 101,284
Wake County, North Carolina Industrial
Facilities & Pollution Control Findings
Authority Revenue, adjustable rate 100,000 6.90% 04-01-09 107,790
Wilmington, North Carolina
General Obligation 100,000 5.60% 06-01-11 101,141
Total Municipal Obligations (Cost $3,820,636) $3,941,130
REPURCHASE AGREEMENT (a) - 3.63%
Wachovia Bank $151,939 5.83% 09-01-95 151,939
(Cost $151,939)
Total Value of Investments (Cost $3,972,575) (b) 97.85% 4,093,069
Other Assets Less Liabilities 2.15% 90,080
Net Assets 100.00% $4,183,149
(a) Joint repurchase agreement entered into August 31, 1995, with a maturity
value of $10,869,785 collateralized by $10,770,000 U.S. Treasury Notes,
6.50%, due May 15, 1997. The aggregate market value of the collateral at
August 31, 1995 was $11,086,298. The Fund's pro rata interest in the
collateral at August 31, 1995 was $154,986. The Fund's pro rata interest
in the joint repurchase agreement is taken into possession by the Fund
upon entering into the repuchase agreement. The collateral is marked to
market daily to ensure its market value is at least 102 percent of the
sales repurchase agreement.
(b) Aggregate cost for federal income tax purposes is the same as for
financial reporting purposes. Unrealized appreciation (depreciation) of
investments for book and federal income tax purposes is as follows:
Unrealized appreciation $126,289
Unrealized depreciation (5,795)
Net unrealized appreciation $120,494
See accompanying notes to financial statements
THE NORTH CAROLINA TAX FREE BOND FUND
STATEMENT OF ASSETS AND LIABILITIES
August 31, 1995
ASSETS
Investments at value (Cost $3,972,575) $4,093,069
Cash 29,732
Interest receivable 62,890
Reserve premium 1,203
Total assets 4,186,894
LIABILITIES
Accrued expenses 1,159
Payable to Advisor 2,586
Total liabilities 3,745
NET ASSETS
(applicable to 403,672 shares outstanding; unlimited
shares of no par value beneficial interest authorized) $4,183,149
NET ASSET VALUE AND REPURCHASE PRICE PER SHARE
($4,183,149 / 403,672 shares) $10.36
NET ASSETS CONSIST OF:
Paid-in capital $4,163,428
Undistributed net investment income 1,521
Accumulated net realized loss on investments (102,294)
Net unrealized appreciation on investments 120,494
$4,183,149
See accompanying notes to financial statements
THE NORTH CAROLINA TAX FREE BOND FUND
STATEMENT OF OPERATIONS
Year ended August 31, 1995
INVESTMENT INCOME
Income
Interest $159,592
Expenses
Professional fees 21,820
Fund accounting fees (note 2) 21,000
Investment advisory fees (note 2) 10,321
Custody fees 4,832
Shareholder servicing expenses 4,550
Fund administration fees (note 2) 4,423
Trustee fees and meeting expenses 4,200
Printing expenses 2,873
Securities pricing fees 2,420
Shareholder servicing fees (note 3) 1,574
Other operating expenses 1,350
Shareholder recordkeeping fees 861
Registration and filing expenses 860
Registration and filing administration fees 226
Total expenses 81,310
Less:
Expense reimbursements (note 2) (41,501)
Investment advisory fees waived (note 2) (10,321)
Fund administration fees waived (note 2) (4,423)
Net expenses 25,065
Net investment income 134,527
REALIZED AND UNREALIZED GAIN ON INVESTMENTS
Net realized loss from investment transactions (83,088)
Decrease in unrealized depreciation on investments 161,103
Net realized and unrealized gain on investments 78,015
Net increase in net assets resulting
from operations $212,542
See accompanying notes to financial statements
THE NORTH CAROLINA TAX FREE BOND FUND
STATEMENTS OF CHANGES IN NET ASSETS
Year ended Year ended
August 31, August 31,
1995 1994
INCREASE IN NET ASSETS
Operations
Net investment income $134,527 $130,504
Net realized loss from investment transactions (83,088) (19,206)
(Increase) decrease in unrealized depreciation on
investments 161,103 (104,107)
Net increase in net assets resulting from
operations 212,542 7,191
Distributions to shareholders from
Net investment income (133,006) (130,504)
Capital share transactions
(a)Increase in net assets resulting from
capital share transactions 174,560 1,628,371
Total increase in net assets 254,096 1,505,058
NET ASSETS
Beginning of year 3,929,053 2,423,995
End of year $4,183,149 $3,929,053
(a) A summary of capital share activity follows:
Year ended August 31, Year ended August 31,
1995 1994
Shares Value Shares Value
Shares sold 262,514 $2,637,430 226,138 $2,302,414
Shares issued for reinvestment
of distributions 10,102 101,474 6,009 60,751
272,616 2,738,904 232,147 2,363,165
Shares redeemed (261,060) (2,564,344) (73,190) (734,794)
Net increase 11,556 $174,560 158,957 $1,628,371
See accompanying notes to financial statements
THE NORTH CAROLINA TAX FREE BOND FUND
FINANCIAL HIGHLIGHTS
(For a Share Outstanding Throughout the Period)
For the
period from
January 13, 1993
Year Year (commencement
ended ended of operations) to
August 31, August 31, August 31,
1995 1994 1993
Net asset value, beginning of period $10.02 $10.40 $10.00
Income (loss) from investment operations
Net investment income 0.45 0.42 0.24
Net realized and unrealized gain 0.34 (0.38) 0.40
Total from investment operations 0.79 0.04 0.64
Less distributions to shareholders from
Net investment income (0.45) (0.42) (0.24)
Net asset value, end of period $10.36 $10.02 $10.40
Total return 8.16% 0.38% 10.43%(a)
Ratios / supplemental data
Net assets, end of period $4,183,149 $3,929,053 $2,423,995
Ratio of expenses to average net assets
Before expense reimbursements and
and fee waivers 2.76% 3.26% 3.50%(a)
After expense reimbursements and
and fee wiavers 0.85% 0.84% 0.77%(a)
Ratio of net investment income to average net assets
Before expense reimbursements and
and fee waivers 2.65% 1.67% 1.25%(a)
After expense reimbursements and
and fee waivers 4.56% 4.09% 3.98%(a)
Portfolio turnover rate 83.12% 22.82% 0.00%
(a) Annualized.
See accompanying notes to financial statements
THE NORTH CAROLINA TAX FREE BOND FUND
NOTES TO FINANCIAL STATEMENTS
August 31, 1995
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The North Carolina Tax Free Bond Fund (the "Fund") is a non-diversified
series of shares of beneficial interest of the Albemarle Investment Trust
(the "Trust"). The Trust is an open-end investment company which was
organized in 1992 as a Massachusetts Business Trust and is registered
under the Investment Company Act of 1940. The Fund began operations on
January 13, 1993. The following is a summary of significant accounting
policies followed by the Fund.
A. Security Valuation - The Fund's investments in securities are
carried at market value. Securities listed on an exchange or quoted
on a national market system are valued at the last sales price on
the day of valuation. Other securities are valued at the most
recent bid price. Securities for which market quotations are not
readily available are valued by an independent pricing service which
takes into consideration institutional bid and last sale prices, and
securities prices, yields, maturities, call features, ratings and
institutional trading in similar groups of securities; or if not
available from the pricing service, the value of a security is
determined following procedures approved by the Board of Trustees.
Short-term investments are valued at cost which approximates market
value.
The Fund invests in debt instruments of municipal issuers within the
state of North Carolina. The issuers' abilities to meet their
obligations may be affected by economic developments in the state of
North Carolina.
B. Federal Income Taxes - No provision has been made for federal income
taxes since it is the policy of the Fund to comply with the
provisions of the Internal Revenue Code applicable to regulated
investment companies and to make sufficient distributions of taxable
income to relieve it from all federal income taxes.
Net realized gains (losses) may differ for financial statements and
tax purposes primarily because of losses incurred subsequent to
October 31, which are deferred for tax purposes.
C. Investment Transactions - Investment transactions are recorded on
the trade date. Realized gains and losses are determined using the
specific identification cost method. Interest income is recorded
daily on the accrual basis.
D. Distributions to Shareholders - Distributions to shareholders are
recorded on the ex-dividend date. The Fund generally declares
dividends daily, payable monthly on a date selected by the Fund's
Trustees. In addition, distributions may be made annually in
November out of net realized gains through October 31 of that year.
The Fund may make a supplemental distribution subsequent to the end
of its fiscal year ending August 31. For the year ended August 31,
1995, 99% of the distributions paid from net investment income
qualify as tax-exempt dividends to non-corporate shareholders.
THE NORTH CAROLINA TAX FREE BOND FUND
NOTES TO FINANCIAL STATEMENTS
August 31, 1995
NOTE 2 - INVESTMENT ADVISORY FEE AND OTHER RELATED PARTY TRANSACTIONS
Pursuant to an investment advisory agreement (commenced April 1, 1994),
Boys, Arnold & Company, Inc. (the "Advisor") provides the Fund with a
continuous program of supervision of the Fund's assets, including the
composition of its portfolio, and furnishes advice and recommendations
with respect to investments, investment policies, and the purchase and
sale of securities. As compensation for its services, the Advisor
receives a fee at the annual rate of 0.35% of the Fund's average daily net
assets. Prior to April 1, 1994, T. Leavell & Associates acted as
investment advisor to the Fund and received a fee at the annual rate of
0.25% of the Fund's first $100 million of average daily net assets and
0.10% of average daily net assets over $100 million.
The Fund's administrator, The Nottingham Company (the "Administrator"),
provides administrative services to and is generally responsible for the
overall management and day-to-day operations of the Fund pursuant to an
accounting and administrative agreement with the Trust. As compensation
for its services, the Administrator receives a fee at the annual rate of
0.15% of the Fund's average daily net assets. The Administrator also
receives a monthly fee of $1,750 for accounting and recordkeeping
services. Additionally, the Administrator charges the Fund for servicing
of shareholder accounts and registration of the Fund's shares. The
Administrator also charges the Fund for certain expenses involved with the
daily valuation of portfolio securities.
Currently, the Fund does not offer its shares for sale in states which
require limitations to be placed on its expenses. The Advisor has
voluntarily waived its fee amounting to $10,321 ($0.03 per share) and has
reimbursed a portion of the Fund's operating expenses for the year ended
August 31, 1995. The total fees waived and expenses reimbursed by the
advisor amounted to $51,822.
The Administrator has voluntarily waived a portion of its fee amounting to
$4,423 ($0.01 per share).
Certain trustees and officers of the Trust are also officers of the
Advisor or the Administrator.
NOTE 3 - SHAREHOLDER SERVICING FEES
The Board of Trustees, including a majority of the Trustees who are not
"interested persons" of the Trust as defined in the Investment Company Act
of 1940, adopted a Shareholder Servicing Fee Plan (the "Plan"). The Plan
regulates the manner in which a regulated investment company may assume
expenses from the servicing and maintenance of shareholder accounts.
The Plan provides that the Fund may incur certain expenses for payment to
persons for providing services including, but not limited to, responding
to shareholder inquiries, providing information on shareholders'
investments in the Fund, and providing such other shareholder services as
the Trust may reasonably request. The basis for amounts paid under the
Plan is determined by the Board of Trustees. Expenses pursuant to the
Plan may not exceed 0.25% of the Fund's average daily net assets per annum
since inception of the Plan, nor exceed 0.25% per annum of the average net
assets of the shareholder accounts being serviced. During the year ended
August 31, 1995, the Fund paid $1,574 of shareholder servicing fees to an
entity of which a former Trustee of the Trust is an officer.
THE NORTH CAROLINA TAX FREE BOND FUND
NOTES TO FINANCIAL STATEMENTS
August 31, 1995
NOTE 4 - PURCHASES AND SALES OF INVESTMENTS
Purchases and sales of investments, other than short-term investments,
aggregated $2,637,430 and $2,564,344, respectively, for the year ended
August 31, 1995.
NOTE 5 - DISTRIBUTIONS TO SHAREHOLDERS
The Fund has capital loss carryforwards for federal income tax purposes of
$77,925 which expire in the year 2003. It is the intention of the Board
of Trustees of the Trust not to distribute any realized gains until the
carryforwards have been offset or expire.
Of the $133,006 of distributions to shareholders ($0.45 per share) during
the fiscal year ended August 31, 1995, the Fund has determined that
$131,676 ($0.44 per share) qualify as exempt-interest dividends for
federal income tax purposes. Shareholders are advised to consult with
their professional tax advisor regarding the state income tax implications
of these distributions.
Independent Auditors' Report
To the Board of Trustees and Shareholders
Albemarle Investment Trust
We have audited the accompanying statement of assets and liabilities, including
the portfolio of investments, of The North Carolina Tax Free Bond Fund (the
"Fund"), a series of the Albemarle Investment Trust, as of August 31, 1995, the
related statement of operations for the year then ended and the related
statements of changes in net assets and financial highlights for each of the
years in the two-year period then ended. These financial statements and
financial highlights are the responsibility of the Fund's management. Our
responsibility is to express an opinion on these financial statements and
financial highlights based on our audits. The financial highlights for the
period from January 13, 1993 (commencement of operations) to August 31, 1993
were audited by other auditors whose report thereon dated September 24, 1993
expressed an unqualified opinion on those financials highlights.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures include confirmation of securities owned as of
August 31, 1995 by correspondence with the custodian. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the 1995 and 1994 financial statements and financial highlights
referred to above present fairly, in all material respects, the financial
position of The North Carolina Tax Free Bond Fund as of August 31, 1995, the
results of its operations for the year then ended and the changes in its net
assets and the financial highlights for each of the years in the two-year period
then ended in conformity with generally accepted accounting principles.
Richmond, Virginia
September 29, 1995
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