[BOYS, ARNOLD & COMPANY LETTERHEAD]
April 16, 1997
Dear Shareholder:
We are pleased to enclose your copy of the Semi-Annual report for The North
Carolina Tax Free Bond Fund for the period ended February 28, 1997.
Over the last six months your fund has performed well in what was a modestly
declining interest rate environment. With the exception of a slight decline in
bond returns in December, municipal bonds experienced positive returns in every
other month of the period. The supply of new municipal bond issues nationally
and in North Carolina has continued at an historically low level. This limited
supply has had the effect of dampening the volatility of the municipal market
and kept prices relatively stable.
For the six months ended February 28, 1997, the Fund had a total return of
+4.75% (which includes both income and price change) after all expenses. This
Fund's return compared favorably with its peers in North Carolina. The average
return was + 4.51% for the 36 "North Carolina Municipal Debt Funds" tracked by
Lipper Analytical Services over the same period. The net asset value of the Fund
on February 28, 1997 was $10.57 and the income paid during the period was $.24
per share.
The Fund remains invested in a well diversified portfolio of high quality North
Carolina municipal bonds with an intermediate average maturity. The portfolio's
overall quality is better than AA as measured by Standard and Poor's Corporation
quality ratings and the average maturity is currently about fifteen years.
We are pleased to announce that now investors can now find the Fund's daily NAV
quotation on over 280,000 market data terminals by using the Fund's new ticker
symbol which is: NCTFX.
In an effort to continuously monitor and control costs of the Fund, the Trustees
recently reviewed the Auditors and Custodian based upon their services and fees.
From that review, they directed changes in each of these service providers which
will result in lower costs to the Fund. These new providers to the Fund are
comparable if not better, well established and experienced firms, which we
believe will provide outstanding service to the Fund.
Subsequent to the close of the Fund's reporting period, the Federal Reserve took
action to raise the discount rate causing both long and short term interest
rates to rise. There is much debate today about whether additional increases
will be enacted by the Fed due to concerns over the strength of the economy and
the potential for labor pressures to nudge up domestic inflation. Ironically,
this comes about as inflation continues to remain benign and according to Fed
Chairman, Alan Greenspan, is sizably overstated by the Consumer Price Index.
Despite these concerns, there are several positive factors which should help
municipal bonds; the most important being municipal bond issuance, which should
remain at historical lows. Additionally, municipal refunding should remain
modest as long as interest rates remain constant and do not decline. And
finally, the lack of tax reform and possible further reduction of the budget
deficit improve the outlook for municipal bonds.
Municipal bonds provide one of the few remaining alternatives for investors to
reduce their tax obligations. We encourage investors to maintain a long term
outlook toward their investment in the Fund and to consider a plan of regular
investment through dollar cost averaging.
We appreciate your continued trust and support and we welcome your questions and
comments.
Sincerely,
/s/ John B. Kuhns /s/ Jon L. Vannice
John B. Kuhns Jon L. Vannice
Past performance is no guarantee of future results. During the period covered
the Fund's Advisor and Administrator waived all or a portion of their fees and
reimbursed a portion of the Fund's expense, which increased the total return and
yield of the Fund.
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THE NORTH CAROLINA TAX FREE BOND FUND
PORTFOLIO OF INVESTMENTS
February 28, 1997
(Unaudited)
- -------------------------------------------------------------------------------------------------------
Principal Interest Maturity Value
Amount Rate Date (note 1)
- -------------------------------------------------------------------------------------------------------
MUNICIPAL OBLIGATIONS - 96.26%
Appalachian State University, North
Carolina Utility System Revenue $150,000 5.90% 05-15-08 $161,030
Asheville, North Carolina
Water System Revenue 150,000 5.50% 08-01-11 153,645
Buncombe County, North Carolina
Public Improvement General Obligation 100,000 5.80% 02-01-09 105,497
Buncombe County, North Carolina
Solid Waste System Special Obligation Revenue 200,000 5.60% 03-01-11 207,243
Cabarrus County, North Carolina
General Obligation 250,000 5.40% 02-01-17 245,751
Cary, North Carolina
General Obligation 100,000 5.50% 02-01-04 104,585
Catawba County, North Carolina
Hospital Revenue 100,000 6.20% 10-01-09 107,647
Charlotte-Mecklenburg Hospital
Authorized North Carolina Health Care
System Revenue 100,000 5.75% 01-01-12 102,179
Charlotte, North Carolina Series A
General Obligation 100,000 5.25% 07-01-03 104,461
Charlotte, North Carolina Water &
Sewer General Obligation 100,000 5.70% 02-01-06 107,165
Charlotte, North Carolina Law Enforcement
Facilities Project Series A Certificate
of Participation 100,000 6.10% 12-01-15 105,900
Concord, North Carolina Utilities
System Revenue 200,000 5.75% 12-01-17 204,607
Concord, North Carolina Utilities
System Revenue 125,000 5.50% 12-01-14 126,237
Dare County, North Carolina Utilities
System Revenue 100,000 5.75% 06-01-14 103,770
Durham, North Carolina Public Improvement
General Obligation 100,000 5.10% 02-01-07 102,553
Durham, North Carolina
General Obligation Revenue 100,000 5.80% 02-01-12 105,790
Fayetteville, North Carolina Public
Works Commission Revenue 100,000 4.80% 03-01-07 99,288
Fayetteville, North Carolina Public
Works Commission Revenue 150,000 5.13% 03-01-10 149,492
Forsyth County, North Carolina
General Obligation 200,000 4.75% 02-01-13 189,339
Gaston County, North Carolina
General Obligation 175,000 5.70% 03-01-11 181,555
Gastonia, North Carolina Combined
Utilities System Revenue 90,000 5.70% 05-01-06 95,984
</TABLE>
(Continued)
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THE NORTH CAROLINA TAX FREE BOND FUND
PORTFOLIO OF INVESTMENTS
February 28, 1997
(Unaudited)
- ---------------------------------------------------------------------------------------------------------
Principal Interest Maturity Value
Amount Rate Date (note 1)
- ---------------------------------------------------------------------------------------------------------
MUNICIPAL OBLIGATIONS - (Continued)
Gastonia, North Carolina Police Station
Project Certificate Participation $100,000 5.70% 08-01-15 $101,778
Greensboro, North Carolina
General Obligation Unlimited 200,000 5.00% 03-01-12 193,041
Greensboro, North Carolina Public Improvement
Series A General Obligation 100,000 5.80% 04-01-07 106,444
Greenville, North Carolina Combined
Enterprise System Revenue 100,000 6.00% 09-01-10 105,796
Hickory, North Carolina
General Obligation 100,000 6.50% 05-01-10 108,201
High Point, North Carolina
General Obligation Revenue 100,000 5.60% 03-01-13 101,465
High Point, North Carolina
General Obligation 200,000 5.00% 03-01-15 188,683
Lincolnton, North Carolina
Enterprise System Revenue 200,000 5.38% 05-01-16 198,349
Mecklenburg County, North Carolina
Public Improvement General Obligation 150,000 5.40% 04-01-04 158,235
Mecklenburg County, North Carolina
Public Improvement General Obligation 200,000 5.50% 04-01-11 206,531
Morganton, North Carolina Water
& Sewer General Obligation Revenue 100,000 5.70% 06-01-14 102,262
North Carolina Central University
Housing System Revenue 200,000 5.80% 11-01-17 206,422
North Carolina Housing Finance Agency
Multifamily Series A Revenue 100,000 5.80% 07-01-13 100,454
North Carolina Medical Care Commission
Memorial Mission Hospital Project Revenue 100,000 6.00% 10-01-12 104,974
North Carolina Medical Care Commission
Carolina Medicorp Project Revenue 200,000 5.50% 05-01-15 197,451
North Carolina Municipal Power Agency -
Number 1 - Catawba Electric Revenue 100,000 6.00% 01-01-09 100,201
North Carolina Municipal Power Agency -
Number 1 - Catawba Electric Revenue 100,000 5.75% 01-01-15 102,734
North Carolina Municipal Power Agency -
Number 1 - Catawba Electric Revenue 100,000 6.00% 01-01-15 108,608
North Carolina State Clean Water
Series A General Obligation 100,000 5.20% 06-01-10 101,118
North Carolina State Clean Water
Series A General Obligation 100,000 5.80% 06-01-16 104,222
Onslow County, North Carolina
General Obligation 100,000 5.70% 03-01-13 102,747
Pitt County, North Carolina
General Obligation 100,000 6.10% 06-01-08 107,331
(Continued)
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THE NORTH CAROLINA TAX FREE BOND FUND
PORTFOLIO OF INVESTMENTS
February 28, 1997
(Unaudited)
- --------------------------------------------------------------------------------------------------------
Principal Interest Maturity Value
Amount Rate Date (note 1)
- --------------------------------------------------------------------------------------------------------
MUNICIPAL OBLIGATIONS - (Continued)
Pitt County, North Carolina Memorial
Hospital Revenue $100,000 5.50% 12-01-15 $98,661
Raleigh, North Carolina
General Obligation 100,000 6.50% 03-01-08 109,742
Raleigh, North Carolina
General Obligation Unlimited 200,000 5.25% 06-01-12 200,750
Rowan County, North Carolina
General Obligation 150,000 5.60% 05-01-10 155,033
Salisbury, North Carolina Water & Sewer
General Obligation 100,000 5.30% 05-01-11 99,368
Union County, North Carolina
Enterprise System Revenue 100,000 5.35% 06-01-09 102,482
Union County, North Carolina
Series A General Obligation 100,000 5.20% 06-01-12 98,238
Union County, North Carolina
Series B General Obligation 100,000 5.30% 05-01-15 97,779
Wake County, North Carolina Industrial
Facilities & Pollution Control Financing
Authority Revenue 100,000 6.90% 04-01-09 108,684
Wilmington, North Carolina Water
General Obligation Revenue 100,000 5.60% 06-01-11 102,055
Winston-Salem, North Carolina
General Obligation 100,000 5.50% 06-01-12 101,386
Total Municipal Obligations (Cost $ 6,833,021) 7,044,943
INVESTMENT COMPANY - 1.00%
North Carolina Municipal Cash Fund 73,400 73,400
(Cost $ 73,400)
Total Value of Investments (Cost $6,906,421 (a)) 97.26 % 7,118,343
Other Assets In Excess of Liabilities 2.74 % 200,190
---- -------
Net Assets 100.00 % $7,318,533
====== ==========
</TABLE>
(a) Aggregate cost for financial reporting and federal income tax purposes is
the same. Unrealized appreciation (depreciation) of investments for
financial reporting and federal income tax purposes is as follows:
Unrealized appreciation $229,952
Unrealized depreciation (18,030)
--------
Net unrealized appreciation $211,922
========
See accompanying notes to financial statements
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THE NORTH CAROLINA TAX FREE BOND FUND
STATEMENT OF ASSETS AND LIABILITIES
February 28, 1997
(Unaudited)
ASSETS
Investments, at value (cost $6,906,421) $7,118,343
Cash 86,459
Interest receivable 114,359
Prepaid expenses 5,683
Due from advisor (note 2) 837
-----------
Total assets 7,325,681
LIABILITIES
Accrued expenses 7,143
Distributions payable 5
-----------
Total liabilities 7,148
NET ASSETS
(applicable to 692,187 shares outstanding; unlimited
shares of no par value beneficial interest authorized) $7,318,533
===========
NET ASSET VALUE AND REPURCHASE PRICE PER SHARE
($7,318,533 / 692,187 shares) $10.57
===========
NET ASSETS CONSIST OF
Paid-in capital $7,198,541
Undistributed net realized loss on investments (91,930)
Net unrealized appreciation on investments 211,922
-----------
$7,318,533
===========
See accompanying notes to financial statements
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THE NORTH CAROLINA TAX FREE BOND FUND
STATEMENT OF OPERATIONS
Period ended February 28, 1997
(Unaudited)
INVESTMENT INCOME
Income
Interest $179,229
Dividends 1,990
----------
Total income 181,219
----------
Expenses
Investment advisory fees (note 2) 11,697
Fund administration fees (note 2) 5,013
Service fees (note 3) 8,355
Custody fees 2,791
Registration and filing administration fees 136
Fund accounting fees (note 2) 10,413
Audit fees 3,533
Legal fees 5,057
Securities pricing fees 2,018
Shareholder recordkeeping fees 473
Minimum operating fees (note 2) 1,965
Shareholder servicing expenses 2,538
Registration and filing expenses 1,314
Printing expenses 1,276
Trustee fees and meeting expenses 3,153
Other operating expenses 2,713
----------
Total expenses 62,445
Less:
Expense reimbursements (note 2) (7,028)
Investment advisory fees waived (note 2) (11,697)
Fund administration fees waived (note 2) (6,978)
Service fees waived (note 2) (8,355)
----------
Net expenses 28,387
----------
Net investment income 152,832
----------
REALIZED AND UNREALIZED GAIN ON INVESTMENTS
Net realized gain from investment transactions 1,821
Increase in unrealized appreciation on investments 155,429
----------
Net realized and unrealized gain on investments 157,250
----------
Net increase in net assets resulting from operations $310,082
==========
See accompanying notes to financial statements
<PAGE>
THE NORTH CAROLINA TAX FREE BOND FUND
STATEMENTS OF CHANGES IN NET ASSETS
(Unaudited)
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Period ended Year ended
February 28 August 31,
1997 1996
INCREASE IN NET ASSETS ----------- ----------
Operations
Net investment income $152,832 $239,837
Net realized gain from investment transactions 1,821 8,543
Increase (decrease) in unrealized appreciation on investments 155,429 (64,001)
---------- ----------
Net increase in net assets resulting from operations 310,082 184,379
---------- ----------
Distributions to shareholders from
Net investment income (152,832) (241,358)
---------- ----------
Capital share transactions
Increase in net assets resulting from capital share transactions (a) 760,776 2,274,337
---------- ----------
Total increase in net assets 918,026 2,217,358
========== ==========
NET ASSETS
Beginning of period 6,400,507 4,183,149
---------- ----------
End of period (including undistributed net investment income of $0 $7,318,533 $6,400,507
at February 28, 1997 and $0 at August 31, 1996) ========== ==========
(a) A summary of capital share activity follows:
- ---------------------------------------------------------------------------------------------------
Period ended Year ended
February 28, 1997 August 31, 1996
- ---------------------------------------------------------------------------------------------------
Shares Value Shares Value
-------- ---------- -------- ----------
Shares sold 112,065 $1,178,408 273,835 $2,873,661
Shares issued for reinvestment
of distributions 11,956 125,940 19,626 204,428
-------- ---------- -------- ----------
124,021 1,304,348 293,461 3,078,089
Shares redeemed (51,745) (543,572) (77,223) (803,752)
-------- ---------- -------- ----------
Net increase 72,276 $760,776 $216,238 $2,274,337
======== ========== ======== ==========
See accompanying notes to financial statements
</TABLE>
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THE NORTH CAROLINA TAX FREE BOND FUND
FINANCIAL HIGHLIGHTS
(For a Share Outstanding Throughout the Period)
(Unaudited)
- -----------------------------------------------------------------------------------------------------------------------------
For the
period from
January 13, 1993
(commencement
Period ended Year ended Year ended Year ended of operations
February 28, August 31, August 31, August 31, August 31,
1997 1996 1995 1994 1993
- -----------------------------------------------------------------------------------------------------------------------------
Net asset value, beginning of period $10.32 $10.36 $10.02 $10.40 $10.00
Income from investment operations
Net investment income 0.24 0.48 0.45 0.42 0.24
Net realized and unrealized gain (loss) on investments 0.25 (0.04) 0.34 (0.38) 0.40
------- ------- ------- ------- -------
Total from investment operations 0.49 0.44 0.79 0.04 0.64
Distributions to shareholders from
Net investment income (0.24) (0.48) (0.45) (0.42) (0.24)
------- ------- ------- ------- -------
Net asset value, end of period $10.57 $10.32 $10.36 $10.02 $10.40
======= ======= ======= ======= =======
Total return 4.75% 4.33% 8.16% 0.38% 10.43%
======= ======= ======= ======= =======
Ratios/supplemental data
Net assets, end of period $7,318,533 $6,400,507 $4,183,149 $3,929,053 $2,423,995
============ ========== ========== ========== ==========
Ratio of expenses to average net assets
Before expense reimbursements and waived fees 1.88%(a) 2.24% 2.76% 3.26% 3.50%(a)
After expense reimbursements and waived fees 0.85%(a) 0.85% 0.85% 0.84% 0.77%(a)
Ratio of net investment income to average net assets
Before expense reimbursements and waived fees 3.55%(a) 3.21% 2.65% 1.67% 1.25%(a)
After expense reimbursements and waived fees 4.58%(a) 4.60% 4.56% 4.09% 3.98%(a)
Portfolio turnover rate 1.56% 9.96% 83.12% 22.82% 0.00%
Average broker commission per share $0.00
- -----------------------------------------------------------------------------------------------------------------------------
(a) Annualized.
See accompanying notes to financial statements
</TABLE>
<PAGE>
THE NORTH CAROLINA TAX FREE BOND FUND
NOTES TO FINANCIAL STATEMENTS
February 28, 1997
(Unaudited)
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND OTHER INFORMATION
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-ended 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
investment objective is 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. 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
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, 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 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 December 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.
The Fund has capital loss carryforwards for federal income tax purposes of
$69,382 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 $152,832 of distributions to shareholders ($0.24 per share) during
the period ended February 28, 1997, the Fund has determined that $152,832
($0.24 per share) qualify as exempt-
(Continued)
<PAGE>
THE NORTH CAROLINA TAX FREE BOND FUND
NOTES TO FINANCIAL STATEMENTS
February 28, 1997
(Unaudited)
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.
E. Use of Estimates - The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the amounts of assets, liabilities,
expenses, and revenues reported in the financial statements. Actual results
could differ from those estimates.
F. 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.
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. For the period ending February 28,
1997, the Advisor has voluntarily waived its fees amounting to $11,697 ($0.02
per share) and has reimbursed the Fund for operating expenses totalling $7,028
to limit those expenses to no more than 0.85% of the average annual net assets
of the Fund.
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 contract with the Administrator provides that the aggregate fees for
the aforementioned administrative, accounting, and recordkeeping services shall
not be less than $3,000 per
(Continued)
<PAGE>
THE NORTH CAROLINA TAX FREE BOND FUND
NOTES TO FINANCIAL STATEMENTS
February 28, 1997
(Unaudited)
month. The Administrator also charges the Fund for certain expenses involved
with the daily valuation of portfolio securities. The Administrator has
voluntarily waived fees of $6,978 ($0.01 per share) for the period ending
February 28, 1997.
Certain trustees and officers of the Trust are also officers or directors 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.
Such fees were waived in their entirety in the current year.
NOTE 4 - PURCHASES AND SALES OF INVESTMENTS
Purchases and sales of investments, other than short-term investments,
aggregated $791,363 and $102,600, respectively, for the period ended February
28, 1997.
