THE WACHOVIA FUNDS &
THE WACHOVIA MUNICIPAL FUNDS
CLASS A SHARES
ALL PORTFOLIOS
CLASS B SHARES
EQUITY FUND
QUANTITATIVE EQUITY FUND
BALANCED FUND
FIXED INCOME FUND
PROSPECTUS
JULY 31, 1997
[GRAPHIC]
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
THE WACHOVIA_ FUNDS AND THE WACHOVIA_ MUNICIPAL FUNDS
(FORMERLY,_ THE_ BILTMORE_ FUNDS_ AND_ THE_ BILTMORE_ MUNICIPAL_
FUNDS)
The Wachovia Funds and The Wachovia Municipal Funds (individually
referred to as the "Trust" or collectively as the "Trusts") are
open-end management investment companies which offer separate
investment portfolios, each having its own investment objective and
policies for different investor needs. The shares offered by this
prospectus represent interests in the following portfolios
(individually referred to as the "Fund" or collectively as the
"Funds"):
- ---------------------------------------------------------
- ---------------------------------------------------------
- ---------------------------------------------------------
- ---------------------------------------------------------
<TABLE>
<S> <C>
THE WACHOVIA FUNDS THE WACHOVIA MUNICIPAL FUNDS
WACHOVIA EQUITY FUND WACHOVIA GEORGIA MUNICIPAL BOND FUND
WACHOVIA QUANTITATIVE EQUITY FUND WACHOVIA NORTH CAROLINA MUNICIPAL BOND FUND
WACHOVIA EQUITY INDEX FUND WACHOVIA SOUTH CAROLINA MUNICIPAL BOND FUND
WACHOVIA SPECIAL VALUES FUND
WACHOVIA EMERGING MARKETS FUND
WACHOVIA BALANCED FUND
WACHOVIA FIXED INCOME FUND
WACHOVIA SHORT-TERM FIXED INCOME FUND
</TABLE>
In addition, The Wachovia Funds offers through separate prospectuses the
following money market portfolios, each having a distinct investment objective
and policies: Wachovia Money Market Fund, Wachovia Prime Cash Management Fund,
Wachovia Tax-Free Money Market Fund, and Wachovia U.S. Treasury Money Market
Fund.
THE SHARES OFFERED BY THIS PROSPECTUS ARE NOT DEPOSITS OR OBLIGATIONS
OF, OR ENDORSED OR GUARANTEED BY, WACHOVIA BANK, N.A. OR ANY OF ITS
AFFILIATES OR SUBSIDIARIES, AND ARE NOT INSURED BY THE FEDERAL DEPOSIT
INSURANCE CORPORATION (THE "FDIC"), THE FEDERAL RESERVE BOARD, OR ANY
OTHER GOVERNMENT AGENCY. INVESTMENT IN THESE SHARES INVOLVES
INVESTMENT RISKS, INCLUDING THE POSSIBLE LOSS OF PRINCIPAL AMOUNT
INVESTED.
This prospectus provides you with information specfic to the Class A
Shares and Class B Shares of the Funds. It contains the information
you should read and know before you invest in the Class A Shares or
Class B Shares of the Funds. The Funds also offer Class Y Shares to
certain institutional investors. Keep this prospectus for future
reference.
The Funds have also filed a Statement of Additional Information dated
January 31, 1997, revised on July 31, 1997, with the Securities and
Exchange Commission ("SEC"). The information contained in the
Statement of Additional Information is incorporated by reference into
this prospectus. To request a copy of the Statement of Additional
Information free of charge, obtain other information, or make
inquiries about the Funds, call 1-800-994-4414 or write the Funds at
(Name of Fund), 101 Greystone Boulevard, SC-9215, Columbia, South
Carolina 29226. The Statement of Additional Information, material
incorporated by reference into this document, and other information
regarding the Funds is maintained electronically with the SEC at
Internet Web site (http://www.sec.gov).
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION PASSED UPON
THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
TABLE OF CONTENTS
- ----------------------------------------------------------
SUMMARY OF INVESTMENT INFORMATION 1
- ----------------------------------------------------------
SUMMARY OF FUND EXPENSES--CLASS A SHARES 2
- ----------------------------------------------------------
SUMMARY OF FUND EXPENSES--CLASS B SHARES 4
- ----------------------------------------------------------
FINANCIAL HIGHLIGHTS 6
- ----------------------------------------------------------
GENERAL INFORMATION 10
- ----------------------------------------------------------
THE WACHOVIA FUNDS 10
Wachovia Equity Fund 10
Wachovia Quantitative Equity Fund 10
Wachovia Equity Index Fund 10
Wachovia Special Values Fund 11
Wachovia Emerging Markets Fund 11
Wachovia Balanced Fund 12
Wachovia Fixed Income Fund 12
Wachovia Short-Term Fixed Income Fund 12
Additional Acceptable Investments 12
- ----------------------------------------------------------
THE WACHOVIA MUNICIPAL FUNDS 13
Wachovia Georgia Municipal Bond Fund 13
Wachovia North Carolina Municipal Bond Fund 13
Wachovia South Carolina Municipal Bond Fund 13
Acceptable Investments 13
State Municipal Securities 13
- ----------------------------------------------------------
PORTFOLIO INVESTMENTS AND STRATEGIES 14
Investment Considerations 14
Equity Investments 14
Securities of Foreign Issuers 14
Securities in Emerging Markets 14
Investments in Debt Obligations 15
Investments in Lower-Rated Debt Obligations 15
Municipal Security Investments 15
Investment Processes 16
Quantitative Equity Fund 16
Equity Index Fund 16
S&P 500 Index 17
Emerging Markets Fund 17
Fixed Income Funds 17
Portfolio Investments 18
Corporate Debt Obligations 18
Fixed Rate Corporate Debt Obligations 18
Floating Rate Corporate Debt Obligations 18
Convertible Securities 18
Put and Call Options 19
Stock Index Futures and Options 19
Forward Foreign Currency Exchange
Contracts 20
Index Participation Contracts 20
Mortgage-Backed Securities 20
Adjustable Rate Mortgage Securities 20
Collateralized Mortgage Obligations 20
Real Estate Mortgage Investment Conduits 21
Stripped Mortgage-Backed Securities 21
Asset-Backed Securities 21
U.S. Government Obligations 22
Demand Master Notes 22
Temporary Investments 22
Restricted and Illiquid Securities 22
Repurchase Agreements 23
Demand Features 23
When-Issued and Delayed Delivery
Transactions 23
Lending of Portfolio Securities 23
Investing in Securities of Other Investment
Companies 23
Ratings 23
Municipal Leases 24
Participation Interests 24
Variable Rate Municipal Securities 24
Municipal Bond Insurance 24
Non-Diversification 24
Duration 24
- ----------------------------------------------------------
INVESTMENT LIMITATIONS 25
Borrowing Money 25
Diversification 25
- ----------------------------------------------------------
TRUST INFORMATION 25
Management of the Trusts 25
Board of Trustees 25
Investment Adviser 25
Sub-Adviser 25
Advisory Fees 25
Adviser's Background 26
Distribution of Shares 27
Distribution Plan 27
Administrative Arrangements 28
Shareholder Servicing Arrangements 28
Administration of the Funds 28
Expenses of the Funds and Class A Shares and
Class B Shares 28
Brokerage Transactions 29
- ----------------------------------------------------------
NET ASSET VALUE 29
- ----------------------------------------------------------
INVESTING IN THE FUNDS 29
Share Purchases 29
Through the Trust Division of Wachovia Bank 29
Through Wachovia Investments, Inc. 29
By Mail 29
Minimum Investment Required 29
What Shares Cost 30
Class A Shares 30
Purchases at Net Asset Value 30
Reducing the Initial Sales Charge 30
Quantity Discounts and Accumulated
Purchases 30
Letter of Intent 30
Reinvestment Privilege 31
Concurrent Purchases 31
Plan Right of Accumulation 31
Class B Shares 31
Conversion Feature 31
Sales Charge Reallowance 32
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
TABLE OF CONTENTS (CONT'D)
Systematic Investment Program 32
Certificates and Confirmations 32
Subaccounting Services 32
Dividends and Capital Gains 32
- ----------------------------------------------------------
EXCHANGE PRIVILEGE 32
Exchange by Telephone 33
- ----------------------------------------------------------
REDEEMING SHARES 33
By Telephone 33
By Mail 34
Signatures 34
Systematic Withdrawal Program 34
Accounts with Low Balances 34
- ----------------------------------------------------------
SHAREHOLDER INFORMATION 34
Voting Rights 34
- ----------------------------------------------------------
EFFECT OF BANKING LAWS 34
- ----------------------------------------------------------
TAX INFORMATION 35
- ----------------------------------------------------------
THE WACHOVIA MUNICIPAL FUNDS TAX INFORMATION 35
Federal Income Tax 35
Georgia and North Carolina Taxes 36
South Carolina Taxes 36
Other State and Local Taxes 36
- ----------------------------------------------------------
OTHER CLASSES OF SHARES 36
- ----------------------------------------------------------
PERFORMANCE INFORMATION 36
- ----------------------------------------------------------
ADDRESSES BACK COVER
- ---------------------------------------------------------
- ---------------------------------------------------------
SUMMARY OF INVESTMENT
INFORMATION
WHO MAY WANT TO INVEST IN THE WACHOVIA_ FUNDS AND THE WACHOVIA_
MUNICIPAL FUNDS?
THE WACHOVIA FUNDS and THE WACHOVIA MUNICIPAL FUNDS offer investment
opportunities to a wide range of investors, from those who may be
investing for the short-term to those with long-term goals. In
addition to certain money market portfolios offered pursuant to
separate prospectuses, the Trusts currently offer the following eight
professionally managed diversified portfolios and three
non-diversified portfolios:
WACHOVIA EQUITY FUND ("EQUITY FUND")--seeks to produce growth of principal and
income;
WACHOVIA QUANTITATIVE EQUITY FUND ("QUANTITATIVE EQUITY FUND")--seeks to
provide growth of principal and income;
WACHOVIA EQUITY INDEX FUND ("EQUITY INDEX FUND")--seeks to provide a
total return that approximates that of the stock market as measured
by the Standard & Poor's Composite Index of 500 Stocks (the "S&P 500
Index" or "Index");
WACHOVIA SPECIAL VALUES FUND ("SPECIAL VALUES FUND")--seeks to produce growth
of principal;
WACHOVIA EMERGING MARKETS FUND ("EMERGING MARKETS FUND")--seeks to produce
long-term capital appreciation;
WACHOVIA BALANCED FUND ("BALANCED FUND")-- seeks to provide long-term
growth of principal and current income;
WACHOVIA FIXED INCOME FUND ("FIXED INCOME FUND")--seeks a high level of total
return;
WACHOVIA SHORT-TERM FIXED INCOME FUND ("SHORT-TERM FIXED INCOME
FUND")--seeks to produce a high level of current income;
WACHOVIA GEORGIA MUNICIPAL BOND FUND ("GEORGIA MUNICIPAL BOND
FUND")--seeks to provide current income which is exempt from federal
regular income tax and the personal income taxes imposed by the State
of Georgia;
WACHOVIA NORTH CAROLINA MUNICIPAL BOND FUND ("NORTH CAROLINA
MUNICIPAL BOND FUND")--seeks to provide current income which is
exempt from federal regular income tax and the income tax imposed by
the State of North Carolina; and
WACHOVIA SOUTH CAROLINA MUNICIPAL BOND FUND ("SOUTH CAROLINA
MUNICIPAL BOND FUND")--seeks to provide current income which is
exempt from federal regular income tax and the South Carolina state
income taxes.
WHO MANAGES THE FUNDS?
Wachovia Asset Management, a business unit of Wachovia Bank, N.A., serves as
investment adviser to THE WACHOVIA FUNDS and THE WACHOVIA MUNICIPAL FUNDS. Twin
Capital Management, Inc. serves as sub-adviser to the QUANTITATIVE EQUITY FUND.
HOW TO BUY AND SELL SHARES
You may buy and sell shares of any of the Funds by telephone, by mail,
or in person. Except as indicated below, all shares are sold with
sales charges. Fund shares are redeemed at net asset value. The Trusts
also offer you the privilege of exchanging shares of one Fund for
another. For more information, please see "Investing in the Funds,"
"Exchange Privilege," and "Redeeming Shares."
RISK FACTORS
Investors should be aware of general risks associated with investment
in mutual funds. Market values of fixed income securities, which
constitute a major part of the investments of several Funds, may vary
inversely in response to change in prevailing interest rates. Foreign
securities in which some of the Funds (particularly the EMERGING
MARKETS FUND) may invest may be subject to certain risks in addition
to those inherent in U.S. investments. One or more of the Funds may
make certain investments and employ certain investment techniques that
involve other risks, including entering into repurchase agreements,
lending portfolio securities, entering into futures contracts and
related options, entering into foreign currency transactions and
forward foreign currency exchange contracts, and borrowing money for
investment purposes. These risks and those associated with investing
in mortgage-backed securities, foreign securities, when-issued
securities, variable rate securities, and equity securities are
described under "Portfolio Investments and Strategies."
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SUMMARY OF FUND EXPENSES
THE WACHOVIA_ FUNDS AND
THE WACHOVIA_ MUNICIPAL FUNDS
CLASS A SHARES
SHAREHOLDER TRANSACTION EXPENSES
<TABLE>
<CAPTION>
QUANTITATIVE EQUITY SPECIAL EMERGING
EQUITY EQUITY INDEX VALUES MARKETS
FUND FUND FUND FUND FUND
----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C>
Maximum Sales Charge Imposed on Purchases (as a percentage
of offering price) 4.50% 4.50% 4.50% 4.50% 4.50%
Maximum Sales Charge Imposed on Reinvested Dividends
(as a percentage of offering price) None None None None None
Contingent Deferred Sales Charge (as a percentage of
original purchase price or redemption proceeds, as
applicable) None None None None None
Redemption Fees (as a percentage of amount redeemed,
if applicable) None None None None None
Exchange Fee None None None None None
<CAPTION>
BALANCED
FUND
-----
<S> <C> Maximum Sales Charge Imposed on Purchases (as a percentage of
offering price) 4.50% Maximum Sales Charge Imposed on Reinvested
Dividends (as a percentage of offering price) None Contingent Deferred
Sales Charge (as a percentage of original purchase price or redemption
proceeds, as applicable) None Redemption Fees (as a percentage of
amount redeemed, if applicable) None Exchange Fee None </TABLE>
ANNUAL CLASS A SHARES OPERATING EXPENSES
(As a percentage of projected average net assets)
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
Management Fee (after waiver, if applicable) (1) 0.60% 0.59% 0.25% 0.72% 1.00%
12b-1 Fees None None None None None
Other Expenses (after waiver and reimbursement,
if applicable) (2) 0.55% 0.53% 0.48% 0.68% 0.85%
Shareholder Servicing Agent Fee 0.25%
Total Class A Shares Operating Expenses (after
waivers and reimbursement, if applicable) (3) 1.15% 1.12% 0.73% 1.40% 1.85%
<CAPTION>
<S> <C>
Management Fee (after waiver, if applicable) (1) 0.53%
12b-1 Fees None
Other Expenses (after waiver and reimbursement,
if applicable) (2) 0.48%
Shareholder Servicing Agent Fee
Total Class A Shares Operating Expenses (after
waivers and reimbursement, if applicable) (3) 1.01%
</TABLE>
SHAREHOLDER TRANSACTION EXPENSES
<TABLE>
<CAPTION>
FIXED SHORT-TERM GEORGIA NORTH CAROLINA
INCOME FIXED-INCOME MUNI BOND MUNI BOND
FUND FUND FUND FUND
----- ----- ----- -----
<S> <C> <C> <C> <C>
Maximum Sales Charge Imposed on Purchases
(as a percentage of offering price) 4.50% 2.50% 4.50% 4.50%
Maximum Sales Charge Imposed on Reinvested
Dividends (as a percentage of offering price) None None None None
Contingent Deferred Sales Charge (as a percentage
of original purchase price or redemption proceeds,
as applicable) None None None None
Redemption Fees (as a percentage of amount redeemed,
if applicable) None None None None
Exchange Fee None None None None
<CAPTION>
SOUTH CAROLINA
MUNI BOND
FUND
-----
<S> <C>
Maximum Sales Charge Imposed on Purchases
(as a percentage of offering price) 4.50%
Maximum Sales Charge Imposed on Reinvested
Dividends (as a percentage of offering price) None
Contingent Deferred Sales Charge (as a percentage
of original purchase price or redemption proceeds,
as applicable) None
Redemption Fees (as a percentage of amount redeemed,
if applicable) None
Exchange Fee None
</TABLE>
ANNUAL CLASS A SHARES OPERATING EXPENSES
(As a percentage of projected average net assets)
<TABLE>
<S> <C> <C> <C> <C> <C>
Management Fee (after waiver, if applicable) (1) 0.48% 0.32% 0.00% 0.31%
12b-1 Fees None None None None
Other Expenses (after waiver and reimbursement,
if applicable) (2) 0.51% 0.56% 1.17% 0.79%
Shareholder Servicing Agent Fee 0.25%
Total Class A Shares Operating Expenses
(after waivers and reimbursement,
if applicable) (3) 0.99% 0.88% 1.17% 1.10%
<CAPTION>
<S> <C>
Management Fee (after waiver, if applicable) (1) 0.26%
12b-1 Fees None
Other Expenses (after waiver and reimbursement,
if applicable) (2) 0.57%
Shareholder Servicing Agent Fee
Total Class A Shares Operating Expenses
(after waivers and reimbursement,
if applicable) (3) 0.83%
</TABLE>
(1) The management fee has been reduced to reflect the voluntary waiver by the
investment adviser. The adviser can terminate this voluntary waiver at any
time at its sole discretion. The maximum management fee is 0.30% for the
EQUITY INDEX FUND, 0.55% for the SHORT-TERM FIXED INCOME FUND, 0.60% for
the FIXED INCOME FUND, 0.70% for the EQUITY FUND, QUANTITATIVE EQUITY FUND
and BALANCED FUND, 0.75% for the GEORGIA MUNICIPAL BOND FUND, NORTH
CAROLINA MUNICIPAL BOND FUND, and SOUTH CAROLINA MUNICIPAL BOND FUND, 0.80%
for the SPECIAL VALUES FUND, and 1.00% for the EMERGING MARKETS FUND.
(2) For the fiscal year ending November 30, 1997, other expenses are
expected to be 1.74% for the GEORGIA MUNICIPAL BOND FUND, absent
an anticipated reimbursement of other operating expenses.
(3) The Annual Class A Shares Operating Expenses and the Operating Expenses
absent the voluntary waivers/ reimbursements were 0.90% and 1.05% for the
EQUITY FUND, 0.87% and 1.02% for the QUANTITATIVE EQUITY FUND, 0.48% and
0.61% for the EQUITY INDEX FUND, 1.21% and 1.50% for the SPECIAL VALUES
FUND, 1.69% and 1.78% for the EMERGING MARKETS FUND, 0.76% and 1.00% for
the BALANCED FUND, 0.74% and 0.92% for the FIXED INCOME FUND, 0.63% and
0.90% for the SHORT-TERM FIXED INCOME FUND, 0.89% and 2.50% for the GEORGIA
MUNICIPAL BOND FUND, 0.84% and 1.61% for the NORTH CAROLINA MUNICIPAL BOND
FUND, and 0.57% and 1.16% for the SOUTH CAROLINA MUNICIPAL BOND FUND for
the fiscal year ended November 30, 1996. For the fiscal year ending
November 30, 1997, the Annual Class A Shares Operating Expenses are
expected to be 1.25% for the EQUITY FUND, 1.23% for the QUANTITATIVE EQUITY
FUND, 0.78% for the EQUITY INDEX FUND, 1.48% for the SPECIAL VALUES FUND,
1.18% for the BALANCED FUND, 1.11% for the FIXED INCOME FUND and the
SHORT-TERM FIXED INCOME FUND, 2.49% for the GEORGIA MUNICIPAL BOND FUND,
1.54% for the NORTH CAROLINA MUNICIPAL BOND FUND, and 1.32% for the SOUTH
CAROLINA MUNICIPAL BOND FUND, absent the voluntary waivers reimbursements
described above in Note 1 and 2.
The purpose of this table is to assist an investor in understanding
the various costs and expenses that a shareholder of the Funds will
bear either directly or indirectly. For more complete descriptions of
the various costs and expenses, see "TRUST INFORMATION" and "INVESTING
IN THE FUNDS."
EXAMPLE
You would pay the following expenses on a $1,000 investment assuming
(1) 5% annual return; (2) redemption at the end of each time period;
and (3) payment of the maximum sales charge. As noted in the table
above, the Funds Class A Shares charge no redemption fees.
<TABLE>
<CAPTION>
QUANTITATIVE EQUITY SPECIAL EMERGING
EQUITY EQUITY INDEX VALUES MARKETS BALANCED
FUND FUND FUND FUND FUND FUND
----- ----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C> <C>
1 Year $ 56 $ 56 $ 52 $ 59 $ 63 $ 55
3 Years $ 80 $ 79 $ 67 $ 87 $101 $ 76
5 Years $105 $104 $ 84 $118 $141 $ 98
10 Years $178 $175 $132 $205 $252 $163
</TABLE>
<TABLE>
<CAPTION>
SHORT-TERM GEORGIA NORTH CAROLINA SOUTH CAROLINA
FIXED INCOME FIXED-INCOME MUNI BOND MUNI BOND MUNI BOND
FUND FUND FUND FUND FUND
----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C>
1 Year $ 55 $ 34 $ 56 $ 56 $ 53
3 Years $ 75 $ 52 $ 80 $ 78 $ 70
5 Years $ 97 $ 73 $106 $103 $ 89
10 Years $161 $131 $181 $173 $143
</TABLE>
THE ABOVE EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE
EXPENSES. ACTUAL EXPENSES MAY BE GREATER OR LESS THAN THOSE SHOWN.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SUMMARY OF FUND EXPENSES
THE WACHOVIA_ FUNDS
CLASS B SHARES
SHAREHOLDER TRANSACTION EXPENSES
<TABLE>
<CAPTION>
QUANTITATIVE
EQUITY EQUITY
FUND FUND
-------------------------- --------------------------
<S> <C> <C>
Maximum Sales Charge Imposed on Purchases (as a percentage of
offering price) None None
Maximum Sales Charge Imposed on Reinvested Dividends
(as a percentage of offering price) None None
Contingent Deferred Sales Charge (as a percentage of original
purchase price or redemption proceeds, as applicable) (1) 5% during the first year, 5% during the first year,
4%
during
the
second
year,
4%
during
the
second
year,
3%
during
the
third
year,
3%
during
the
third
year,
3%
during
the
fourth
year,
3%
during
the
fourth
year,
2%
during
the
fifth
year,
2%
during
the
fifth
year,
1%
during
the
sixth
year,
1%
during
the
sixth
year,
and 0% after the seventh year. and 0% after the seventh year.
Redemption Fees (as a percentage of amount redeemed, if
applicable) None None
Exchange Fee None None
</TABLE>
ANNUAL CLASS B SHARES OPERATING EXPENSES
(As a percentage of projected average net assets)
<TABLE>
<S> <C> <C> <C>
Management Fee (after waiver, if applicable) (2) 0.60% 0.59%
12b-1 Fees 0.75% 0.75%
Other Expenses (after reimbursement, if applicable) 0.55% 0.53%
Shareholder Servicing Agent Fee 0.25%
Total Class B Shares Operating Expenses (after waiver,
if applicable) 1.90% 1.87%
</TABLE>
SHAREHOLDER TRANSACTION EXPENSES
<TABLE>
<CAPTION>
BALANCED FIXED INCOME
FUND FUND
-------------------------- --------------------------
<S> <C> <C>
Maximum Sales Charge Imposed on Purchases (as a percentage of
offering price) None None
Maximum Sales Charge Imposed on Reinvested Dividends
(as a percentage of offering price) None None
Contingent Deferred Sales Charge (as a percentage of original
purchase
price or redemption proceeds, as applicable) (1) 5% during the first year, 5% during the first year,
4% during the second year, 4% during the second year,
3% during the third year, 3% during the third year,
3% during the fourth year, 3% during the fourth year,
2% during the fifth year, 2% during the fifth year,
1% during the sixth year, 1% during the sixth year,
and 0% after the seventh year. and 0% after the seventh year.
Redemption Fees (as a percentage of amount redeemed, if
applicable) None None
Exchange Fee None None
</TABLE>
ANNUAL CLASS B SHARES OPERATING EXPENSES
(As a percentage of projected average net assets)
<TABLE>
<S> <C> <C> <C>
Management Fee (after waiver, if applicable) (2) 0.53% 0.48%
12b-1 Fees 0.75% 0.75%
Other Expenses (after reimbursement, if applicable) 0.48% 0.51%
Shareholder Servicing Agent Fee 0.25%
Total Class B Shares Operating Expenses (after waiver,
if applicable) 1.76% 1.74%
</TABLE>
(1) No contingent deferred sales charge will be imposed on: (a) the portion of
redemption proceeds attributable to increases in the value of the account
due to increases in the net asset value per Share, (b) Shares acquired
through reinvestment of dividends and capital gains, (c) Shares held for
more than seven years after the end of the calendar month of acquisition,
(d) accounts following the death or disability of any shareholder in the
account, or (e) minimum required distributions to a shareholder over the
age of 70-1/2 from an IRA or other retirement plan.
(2) The management fee has been reduced to reflect the voluntary
waiver by the investment adviser. The adviser can terminate this
voluntary waiver at any time at its sole discretion. The maximum
management fee is 0.70% for the EQUITY FUND, QUANTITATIVE EQUITY
FUND and the BALANCED FUND, and 0.60% for the FIXED INCOME FUND.
(3) The Annual Class B Shares Operating Expenses and the Operating Expenses
absent the voluntary waiver were 1.90% and 2.10% for the EQUITY FUND, 1.87%
and 1.98% for the QUANTITATIVE EQUITY FUND, 1.76% and 1.92% for the
BALANCED FUND, and 1.74% and 1.87% for the FIXED INCOME FUND for the fiscal
year ended November 30, 1996. For the fiscal year ending November 30, 1997,
the Annual Class B Shares are expected to be 2.00% for the EQUITY FUND,
1.98% for the QUANTITATIVE EQUITY FUND, 1.93% for the BALANCED FUND, and
1.86% for the FIXED INCOME FUND, absent the voluntary waiver described
above in Note 2.
LONG-TERM SHAREHOLDERS MAY PAY MORE THAN THE ECONOMIC EQUIVALENT OF THE MAXIMUM
FRONT-END SALES CHARGE PERMITTED UNDER THE RULES OF THE NATIONAL ASSOCIATION OF
SECURITIES DEALERS, INC.
The purpose of this table is to assist an investor in understanding
the various costs and expenses that a shareholder of the Funds will
bear either directly or indirectly. For more complete descriptions of
the various costs and expenses, see "TRUST INFORMATION" and "INVESTING
IN THE FUND."
EXAMPLE
You would pay the following expenses on a $1,000 investment assuming
(1) 5% annual return and (2) redemption at the end of each time
period:
<TABLE>
<CAPTION>
QUANTITATIVE
EQUITY EQUITY BALANCED FIXED INCOME
FUND FUND FUND FUND
<S> <C> <C> <C> <C>
1 Year $71 $71 $70 $69
3 Years $93 $92 $88 $88
</TABLE>
You would pay the following expenses on the same investment, assuming
no redemptions:
<TABLE>
<CAPTION>
QUANTITATIVE
EQUITY EQUITY BALANCED FIXED INCOME
FUND FUND FUND FUND
<S> <C> <C> <C> <C>
1 Year $19 $19 $18 $18
3 Years $60 $59 $55 $55
</TABLE>
THE ABOVE EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE
EXPENSES. ACTUAL EXPENSES MAY BE GREATER OR LESS THAN THOSE SHOWN.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
THE WACHOVIA_ FUNDS AND THE WACHOVIA_ MUNICIPAL FUNDS
FINANCIAL HIGHLIGHTS--CLASS A SHARES
(For a Class A Share outstanding throughout each period) The following
table has been audited by Ernst & Young LLP, the Fund's independent
auditors. Their report dated January 17, 1997, on the Funds' financial
statements for the year ended November 30, 1996, and on the following
table for the periods presented, is included in the Fund's Annual
Report to shareholders dated November 30, 1996, which is incorporated
herein by reference. This table should be read in conjunction with the
Fund's financial statements and notes thereto, which may be obtained
free of charge from the Trust.
<TABLE>
<CAPTION>
NET NET REALIZED AND DISTRIBUTIONS FROM NET
NET ASSET INVESTMENT UNREALIZED GAIN/ DISTRIBUTIONS REALIZED GAIN ON
VALUE, INCOME/ (LOSS) ON INVESTMENTS, TOTAL FROM FROM NET INVESTMENTS, FUTURES
PERIOD ENDED BEGINNING (OPERATING FUTURES CONTRACTS, AND INVESTMENT INVESTMENT CONTRACTS AND FOREIGN
NOVEMBER 30, OF PERIOD LOSS) FOREIGN CURRENCY OPERATIONS INCOME CURRENCY TRANSACTIONS
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
WACHOVIA EQUITY FUND
1993(a) $ 10.00 0.12 0.25 0.37 (0.09) --
1994 $ 10.28 0.20 0.12 0.32 (0.20) (0.08)
1995 $ 10.32 0.23 2.64 2.87 (0.25) (0.23)
1996 $ 12.71 0.22(i) 2.83 3.05 (0.22) (0.73)
WACHOVIA QUANTITATIVE EQUITY FUND
1994(b) $ 10.00 0.12 (0.43) (0.31) (0.09) --
1995 $ 9.60 0.22 3.51 3.73 (0.22) --
1996 $ 13.11 0.24(i) 2.77 3.01 (0.21) (0.24)
WACHOVIA EQUITY INDEX FUND
1993(a) $ 10.00 0.15 0.43 0.58 (0.11) --
1994 $ 10.47 0.25 (0.19) 0.06 (0.24) (0.02)
1995 $ 10.27 0.28 3.37 3.65 (0.27) (0.03)
1996 $ 13.62 0.32(i) 3.13 3.45 (0.31) (0.78)
WACHOVIA SPECIAL VALUES FUND
1993(a) $ 10.00 (0.002) 0.242 0.24 -- --
1994 $ 10.24 0.06 (0.22) (0.16) (0.05) (0.28)
1995 $ 9.75 0.09 2.42 2.51 (0.02) (0.06)
1996 $ 12.18 0.35 4.13 4.48 (0.08) (0.91)
WACHOVIA EMERGING MARKETS FUND
1995(c) $ 10.00 0.05 0.36 0.41 -- --
1996 $ 10.41 0.09(i) 1.20 1.29 (0.03) --
WACHOVIA BALANCED FUND
1993(a) $ 10.00 0.19 0.29 0.48 (0.15) --
1994 $ 10.33 0.35 (0.38) (0.03) (0.33) (0.04)
1995 $ 9.93 0.40 2.13 2.53 (0.38) (0.16)
1996 $ 11.92 0.38(i) 1.72 2.10 (0.38) (0.34)
WACHOVIA FIXED INCOME FUND
1993(a) $ 10.00 0.31 (0.01) 0.30 (0.30) --
1994 $ 10.00 0.56 (0.98) (0.42) (0.55) (0.06)
1995 $ 8.97 0.58 0.92 1.50 (0.57) --
1996 $ 9.90 0.61(i) (0.09) 0.52 (0.59) --
WACHOVIA SHORT-TERM FIXED INCOME FUND
1993(a) $ 10.00 0.27 (0.10) 0.17 (0.26) --
1994 $ 9.91 0.45 (0.33) 0.12 (0.45) --
1995 $ 9.58 0.59 0.24 0.83 (0.52) --
1996 $ 9.89 0.56(i) (0.06) 0.50 (0.60) --
WACHOVIA GEORGIA MUNICIPAL BOND FUND
1995(c) $ 10.00 0.41 0.96 1.37 (0.41) --
1996 $ 10.96 0.47 0.05 0.52 (0.47) (0.01)
WACHOVIA NORTH CAROLINA MUNICIPAL BOND FUND
1995(c) $ 10.00 0.43 0.99 1.42 (0.43) --
1996 $ 10.99 0.45 0.09 0.54 (0.45) (0.05)
WACHOVIA SOUTH CAROLINA MUNICIPAL BOND FUND (D)
9/30/91(e) $ 10.00 0.43 0.17 0.60 (0.43) --
9/30/92 $ 10.17 0.60 0.36 0.96 (0.60) --
9/30/93 $ 10.53 0.59 0.74 1.33 (0.59) --
11/30/93(f) $ 11.27 0.10 (0.15) (0.05) (0.10) --
11/30/94 $ 11.12 0.56 (1.04) (0.48) (0.56) (0.03)
11/30/95 $ 10.05 0.56 1.10 1.66 (0.56) (0.10)
11/30/96 $ 11.05 0.55 0.03 0.58 (0.55) (0.03)
<CAPTION>
PERIOD ENDED TOTAL
NOVEMBER 30, DISTRIBUTIONS
<S> <C>
WACHOVIA EQUITY FUND
1993(a) (0.09)
1994 (0.28)
1995 (0.48)
1996 (0.95)
WACHOVIA QUANTITATIVE EQUITY FUND
1994(b) (0.09)
1995 (0.22)
1996 (0.45)
WACHOVIA EQUITY INDEX FUND
1993(a) (0.11)
1994 (0.26)
1995 (0.30)
1996 (1.09)
WACHOVIA SPECIAL VALUES FUND
1993(a) --
1994 (0.33)
1995 (0.08)
1996 (0.99)
WACHOVIA EMERGING MARKETS FUND
1995(c) --
1996 (0.03)
WACHOVIA BALANCED FUND
1993(a) (0.15)
1994 (0.37)
1995 (0.54)
1996 (0.72)
WACHOVIA FIXED INCOME FUND
1993(a) (0.30)
1994 (0.61)
1995 (0.57)
1996 (0.59)
WACHOVIA SHORT-TERM FIXED INCOME FUND
1993(a) (0.26)
1994 (0.45)
1995 (0.52)
1996 (0.60)
WACHOVIA GEORGIA MUNICIPAL BOND FUND
1995(c) (0.41)
1996 (0.48)
WACHOVIA NORTH CAROLINA MUNICIPAL BOND FUND
1995(c) (0.43)
1996 (0.50)
WACHOVIA SOUTH CAROLINA MUNICIPAL BOND FUND (D)
9/30/91(e) (0.43)
9/30/92 (0.60)
9/30/93 (0.59)
11/30/93(f) (0.10)
11/30/94 (0.59)
11/30/95 (0.66)
11/30/96 (0.58)
</TABLE>
* Computed on an annualized basis.
(a) Reflects operations for the period from May 10, 1993 (date of
initial public investment) to November 30, 1993.
(b) Reflects operations for the period from March 28, 1994 (date of
initial public investment) to November 30, 1994.
(c) Reflects operations for the period from December 26, 1994 (date
of initial public investment) to November 30, 1995.
(d) Prior to November 30, 1993 the Fund's year end was September 30.
(e) Reflects operations for the period from January 11, 1991 (date of initial
public investment) to September 30, 1991.
(f) Reflects operations for the two months ended November 30, 1993.
(g) Based on net asset value, which does not reflect the sales charge or
contingent deferred sales charge, if applicable.
(h) This voluntary expense decrease is reflected in both the expense
and net investment income ratios shown above.
(i) Per share information is based on average shares outstanding.
(j) On July 22, 1996, the Funds created Class Y Shares for certain
institutional investors. Certain of these investors' shares were
converted from Class A to Class Y Shares, which accounts for a
portion of the decrease in Class A Shares' assets.
Further information about the Fund's performance is contained in the
Fund's Annual Report for the fiscal year ended November 30, 1996,
which can be obtained free of charge.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
RATIOS TO AVERAGE NET ASSETS
NET ASSET NET NET ASSETS, END AVERAGE
VALUE, END TOTAL INVESTMENT EXPENSE WAIVER/ OF PERIOD (000 COMMISSION PORTFOLIO
OF PERIOD RETURN(G) EXPENSES INCOME REIMBURSEMENT(H) OMITTED)(J) RATE PAID TURNOVER RATE
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
$ 10.28 3.68% 0.81%* 2.18%* 0.32%* $ 61,997 -- 50%
$ 10.32 3.10% 0.87% 1.98% 0.16% $ 87,022 -- 35%
$ 12.71 28.74% 0.90% 1.99% 0.07% $ 130,150 -- 65%
$ 14.81 25.56% 0.90% 1.62% 0.15% $ 20,774 $ 0.0652 64%
$ 9.60 (3.08%) 0.90%* 1.83%* 0.10%* $ 91,979 -- 64%
$ 13.11 39.33% 0.87% 1.93% 0.10% $ 121,895 -- 63%
$ 15.67 23.74% 0.87% 1.70% 0.15% $ 15,742 $ 0.0532 44%
$ 10.47 5.80% 0.43%* 2.54%* 0.12%* $ 149,266 -- 9%
$ 10.27 0.56% 0.46% 2.44% 0.08% $ 183,852 -- 9%
$ 13.62 36.15% 0.48% 2.39% 0.05% $ 186,841 -- 60%
$ 15.98 27.19% 0.48% 2.23% 0.13% $ 18,154 $ 0.0137 12%
$ 10.24 2.40% 1.25%* (0.03%)* 1.79%* $ 12,072 -- 68%
$ 9.75 (1.61%) 1.13% 0.63% 1.09% $ 17,431 -- 62%
$ 12.18 25.91% 1.29% 0.80% 0.58% $ 24,093 -- 57%
$ 15.67 39.78% 1.21% 0.47% 0.29% $ 6,642 $ 0.0650 38%
$ 10.41 4.10% 1.80%* 0.85%* 0.28%* $ 71,276 -- 17%
$ 11.67 12.45% 1.69% 0.73% 0.09% $ 5,488 $ 0.0009 30%
$ 10.33 4.89% 0.75%* 3.30%* 0.19%* $ 166,271 -- 60%
$ 9.93 (0.39%) 0.75% 3.46% 0.17% $ 194,430 -- 74%
$ 11.92 26.32% 0.76% 3.58% 0.16% $ 207,421 -- 102%
$ 13.30 18.55% 0.76% 3.05% 0.24% $ 18,619 $ 0.0545 99%
$ 10.00 3.02% 0.68%* 5.44%* 0.19%* $ 140,325 -- 149%
$ 8.97 (4.30%) 0.71% 5.90% 0.13% $ 148,751 -- 148%
$ 9.90 17.20% 0.74% 6.07% 0.10% $ 169,846 -- 155%
$ 9.83 5.51% 0.74% 6.05% 0.18% $ 4,853 -- 181%
$ 9.91 1.69% 0.58%* 4.78%* 0.22%* $ 154,459 -- 73%
$ 9.58 1.27% 0.60% 4.62% 0.18% $ 148,326 -- 151%
$ 9.89 8.82% 0.63% 5.83% 0.16% $ 124,720 -- 147%
$ 9.79 5.29% 0.63% 5.50% 0.27% $ 1,675 -- 145%
$ 10.96 13.93% 0.92%* 4.30%* 1.88%* $ 10,220 -- 14%
$ 11.00 4.97% 0.89% 4.40% 1.61% $ 7,531 -- 14%
$ 10.99 14.40% 0.85% 4.40% 1.19% $ 18,679 -- 19%
$ 11.03 5.17% 0.84% 4.24% 0.77% $ 13,752 -- 7%
$ 10.17 6.32% 0.82%* 5.73%* 0.86%* $ 21,438 -- 0%
$ 10.53 9.73% 0.61% 5.83% 0.73% $ 63,139 -- 0%
$ 11.27 13.03% 0.55% 5.46% 0.62% $ 82,674 -- 4%
$ 11.12 (0.48%) 0.55%* 5.11%* 0.60%* $ 83,371 -- 2%
$ 10.05 (4.52%) 0.60% 5.22% 0.59% $ 75,995 -- 23%
$ 11.05 16.97% 0.58% 5.23% 0.55% $ 93,725 -- 15%
$ 11.05 5.54% 0.57% 5.10% 0.59% $ 65,981 -- 20%
</TABLE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
THE WACHOVIA_ FUNDS
FINANCIAL HIGHLIGHTS--CLASS B SHARES
(For a Class B Share outstanding throughout each period)
The following table has been audited by Ernst & Young LLP, the Funds'
independent auditors. Their report dated January 17, 1997, on the
Funds' financial statements for the year ended November 30, 1996, and
on the following table for the periods presented, is included in the
Fund's Annual Report to shareholders dated November 30, 1996, which is
incorporated herein by reference. This table should be read in
conjunction with the Fund's financial statements and notes thereto,
which may be obtained free of charge from the Trust.
<TABLE>
<CAPTION>
NET REALIZED AND
UNREALIZED GAIN/
NET ASSET (LOSS) ON TOTAL DISTRIBUTIONS
VALUE, NET INVESTMENTS FROM FROM NET
PERIOD ENDED BEGINNING INVESTMENT AND FUTURES INVESTMENT INVESTMENT NET ASSET VALUE,
NOVEMBER 30, OF PERIOD INCOME CONTRACTS OPERATIONS INCOME END OF PERIOD
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
WACHOVIA EQUITY FUND
1996(a) $ 12.43 0.02 2.37 2.39 (0.03) $ 14.79
WACHOVIA QUANTITATIVE EQUITY FUND
1996(a) $ 13.09 0.04 2.56 2.60 (0.04) $ 15.65
WACHOVIA BALANCED FUND
1996(a) $ 11.68 0.09 1.59 1.68 (0.07) $ 13.29
WACHOVIA FIXED INCOME FUND
1996(a) $ 9.45 0.15 0.40 0.55 (0.17) $ 9.83
</TABLE>
* Computed on an annualized basis.
(a) Reflects operations for the period from July 22, 1996 (date of
initial public investment) to November 30, 1996.
(b) Based on net asset value, which does not reflect the sales charge
or contingent deferred sales charge, if applicable.
(c) This voluntary expense decrease is reflected in both the expense
and net investment income ratios shown above.
Further information about the Funds' performance is contained in the
Funds' Annual Report for the fiscal year ended November 30, 1996,
which can be obtained free of charge.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
RATIOS TO AVERAGE NET ASSETS NET ASSETS, END AVERAGE
TOTAL NET INVESTMENT EXPENSE WAIVER/ OF PERIOD (000 COMMISSION PORTFOLIO
RETURN(B) EXPENSES INCOME REIMBURSEMENT(C) OMITTED) RATE PAID TURNOVER RATE
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
19.25% 1.90%* 0.02%* 0.20%* $ 976 $ 0.0652 64%
19.90% 1.87%* 0.46%* 0.11%* $ 1,414 $ 0.0532 44%
14.47% 1.76%* 1.93%* 0.16%* $ 1,821 $ 0.0545 99%
5.83% 1.74%* 5.20%* 0.13%* $ 113 -- 181%
</TABLE>
- ---------------------------------------------------------
- ---------------------------------------------------------
GENERAL INFORMATION
THE WACHOVIA FUNDS was established as a Massachusetts business trust
under a Declaration of Trust dated November 19, 1991. (For purposes of
this prospectus, "THE WACHOVIA FUNDS" refers only to those portfolios
of the Trust that are included in this combined prospectus.) THE
WACHOVIA MUNICIPAL FUNDS was established as a Massachusetts business
trust under a Declaration of Trust dated August 15, 1990. Each
Declaration of Trust permits the respective Trust to offer separate
series of shares of beneficial interest representing interests in
separate portfolios of securities. As of the date of this prospectus,
the Trusts offer three classes of shares: Class A Shares, Class Y
Shares, and for the Equity Fund, the Quantitative Equity Fund, the
Balanced Fund and the Fixed Income Fund, Class B Shares. Class Y
Shares are offered to certain accounts held by Wachovia Bank, N.A.
("Wachovia Bank") and its affiliates in a fiduciary, advisory, agency,
custodial, or similar capacity. Class A Shares and Class B Shares are
sold to those customers as well as other individuals and customers of
Wachovia Bank. This prospectus relates only to Class A Shares and
Class B Shares ("Shares") of the Funds.
The investment objective and policies of each Fund appear below. The
investment objective of a Fund cannot be changed without shareholder
approval. While a Fund cannot assure that it will achieve its
investment objective, it attempts to do so by following the investment
policies described below.
Unless indicated otherwise, the investment policies of a Fund may be
changed by the Trustees without shareholder approval. However,
shareholders will be notified before any material change in these
policies becomes effective.
For additional information about investment limitations, strategies,
and certain investment policies, please refer to the "Portfolio
Investments and Strategies" section of this prospectus.
- ---------------------------------------------------------
- ---------------------------------------------------------
THE WACHOVIA_ FUNDS
WACHOVIA_ EQUITY FUND
The investment objective of the EQUITY FUND is to produce growth of
principal and income. The Fund pursues its investment objective by
investing primarily in a professionally-managed and diversified
portfolio of common stock of companies with an established market.
Under normal market conditions, the Fund intends to invest at least
65% of its total assets in equity securities. These securities will be
primarily quality mid- to large- capitalization common stocks. The
Fund's investment adviser seeks undervalued stocks with improving
prospects by integrating two disciplines to capture both growth and
value opportunities. The Fund's investment adviser will integrate
value and growth management techniques in attempting to select
undervalued stocks that have prospects for improving fundamentals
while evening out the price volatility often associated with high
growth investments.
Acceptable investments include:
common or preferred stocks of U.S. companies which are either listed on the New
York or American Stock Exchange or traded in over-the-counter markets and are
considered by the Fund's investment adviser to have an established market;
convertible securities;
investments in American Depositary Receipts ("ADRs") of foreign companies
traded on the New York Stock Exchange or in over-the-counter markets. The Fund
may not invest more than 20% of its assets in ADRs. In addition, the Fund may
invest up to 10% of its assets in other securities of foreign issuers
("Non-ADRs"). (See "Securities of Foreign Issuers."); and
domestic issues of corporate debt obligations rated A or better by Moody's
Investors Service, Inc. ("Moody's") or Standard & Poor's Ratings Group ("S&P").
WACHOVIA_ QUANTITATIVE EQUITY FUND
The investment objective of the QUANTITATIVE EQUITY FUND is to provide
growth of principal and income. The Fund pursues its investment
objective by investing in a professionally managed and diversified
portfolio consisting primarily of large capitalization common stocks.
The average market capitalization of the stocks in the Fund's universe
will be in excess of $1 billion. These securities will primarily be
composed of issues of domestic companies. Stocks are selected by the
Fund's sub-adviser using a quantitative computer valuation model
described below under "Investment Processes." The Fund intends to hold
a broadly diversified portfolio of common stocks that, in the
aggregate, exhibit investment characteristics similar to the stocks
found in the S&P 500 Index. However, the Fund will not limit its
investments solely to stocks represented in the Index. There can be no
assurance that the Fund's investment performance will match or exceed
that of the Index. Under normal market conditions, the Fund intends to
invest at least 65% of its total assets in equity securities.
Although the Fund normally seeks to remain substantially fully
invested in the common stocks in the universe identified by the Fund's
investment adviser, the Fund may also invest in the acceptable
investments listed under "WACHOVIA EQUITY FUND" above.
WACHOVIA_ EQUITY INDEX FUND
The investment objective of the EQUITY INDEX FUND is to provide a
total return that approximates that of the stock market as measured by
the S&P 500 Index. The Fund pursues its investment objective by
investing in a broadly diversified portfolio of common stocks that
make up the Index. The Fund will normally seek to be invested in all
the stocks that comprise the Index and achieve a correlation between
the performance of its portfolio and that of the Index of at least
0.95 of 1%; a figure of 1.00 would represent perfect correlation. The
Fund is managed by utilizing a computer program that identifies which
stocks should be purchased or sold in order to approximate, as much as
possible, the investment return of the securities that comprise the
S&P 500 Index. Under normal circumstances, at least 95% of the value
of the Fund's total assets will be invested in stocks represented in
the Index and S&P 500 Index futures contracts. However, the Fund is
not required to sell securities if the 95% investment level changes
due to increases or decreases in the market value of portfolio
securities.
In addition, the Fund may hold cash reserves which may be invested in,
but not limited to, the following:
commercial paper rated, at the time of purchase, at least Prime-1 or
A-1 by Moody's or S&P, or, if unrated, of comparable quality as
determined by the Fund's investment adviser;
time and savings deposits (including certificates of deposit) in domestic,
commercial and savings banks; and
index participation contracts.
WACHOVIA_ SPECIAL VALUES FUND
The investment objective of the SPECIAL VALUES FUND is to produce
growth of principal. The Fund pursues its investment objective by
investing primarily in a portfolio of equity securities comprising the
small capitalization sector of the United States equity market which
the investment adviser believes to be significantly undervalued with
potential for above-average capital appreciation commensurate with
increased risk. Typical investments are in stocks that have low
price-to-earnings ratios, are generally out of favor in the
marketplace, are selling significantly below their stated or
replacement book value or are undergoing a reorganization or other
corporate action that may create above-average price appreciation.
Under normal market conditions, the Fund intends to invest at least
65% of its total assets in equity securities of companies that have a
market value capitalization of up to $1 billion. The Fund will limit
its investments to up to 20% of total assets in securities of foreign
issuers which are freely traded on United States securities exchanges
or in the over-the-counter market in the form of ADRs and up to 10% of
total assets in other securities of foreign issuers.
Acceptable investments include, but are not limited to:
common stocks of U.S. companies which are either listed on the New York or
American Stock Exchange or traded in over-the-counter markets and are
considered by the Fund's investment adviser to have potential for above-average
appreciation;
domestic issues of corporate debt obligations (including convertible bonds);
securities of foreign issuers; and
master limited partnerships.
In addition, the Fund may invest in high yield corporate bonds
(commonly known as junk bonds) and speculative grade preferred stocks.
WACHOVIA_ EMERGING MARKETS FUND
The investment objective of the EMERGING MARKETS FUND is to produce
long-term capital appreciation. The Fund pursues its investment
objective by investing primarily in a professionally managed and
diversified portfolio of securities of issuers and companies located
in countries that are generally considered to be developing or
emerging countries by the International Bank for Reconstruction and
Development (more commonly known as the World Bank) and the
International Finance Corporation, as well as countries that are
classified by the United Nations or otherwise regarded by their
authorities as developing. Many investments in emerging markets can be
considered speculative, and therefore may offer higher potential for
gains and losses than investments in the developed markets of the
world. Because investing in emerging markets can involve significant
risks, the Fund is designed for aggressive investors. Under normal
market conditions, the Fund intends to invest at least 65% of its
total assets in securities of issuers and companies located in
countries having emerging markets. Although the Fund will focus its
investment on the common stocks of foreign companies located in
emerging market countries, the Fund may also invest in other
securities, including debt securities.
Acceptable investments may also include, but will not be limited to:
preferred stocks of foreign companies;
convertible securities and warrants of foreign companies;
investments in ADRs of foreign companies traded on the New York Stock
Exchange or in over-the-counter markets, and investments in European
Depositary Receipts ("EDRs," sometimes also referred to as
Continental Depositary Receipts), which are receipts issued in
Europe, typically by foreign banks and trust companies, that evidence
ownership of either foreign or domestic underlying securities and
Global Depositary Receipts.
fixed-income obligations of foreign governments, supranational entities and
corporate debt obligations denominated in currencies other than U.S. dollars,
rated B or better at the time of purchase by Moody's or S&P; and
U.S. equity and debt securities rated, at the time of purchase, B or better by
Moody's or S&P.
In addition, the Fund may enter into foreign currency transactions and
may maintain reserves in foreign or U.S. money market instruments.
WACHOVIA_ BALANCED FUND
The investment objective of the BALANCED FUND is to provide long-term
growth of principal and current income. The Fund pursues its
investment objective by investing primarily in a
professionally-managed, diversified portfolio of equity securities and
debt securities. The Fund's investment approach, as related to equity
securities, is to produce long-term growth of principal and income by
investing in a diversified portfolio of common stocks. The Fund will
seek undervalued stocks with improving prospects in an attempt to
capture both growth and value opportunities. With regard to debt
securities, the Fund's investment approach will be to maximize total
return (which consists of capital appreciation and income) available
from a diversified portfolio of fixed income securities while
providing relative stability of principal and income as compared to
other fixed income securities. Under normal market circumstances, the
Fund will invest at least 65% of its assets in equity securities and
debt securities. As a matter of operating policy, the asset mix of the
Fund will normally range between 50-70% in common stocks and
convertible securities, 30-50% in preferred stocks and bonds, and
0-20% in money market instruments. The Fund will maintain at least 25%
of its assets in fixed income senior securities (including the value
of convertible senior securities attributable to their fixed income
characteristics).
Acceptable investments include but are not limited to:
common or preferred stocks of U.S. companies which are either listed on the New
York or American Stock Exchange or traded in the over-the-counter markets and
are considered by the Fund's investment adviser to have an established market;
convertible securities;
investments in ADRs of foreign companies traded on the New York Stock Exchange
or in the over-the-counter market. The Fund may not invest more than 20% of its
assets in ADRs. In addition, the Fund may invest up to 10% of its assets in
Non-ADRs. (See "Securities of Foreign Issuers.");
domestic issues of corporate debt obligations (including convertible
bonds) rated, at the time of purchase, A or better by S&P or Moody's
or, if not rated, are determined by the Fund's investment adviser to
be of comparable quality;
mortgage-backed and asset-backed securities;
commercial paper rated not less than A-1 by S&P or Prime-1 by
Moody's, and unrated commercial paper that is deemed by the Fund's
investment adviser to be of comparable quality; and
time and savings deposits (including certificates of deposit) in commercial or
savings banks.
WACHOVIA_ FIXED INCOME FUND
The investment objective of the FIXED INCOME FUND is to seek a high
level of total return. As a secondary investment objective, the Fund
will attempt to minimize volatility of principal relative to the fixed
income markets. Total return consists of income and capital gains. The
Fund pursues its investment objectives by investing primarily in a
diversified portfolio of fixed income securities that, at the time of
purchase, are rated in the top three investment categories by a
nationally recognized statistical rating organization (NRSRO) or, if
unrated, are of comparable quality to securities with such ratings.
The Fund will maintain an average dollar-weighted maturity of between
6 to 10 years. The Fund will invest, under normal circumstances, at
least 65% of the value of its total assets in fixed income securities.
Acceptable investments include:
domestic issues of corporate debt obligations, including demand
master notes rated at the time of purchase Aaa, Aa, or A by Moody's
or AAA, AA, or A by S&P or, if unrated, of comparable quality as
determined by the Fund's investment adviser;
convertible securities;
mortgage-backed and asset-backed securities;
commercial paper that at the time of purchase is rated not less than
Prime-1 or A-1, by Moody's or S&P, respectively, or, if unrated, of
comparable quality as determined by the Fund's investment adviser;
and
time and savings deposits (including certificates of deposit) in commercial or
savings banks.
WACHOVIA_ SHORT-TERM FIXED INCOME FUND
The investment objective of the SHORT-TERM FIXED INCOME FUND is to
produce a high level of current income with a minimum of principal
volatility. The Fund pursues its investment objective by investing
primarily in a diversified portfolio of short-term, high-grade, fixed
income securities. Under normal market circumstances, the Fund will
invest at least 65% of its assets in such securities. The Fund will
maintain an average dollar-weighted maturity of between one to three
years. Otherwise, the Fund may invest in the acceptable investments
listed under "WACHOVIA FIXED INCOME FUND" above.
ADDITIONAL ACCEPTABLE INVESTMENTS
In addition to the acceptable investments discussed above, each of the
Funds may borrow money, enter into repurchase agreements, lend
portfolio securities, invest in money market instruments, restricted
and illiquid securities, securities issued or guaranteed by the U.S.
government, its agencies or instrumentalities, securities of other
investment companies, warrants, demand master notes and engage in
when-issued and delayed delivery transactions. The Funds may also
engage in put and call options, futures, and options on futures for
hedging purposes.
- ---------------------------------------------------------
- ---------------------------------------------------------
THE WACHOVIA_ MUNICIPAL FUNDS
WACHOVIA_ GEORGIA MUNICIPAL BOND FUND
The investment objective of the GEORGIA MUNICIPAL BOND FUND is to
provide current income which is exempt from federal regular income tax
and the personal income taxes imposed by the State of Georgia. As a
matter of investment policy which may not be changed without
shareholder approval, the Fund will invest its assets so that, under
normal circumstances, at least 80% of its total assets are invested in
obligations, the interest income from which is exempt from federal
regular income tax and the personal income taxes imposed by the State
of Georgia ("Georgia Municipal Securities").
WACHOVIA_ NORTH CAROLINA MUNICIPAL BOND FUND
The investment objective of the NORTH CAROLINA MUNICIPAL BOND FUND is
to provide current income which is exempt from federal regular income
tax and the income tax imposed by the State of North Carolina. As a
matter of investment policy which may not be changed without
shareholder approval, the Fund will invest its assets so that, under
normal circumstances, at least 80% of its total assets are invested in
obligations, the interest income from which is exempt from federal
regular income tax and the income tax imposed by the State of North
Carolina ("North Carolina Municipal Securities").
WACHOVIA_ SOUTH CAROLINA MUNICIPAL BOND FUND
The investment objective of the SOUTH CAROLINA MUNICIPAL BOND FUND is
to provide current income which is exempt from federal regular income
tax and South Carolina state income taxes. As a matter of investment
policy which may not be changed without shareholder approval, the Fund
will invest its assets so that, under normal circumstances, at least
80% of its interest income is exempt from federal regular income tax
and South Carolina state income taxes or that at least 80% of its
total assets are invested in obligations, the interest income from
which is exempt from federal regular income tax and South Carolina
state income taxes ("South Carolina Municipal Securities").
The Funds' investment adviser may consider the potential for capital
appreciation in the selection of portfolio investments for each of THE WACHOVIA
MUNICIPAL FUNDS.
ACCEPTABLE INVESTMENTS
The Funds invest primarily in Georgia Municipal Securities, North
Carolina Municipal Securities, and South Carolina Municipal
Securities, respectively (collectively, "State Municipal Securities").
These securities are:
obligations, including industrial development bonds, issued on behalf
of the states of Georgia, North Carolina, and South Carolina,
respectively, and their respective political subdivisions or
agencies;
obligations issued by or on behalf of any state, territory or
possession of the United States, including the District of Columbia,
or any political subdivision or agency of any of these; and
participation interests, as described below, in any of the above
obligations, the interest from which is, in the opinion of bond
counsel for the issuers or in the opinion of officers of the Trust
and/or the investment adviser to the Funds, exempt from both federal
regular income tax and the personal income tax imposed by the states
of Georgia, North Carolina, and South Carolina, respectively. It is
likely that shareholders who are subject to alternative minimum tax
will be required to include interest from a portion of the municipal
securities owned by the Fund in calculating the federal individual
alternative minimum tax or the federal alternative minimum tax for
corporations.
STATE MUNICIPAL SECURITIES
State Municipal Securities are generally issued to finance public
works, such as airports, bridges, highways, housing, hospitals,
schools, streets, and water and sewer works. They are also issued to
repay outstanding obligations, to raise funds for general operating
expenses, and to make loans to other public institutions and
facilities. State Municipal Securities include industrial development
bonds issued by or on behalf of public authorities to provide
financing aid to acquire sites or construct or equip facilities for
privately or publicly owned corporations. The availability of this
financing encourages these corporations to locate within the
sponsoring communities and thereby increases local employment.
The two principal classifications of municipal securities are "general
obligation" and "revenue" bonds. General obligation bonds are secured
by the issuer's pledge of its full faith and credit and taxing power
for the payment of principal and interest. However, interest on and
principal of revenue bonds are payable only from the revenue generated
by the facility financed by the bond or other specified sources of
revenue.
Revenue bonds do not represent a pledge of credit or create any debt
of or charge against the general revenues of a municipality or public
authority. Industrial development bonds are typically classified as
revenue bonds; the industry which is the beneficiary of such bonds is
generally the only source of payment for the bonds.
Characteristics. State Municipal Securities are subject to one or more of the
following quality standards:
rated A or above by Moody's or S&P at time of purchase;
insured by a municipal bond insurance company which is rated AAA by S&P or Aaa
by Moody's;
secured by an irrevocable escrow of direct obligations of the U.S. government;
or
unrated if determined to be of comparable quality to one of the foregoing
rating categories by the Fund's investment adviser.
(A description of the rating categories is contained in the Appendix
to the Funds' Statement of Additional Information).
- ---------------------------------------------------------
- ---------------------------------------------------------
PORTFOLIO INVESTMENTS
AND STRATEGIES
INVESTMENT CONSIDERATIONS
Equity Investments. As with other mutual funds that invest in equity
securities, the EQUITY FUND, QUANTITATIVE EQUITY FUND, EQUITY INDEX
FUND, SPECIAL VALUES FUND and BALANCED FUND are subject to market
risks. That is, the possibility exists that common stocks will decline
over short or even extended periods of time. The United States equity
market tends to be cyclical, experiencing both periods when stock
prices generally increase and periods when stock prices generally
decrease.
Because the SPECIAL VALUES FUND invests primarily in small
capitalization stocks, there are some additional risk factors
associated with investments in the Fund. In particular, stocks in the
small capitalization sector of the United States equity market have
historically been more volatile in price than larger capitalization
stocks, such as those included in the S&P 500 Index. This is because,
among other things, small companies have less certain growth prospects
than larger companies; have a lower degree of liquidity in the equity
market; and tend to have a greater sensitivity to changing economic
conditions. Further, in addition to exhibiting greater volatility, the
stocks of small companies may, to some degree, fluctuate independently
of the stocks of large companies. That is, the stocks of small
companies may decline in price as the prices of large company stocks
rise or vice versa. Therefore, investors should expect that the Fund
will be more volatile than, and may fluctuate independently of, broad
stock market indices such as the S&P 500 Index.
Securities Of Foreign Issuers. THE EQUITY FUND, QUANTITATIVE EQUITY
FUND, SPECIAL VALUES FUND, EMERGING MARKETS FUND, and BALANCED FUND
may invest in the securities of foreign issuers. There may be certain
risks associated with investing in foreign securities. These include
risks of adverse political and economic developments (including
possible governmental seizure or nationalization of assets), the
possible imposition of exchange controls or other governmental
restrictions, less uniformity in accounting and reporting
requirements, and the possibility that there will be less information
on such securities and their issuers available to the public. In
addition, there are restrictions on foreign investments in other
jurisdictions and there tends to be difficulty in obtaining judgments
from abroad and affecting repatriation of capital invested abroad.
Delays could occur in settlement of foreign transactions, which could
adversely affect shareholder equity. Foreign securities may be subject
to foreign taxes, which reduce yield, and may be less marketable than
comparable United States securities. As a matter of practice, a Fund
will not invest in the securities of a foreign issuer if any risk
identified above appears to a Fund's investment adviser to be
substantial.
Securities In Emerging Markets. Investing in the EMERGING MARKETS FUND
entails a substantial degree of risk. Because of the special risks
associated with investing in emerging markets, an investment in the
EMERGING MARKETS FUND should be considered speculative. Investors are
strongly advised to carefully consider the special risks involved in
emerging markets, which are in addition to the usual risks of
investing in domestic markets and in developed markets around the
world. By itself, an investment in the EMERGING MARKETS FUND does not
constitute a balanced investment plan. Investors should be willing to
assume a higher degree of risk and accept a higher level of volatility
than is generally associated with investment in more developed
markets.
These risks include a possibility of expropriation, nationalization or
confiscatory taxation, taxation of income earned in foreign nations
(including, for example, withholding taxes on interest and dividends)
or other taxes imposed with respect to investments in foreign nations,
foreign exchange controls (which may include suspension of the ability
to transfer currency from a given country and repatriation of
investments), default in foreign government securities, political or
social instability or diplomatic developments which could adversely
affect investment in securities of issuers in foreign nations.
(Please refer to the Statement of Additional Information for an
expanded discussion of sovereign debt obligations.) In addition, there
is often less publicly available information about foreign issuers
than those in the United States. Emerging market companies are not
generally subject to uniform accounting, auditing and financial
reporting standards, and auditing practices and requirements may not
be comparable to those applicable to U.S. companies. Further, the
EMERGING MARKETS FUND may encounter difficulties or be unable to
pursue legal remedies and obtain judgments in foreign courts.
Because the EMERGING MARKETS FUND'S securities will generally be
denominated in foreign currencies, the value of such securities to the
Fund will be affected by changes in currency exchange rates and in
exchange control regulations, and costs will be incurred in connection
with conversion between currencies. A change in the value of a foreign
currency against the U.S. dollar will result in corresponding change
in the U.S. dollar value of the Fund's securities denominated in the
currency. Such changes will also affect the Fund's income and
distributions to shareholders. The Fund may be affected, either
favorably or unfavorably, by the fluctuations in the relative rates of
exchange between the currencies of different nations, and the Fund
therefore may engage in certain hedging strategies. Such strategies
involve certain investment risks and transaction costs to which the
Fund might not otherwise be subject. These risks include dependence on
the investment adviser's ability to predict movements in exchange
rates, and imperfect movements between exchange rates and currency
hedges.
Brokerage commissions, fees for custodial services, and other costs
relating to investments in emerging market countries are generally
greater than in the United States. Such markets have different
clearance and settlement procedures, and in certain markets, there
have been occasions when settlements have been unable to keep pace
with the volume of securities transactions, making it difficult to
effect certain transactions. The inability of the EMERGING MARKETS
FUND to make intended security purchases due to settlement problems
could cause the Fund to miss attractive investment opportunities.
Inability to sell a portfolio security due to settlement problems
could result in either losses to the Fund, if the value of the
portfolio security subsequently declines, or, if the Fund has entered
into a contract to sell the security, could result in possible claims
against the Fund.
In certain emerging market countries, there is less government
supervision and regulation of business and industry practices, stock
exchanges, brokers, and listed companies than in the United States.
The economies of emerging market countries may be predominantly based
on a few industries and may be highly vulnerable to change in local or
global trade conditions. The securities markets of many of the
countries in which the Fund may invest also may be smaller, less
liquid, and subject to greater price volatility than those in the
United States. Some emerging market countries also may have fixed or
managed currencies which are not free-floating against the U.S.
dollar. Further, certain emerging market country currencies may not be
internationally traded. Certain of these currencies have experienced a
steady devaluation relative to the U.S. dollar. Any devaluations in
the currencies in which the Fund's portfolio securities are
denominated may have an adverse impact on the Fund. Finally, many
emerging market countries have experienced substantial, and in some
periods, extremely high, rates of inflation for many years. Inflation
and rapid fluctuations in inflation rates have had, and may continue
to have, negative effects on the economies for individual emerging
market countries. Moreover, the economies of individual emerging
market countries may differ favorably or unfavorably from the U.S.
economy in such respects as the rate of growth of domestic product,
inflation, capital reinvestment, resource self-sufficiency and balance
of payments position.
Investments In Debt Obligations. The market value of debt obligations,
and therefore a Fund's net asset value, will fluctuate due to changes
in economic conditions and other market factors, such as interest
rates, which are beyond the control of the Fund's investment adviser.
In the debt market, prices generally move inversely to interest rates.
A decline in market interest rates results in a rise in the market
prices of outstanding debt obligations. Conversely, an increase in
market interest rates results in a decline in market prices. In either
case, the amount of change in market prices of debt obligations in
response to changes in market interest rates generally depends on the
maturity of the debt obligations. Although debt obligations with
longer maturities offer potentially greater returns, they will
generally experience the greatest market price changes. Consequently,
to the extent a Fund is significantly invested in debt obligations
with longer maturities, there is a greater possibility of fluctuation
in the Fund's net asset value. The Fund's investment adviser will
attempt to minimize the fluctuation of each Fund's net asset value by
predicting the direction of interest rates; however, the investment
adviser could be incorrect in its expectations about the direction and
the extent of these market factors.
Investments In Lower-Rated Debt Obligations. From time to time, a
portion of the EMERGING MARKETS FUND'S and the SPECIAL VALUES FUND'S
portfolios may consist of lower-rated debt obligations (i.e., rated
below BBB by S&P or Baa by Moody's) which are commonly referred to as
"junk bonds." The Funds will not invest more than 35% of its total
assets in such securities. Lower-rated securities will usually offer
higher yields than higher-rated securities. However, there is more
risk associated with these investments. These lower-rated bonds may be
more susceptible to real or perceived adverse economic conditions than
investment grade bonds. These lower-rated bonds are regarded as
predominantly speculative with regard to each issuer's continuing
ability to make principal and interest payments. In addition, the
secondary trading market for lower-rated bonds may be less liquid than
the market for investment grade bonds. Purchasers should carefully
assess the risks associated with an investment in the EMERGING MARKETS
FUND and the SPECIAL VALUES FUND.
Many corporate debt obligations, including many lower-rated bonds,
permit the issuers to call the security and thereby redeem their
obligations earlier than the stated maturity dates. Issuers are more
likely to call bonds during periods of declining interest rates. In
these cases, if the EMERGING MARKETS FUND owns a bond which is called,
the Fund will receive its return of principal earlier than expected
and would likely be required to reinvest the proceeds at lower
interest rates, thus reducing income to the Fund.
Municipal Security Investments. Yields on State Municipal Securities
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 the respective
state or its municipalities could impact a Fund's portfolio. A
municipal bond fund's concentration in securities issued by a specific
state and its political subdivisions provides a greater level of risk
than a fund which is diversified across numerous states and municipal
entities. A state's dependence on agriculture, manufacturing, tourism,
and service industries leaves it vulnerable to both the business cycle
and long term national economic trends.
(Please refer to the Funds' Statement of Additional Information for an
expanded discussion of Georgia, North Carolina, or South Carolina
investment risks, as appropriate.)
The ability of a Fund to achieve its investment objective also depends
on the continuing ability of the issuers of State Municipal Securities
and participation interests, or the guarantors of either, to meet
their obligations for the payment of interest and principal when due.
Investing in State Municipal Securities which meet the Fund's quality
standards may not be possible if the state or its municipalities do
not maintain their current credit ratings. In addition, the issuance,
tax exemption and liquidity of State Municipal Securities may be
adversely affected by judicial, legislative or executive action,
including, but not limited to, rulings of state and federal courts,
amendments to the state and federal constitutions, changes in
statutory law, and changes in administrative regulations, as well as
voter initiatives.
INVESTMENT PROCESSES
Quantitative Equity Fund. To select stocks for the QUANTITATIVE EQUITY
FUND, the Fund's sub-adviser initially identifies a broad universe of
approximately 900 common stocks. The sub-adviser utilizes four
criteria when determining what common stocks will be included in the
Fund's universe: each stock must be highly capitalized, each stock
must be traded on the New York or American Stock Exchange or in the
over-the-counter markets, each stock must be among the most liquid and
highly traded stocks on its respective exchange, and each stock must
be actively followed by a minimum of three industry analysts.
The Fund's sub-adviser then screens the stocks in the universe, using
a quantitative computer valuation model, to evaluate the relative
attractiveness of each stock. The sub-adviser's model focuses on two
measurement factors: the relative value of the stocks (including their
present and historical price-to-earnings and market price-to-book
value ratios, and the present value of each stock's projected dividend
income) and the stock's growth prospects and earnings momentum
(including changes, over time, in analysts' earning forecasts, and
positive or negative surprises in reported earnings). The Fund's
sub-adviser will vary the importance placed on each factor, depending
on market trends.
Using the valuation model described above, the Fund's investment
adviser then ranks each stock in the universe by decile. The stocks
are classified by industry group, based on industry categories and
weightings found in the S&P 500 Index. In managing the Fund, the
investment adviser continuously monitors the rankings of the stocks in
the universe and employs an active selling discipline, replacing less
attractive stocks (as determined by the valuation model) with more
attractive stocks to maintain a high average rank for the portfolio.
In maintaining the diversification of the portfolio, the investment
adviser gives consideration to the industry weightings found in the
Index.
Although the QUANTITATIVE EQUITY FUND intends to hold a broadly
diversified portfolio of common stocks that, in the aggregate, exhibit
investment characteristics similar to the stocks found in the Index,
the Fund will not limit its investments solely to stocks represented
in the Index. By investing in those common stocks that are included in
the universe described above (a large number of which are not included
in the Index), the Fund will seek to provide a higher rate of total
return than the Index. There can be no assurance that the Fund's
investment performance will match or exceed that of the Index.
Equity Index Fund. The EQUITY INDEX FUND is managed passively, in the
sense that the traditional management functions of economic,
financial, and market analysis are limited to the extent that the Fund
seeks to duplicate the composition of the S&P 500 Index. Furthermore,
a company's adverse financial circumstance will not require its
elimination from the Fund's portfolio, unless the company's stock is
removed from the Index by S&P. The Fund is managed by utilizing a
computer program that identifies which stocks should be purchased or
sold in order to approximate, as much as possible, the investment
return of the securities that comprise the Index. The Fund will select
a stock for purchase into its investment portfolio based on the
stock's inclusion and weighting in the Index, starting with the
heaviest-weighted stock. Thus, the proportion of Fund assets invested
in any one stock comprising the Index may not be identical to the
percentage the particular stock represents in the Index.
On occasion, so as to respond to changes in the Index's composition,
as well as corporate mergers, tender offers, and other circumstances,
additional adjustments will be made in the EQUITY INDEX FUND'S
portfolio. However, it is anticipated that these adjustments will
occur infrequently, and the costs will be minimized. As a result,
portfolio turnover is expected to be below that encountered in other
investment company portfolios. Therefore, the accompanying costs,
including accounting costs, brokerage fees, custodial expenses, and
transfer taxes, are expected to be relatively low. While the cash
flows into and out of the Fund will impact the Fund's portfolio
turnover rate and the Fund's ability to duplicate the composition of
the Index and approximate its performance, investment adjustments will
be made, as practicably as possible, to account for these
circumstances.
Since the EQUITY INDEX FUND will seek to duplicate the Index's stock
composition precisely, it is anticipated that the Fund's performance
will approximate the performance of the Index. Factors such as the
size of the Fund's portfolio, the size and timing of cash flows into
and out of the Fund, changes in the securities markets and the Index
itself, and the normal costs of a mutual fund, discussed herein, will
account for the difference between the performances of the Fund and
the Index.
In order to accommodate cash flows and maintain adequate liquidity to
meet redemption requests, the Fund may enter into stock index futures
contracts, options, options on futures contracts, and index
participation interests. This will allow the Fund to simultaneously
maximize the level of the Fund assets that are tracking the
performance of the S&P 500 Index. The Fund can sell futures contracts
and options in order to close out a previously established position.
The Fund will not enter into any stock index futures contract for the
purpose of speculation.
S&P 500 Index. The S&P 500 Index consists of 500 selected common
stocks, most of which are listed on the New York Stock Exchange.
S&P designates the stocks to be included in the Index on a
statistical basis. A particular stock's weighting in the Index is
based on its relative total market value; that is, its market
price per share times the number of shares outstanding. From time
to time, S&P may add or delete stocks from the Index. THE
QUANTITATIVE EQUITY and EQUITY INDEX FUNDS utilize the Index as
the standard performance benchmark because it represents
approximately 70% of the total market value of all common stocks.
In addition, it is familiar to investors, and is recognized as a
barometer of common stock investment returns.
The Index is an unmanaged, statistical measure of stock market
performance. As such, it does not reflect the actual cost of
investing in common stocks. By contrast, the QUANTITATIVE EQUITY
and EQUITY INDEX FUNDS incur the normal costs of a mutual fund,
including brokerage and execution costs, advisory fees, and
administrative and custodial costs and expenses. S&P selects the
common stocks to be included in the Index solely on a statistical
basis. Inclusion of a particular security in the Index in no way
implies an opinion by S&P as to the stock's appropriateness as an
investment. The Funds are not sponsored, endorsed, sold or
promoted by, or affiliated with, S&P.
Emerging Markets Fund. The investment adviser will consider the
following securities as permissable investments for the EMERGING
MARKETS FUND: (i) securities of companies the principal securities
trading market for which is an emerging market country; (ii)
securities, traded in any market, of companies or issuers that derive
50% or more of their total revenue from either goods or services
produced in such emerging market countries or sales made in such
emerging market countries; or (iii) securities of companies organized
under the laws of, and with a principal office in, an emerging market
country. In selecting equity securities for the EMERGING MARKETS FUND,
the investment adviser focuses on a broad diversification of emerging
market countries. Initially, the adviser identifies those emerging
market countries that, in the investment adviser's judgment, have
made, or are currently making, progress toward improving their
economies and market environments through financial and/or political
reform, and which are likely to produce premium returns. Second, the
investment adviser then uses a disciplined allocation process to
classify the emerging market countries that it has identified into one
of two categories (or "Tiers"). The first, Tier 1, is comprised of the
most established and liquid of emerging market countries. The second,
Tier 2, represents those emerging market countries which are less
established, smaller, and less liquid than those in Tier 1. Examples
of countries classified in Tier 1 are Argentina, Brazil, Mexico and
Thailand; examples of countries which are classified in Tier 2 include
Colombia, the Philippines, Greece, Peru and Portugal.
In constructing the EMERGING MARKETS FUND'S investment portfolio, the
investment adviser normally gives the Tier 1 emerging market countries
a greater weighting than is afforded to the Tier 2 emerging market
countries. Within each Tier, each emerging market country is equally
weighted and then its weight is adjusted to reflect the investment
adviser's investment judgments regarding the particular country. The
investment adviser will consider economic factors, political
conditions and currency and market valuation levels, in deciding upon
which emerging market countries to include in the portfolio and how
those countries should be classified and weighted.
The number of emerging market countries represented in the EMERGING
MARKETS FUND'S portfolio will vary over time. It is the investment
adviser's intention that the Fund remain broadly diversified across
many emerging market countries, companies, and geographic regions.
Under normal market conditions, the investment adviser expects to
invest in the securities of issuers located in a minimum of six
different emerging market countries, with up to 25% of the Fund's
total assets invested in any one country.
In selecting securities in each emerging market country for purchase
by the EMERGING MARKETS FUND, the investment adviser will focus on the
most prominent and largest capitalized companies. The investment
adviser will seek to construct the Fund's investment portfolio in a
manner that maintains adequate liquidity for trading purposes, and
will attempt to utilize the low historical correlation of returns
among emerging market countries to moderate the portfolio's
volatility, wherever feasible.
Fixed Income Funds. The FIXED INCOME FUND'S and the SHORT-TERM FIXED
INCOME FUND'S investment adviser does not select securities purely to
maximize the current yield of the Funds. The Funds' investment adviser
attempts to manage the Funds' total performance, which includes both
changes in principal value of the Funds' portfolios and interest
income earned, to anticipate the opportunities and risks of changes in
market interest rates. When the Funds' investment adviser expects that
market interest rates may decline, which would cause prices of
outstanding debt obligations to rise, it generally extends the average
maturity of the Funds' portfolios. When, in the investment adviser's
judgment, market interest rates may rise, which would cause market
prices of outstanding debt obligations to decline, it generally
shortens the average maturity of the Funds' portfolios. Further, the
Funds' investment adviser attempts to improve the Funds' total return
by weighing the relative value of fixed income securities issues
having similar maturities in selecting portfolio securities. By
actively managing the Funds' portfolios in this manner, the Funds'
investment adviser seeks to provide capital appreciation during
periods of falling interest rates and protection against capital
depreciation during periods of rising rates.
PORTFOLIO INVESTMENTS
Corporate Debt Obligations. The Funds (except the EQUITY INDEX FUND
and THE WACHOVIA MUNICIPAL FUNDS) may invest in corporate debt
obligations, including corporate bonds, notes, and debentures, which
may have floating or fixed rates of interest. These obligations have
the requisite ratings as described above. However, if a security loses
its rating or has its rating reduced, the Fund is not required to drop
the security from its portfolio, but may consider doing so.
Fixed Rate Corporate Debt Obligations. The Funds may invest in fixed
rate corporate securities, including fixed rate securities with
short-term characteristics. Fixed rate securities with short-term
characteristics are long-term debt obligations but are treated in the
market as having short maturities because call features of the
securities may make them callable within a short period of time. A
fixed rate security with short-term characteristics would include a
fixed income security priced close to call or redemption price or a
fixed income security approaching maturity, where the expectation of
call or redemption is high.
Fixed rate securities tend to exhibit more price volatility during
times of rising or falling interest rates than securities with
floating rates of interest. This is because floating rate securities,
as described below, behave like short-term instruments in that the
rate of interest they pay is subject to periodic adjustments based on
a designated interest rate index. Fixed rate securities pay a fixed
rate of interest and are more sensitive to fluctuating interest rates.
In periods of rising interest rates the value of a fixed rate security
is likely to fall. Fixed rate securities with short-term
characteristics are not subject to the same price volatility as fixed
rate securities without such characteristics. Therefore, they behave
more like floating rate securities with respect to price volatility.
Floating Rate Corporate Debt Obligations. The Funds (except the EQUITY
INDEX FUND and THE WACHOVIA MUNICIPAL FUNDS) may invest in floating
rate corporate debt obligations, including increasing rate securities.
Floating rate securities are generally offered at an initial interest
rate which is at or above prevailing market rates. The interest rate
paid on these securities is then reset periodically (commonly every 90
days) to an increment over some predetermined interest rate index.
Commonly utilized indices include the three-month Treasury bill rate,
the 180-day Treasury bill rate, the one-month or three-month London
Interbank Offered Rate (LIBOR), the prime rate of a bank, the
commercial paper rates, or the longer-term rates on U.S. Treasury
securities. An example of floating and fixed rate corporate debt
obligations in which a Fund can invest include Yankee bonds, which are
U.S. dollar-denominated bonds issued in the United States by foreign
banks or corporations.
Some of the floating rate corporate debt obligations in which the
FIXED INCOME FUND may invest include floating rate corporate debt
securities issued by savings associations collateralized by adjustable
rate mortgage loans, also known as collateralized thrift notes. Many
of these collateralized thrift notes have received AAA ratings from
NRSROs. Collateralized thrift notes differ from traditional
"pass-through" certificates in which payments made are linked to
monthly payments made by individual borrowers net of any fees paid to
the issuer or guarantor of such securities.
Convertible Securities. The Funds (except THE WACHOVIA MUNICIPAL
FUNDS) may invest in convertible securities. Convertible securities
are fixed income securities which may be exchanged or converted into a
predetermined number of the issuer's underlying common stock at the
option of the holder during a specified time period. Convertible
securities may take the form of convertible bonds, convertible
preferred stock or debentures, units consisting of "usable" bonds and
warrants or a combination of the features of several of these
securities. The investment characteristics of each convertible
security vary widely, which allows convertible securities to be
employed for different investment objectives.
Convertible bonds and convertible preferred stocks are fixed income
securities that generally retain the investment characteristics of
fixed income securities until they have been converted but also react
to movements in the underlying equity securities. The holder is
entitled to receive the fixed income of a bond or the dividend
preference of a preferred stock until the holder elects to exercise
the conversion privilege. Usable bonds are corporate bonds that can be
used in whole or in part, customarily at full face value, in lieu of
cash to purchase the issuer's common stock. When owned as part of a
unit along with warrants, which entitle the holder to buy the common
stock, they function as convertible bonds, except that the warrants
generally will expire before the bonds' maturity. Convertible
securities are senior to equity securities, and therefore have a claim
to assets of the corporation prior to the holders of common stock in
the case of liquidation. However, convertible securities are generally
subordinated to similar non-convertible securities of the same
company. The interest income and dividends from convertible bonds and
preferred stocks provide a stable stream of income with generally
higher yields than common stocks, but lower than non-convertible
securities of similar quality. A Fund will exchange or convert the
convertible securities held in its portfolio into shares of the
underlying common stocks when, in the Fund's investment adviser's
opinion, the investment characteristics of the underlying common
shares will assist a Fund in achieving its investment objective.
Otherwise, a Fund will hold or trade the convertible securities. In
selecting convertible securities for a Fund, the Fund's investment
adviser evaluates the investment characteristics of the convertible
security as a fixed income instrument, and the investment potential of
the underlying equity security for capital appreciation. In evaluating
these matters with respect to a particular convertible security, the
Fund's investment adviser considers numerous factors, including the
economic and political outlook, the value of the security relative to
other investment alternatives, trends in the determinants of the
issuer's profits, and the issuer's management capability and
practices.
Put And Call Options. The Funds (except THE WACHOVIA MUNICIPAL FUNDS)
may purchase put options on their portfolio securities. These options
will be used only as a hedge to attempt to protect securities which a
Fund holds against decreases in value. A Fund may purchase these put
options as long as they are listed on a recognized options exchange
and the underlying stocks are held in its portfolio. A Fund may also
write call options on securities either held in its portfolio or which
it has the right to obtain without payment of further consideration or
for which it has segregated cash in the amount of any additional
consideration. The call options which a Fund writes and sells must be
listed on a recognized options exchange. The writing of calls by a
Fund is intended to generate income for a Fund and thereby protect
against price movements in particular securities in a Fund's
portfolio.
Prior to exercise or expiration, an option position can only be
terminated by entering into a closing purchase or sale transaction.
This requires a secondary market on an exchange which may or may not
exist for any particular call or put option at any specific time. The
absence of a liquid secondary market also may limit the Fund's ability
to dispose of the securities underlying an option. The inability to
close options also could have an adverse impact on the Fund's ability
to effectively hedge its portfolio. These instruments may not be
available with regard to the securities of certain emerging markets in
which the EMERGING MARKETS FUND may invest.
The effective use of futures and options as hedging techniques depends
on the correlation between their prices and the behavior of a Fund's
portfolio securities as well as the investment adviser's ability to
accurately predict the direction of stock prices, interest rates and
other relevant economic factors. In addition, daily limits on the
fluctuation of futures and options prices could cause a Fund to be
unable to timely liquidate its futures or options position and cause
it to suffer greater losses than would otherwise be the case. In this
regard, a Fund may be unable to anticipate the extent of its losses
from futures transactions. These instruments may not be available with
regard to the securities of certain emerging markets in which the
EMERGING MARKETS FUND may invest.
Stock Index Futures And Options. The EQUITY FUND, QUANTITATIVE EQUITY
FUND, EQUITY INDEX FUND, SPECIAL VALUES FUND, EMERGING MARKETS FUND,
and BALANCED FUND may utilize stock index futures contracts, options,
and options on futures contracts, subject to the limitation that the
value of these futures contracts and options will not exceed 20% of a
Fund's total assets. Also, a Fund will not purchase options to the
extent that more than 5% of the value of a Fund's total assets would
be invested in premiums on open put option positions (and, in the case
of the SPECIAL VALUES FUND and EMERGING MARKETS FUND, margin deposits
on open positions). These futures contracts and options will be used
to handle cash flows into and out of a Fund and to potentially reduce
transactional costs, since transactional costs associated with futures
and options contracts can be lower than costs stemming from direct
investment in stocks. The Funds will not enter into these transactions
for speculative purposes.
There are several risks accompanying the utilization of futures
contracts to effectively anticipate market movements. First, positions
in futures contracts may be closed only on an exchange or board of
trade that furnishes a secondary market for such contracts. While the
Funds plan to utilize futures contracts only if there exists an active
market for such contracts, there is no guarantee that a liquid market
will exist for the contracts at a specified time. Furthermore,
because, by definition, futures contracts look to projected price
levels in the future, and not to current levels of valuation, market
circumstances may result in there being a discrepancy between the
price of the stock index future and the movement in the corresponding
stock index. The absence of a perfect price correlation between the
futures contract and its underlying stock index could stem from
investors choosing to close futures contracts by offsetting
transactions rather than satisfying additional margin requirements.
This could result in a distortion of the relationship between the
index and the futures market. In addition, because the futures market
imposes less burdensome margin requirements than the securities
market, an increased amount of participation by speculators in the
futures market could result in price fluctuations.
Forward Foreign Currency Exchange Contracts. The EMERGING MARKETS FUND
may enter into forward foreign currency exchange contracts. A forward
foreign currency exchange contract ("forward contract") is an
obligation to purchase or sell an amount of a particular currency at a
specific price and on a future date agreed upon by the parties.
Generally, no commission charges or deposits are involved. At the time
the Fund enters into a forward contract, Fund assets with a value
equal to the Fund's obligation under the forward contract are
segregated on the Fund's records and are maintained until the forward
contract has been settled. The Fund will not enter into a forward
contract with a term of more than one year. The Fund will generally
enter into a forward contract to provide the proper currency to settle
a securities transaction at the time the transaction occurs ("trade
date"). The period between the trade date and settlement date will
vary between 24 hours and 30 days, depending upon local custom.
The EMERGING MARKETS FUND may also protect against the decline of a
particular foreign currency by entering into a forward contract to
sell an amount of that currency approximating the value of all or a
portion of the Fund's assets denominated in that currency ("hedging").
The success of this type of short-term hedging strategy is highly
uncertain due to the difficulties of predicting short-term currency
market movements and of precisely matching forward contract amounts
and the constantly changing value of the securities involved. Although
the investment adviser will consider the likelihood of changes in
currency values when making investment decisions, the investment
adviser believes that it is important to be able to enter into forward
contracts when it believes the interest of the Fund will be served.
The Fund will only enter into forward contracts for hedging purposes
and will not enter into forward contracts in a particular currency in
an amount in excess of the Fund's assets denominated in that currency.
No more than 30% of the Fund's assets will be committed to forward
contracts at any time. (This restriction does not include forward
contracts entered into to settle securities transactions.)
Index Participation Contracts. The EQUITY INDEX FUND may participate
in the purchasing and selling of index participation contracts based
on the S&P 500 Index. The Fund will utilize index participation
contracts to aid in the management of cash flows into and out of the
Fund and not for speculative purposes. These contracts provide the
equivalent of a position in the stocks of the Index, where each stock
is represented in the same proportion as it is represented in the
Index. Unlike futures contracts, positions in these instruments may
last indefinitely, with no expiration date and will pay dividends
implied by the underlying stocks in the Index. Generally, the value of
an Index participation contract will rise and fall as the value of the
Index rises and falls. Index participation contracts have lower
transaction costs than those associated with the purchase and sale of
individual stocks. The Fund will invest in index participation
contracts only if there exists an active market for such contracts.
The value of these contracts, together with the value of the EQUITY
INDEX FUND'S investment in stock index futures contracts, options and
options on futures contracts will not exceed 20% of the Fund's total
assets. The Fund's use of these investments will be to accommodate
cash flows and maintain adequate liquidity to meet redemption
requests, while simultaneously maximizing the level of Fund assets
which are tracking the performance of the S&P 500 Index.
Mortgage-Backed Securities. The EMERGING MARKETS FUND, BALANCED FUND,
FIXED INCOME FUND, and SHORT-TERM FIXED INCOME FUND may invest in
mortgage-backed securities. Mortgage-backed securities are securities
that directly or indirectly represent a participation in, or are
secured by and payable from, mortgage loans on real property. There
are currently three basic types of mortgage-backed securities: (i)
those issued or guaranteed by the U.S. government or one of its
agencies or instrumentalities, such as the Government National
Mortgage Association ("Ginnie Mae"), Fannie Mae and the Federal Home
Loan Mortgage Corporation ("Freddie Mac"); (ii) those issued by
private issuers that represent an interest in or are collateralized by
mortgage-backed securities issued or guaranteed by the U.S. government
or one of its agencies or instrumentalities; and (iii) those issued by
private issuers that represent an interest in or are collateralized by
whole loans or mortgage-backed securities without a government
guarantee but usually having some form of private credit enhancement.
Adjustable Rate Mortgage Securities. Adjustable rate mortgage
securities ("ARMS") are pass-through mortgage securities representing
interests in adjustable rather than fixed interest rate mortgages. The
ARMS in which a Fund invests are issued by Ginnie Mae, Fannie Mae or
Freddie Mac, and are actively traded. The underlying mortgages which
collateralize ARMS issued by Ginnie Mae are fully guaranteed by the
Federal Housing Administration or Veterans Administration, while those
collateralizing ARMS issued by Fannie Mae or Freddie Mac are typically
conventional residential mortgages conforming to strict underwriting
size and maturity constraints.
Collateralized Mortgage Obligations. Collateralized mortgage
obligations ("CMOs") are debt obligations collateralized by mortgage
loans or mortgage pass-through securities. Typically, CMOs are
collateralized by Ginnie Mae, Fannie Mae or Freddie Mac Certificates,
but may be collateralized by whole loans or private pass-through
securities.
A Fund will only invest in CMOs which are rated AAA by an NRSRO or are
of comparable quality as determined by a Fund's investment adviser,
and which may be: (a) collateralized by pools of mortgages in which
each mortgage is guaranteed as to payment of principal and interest by
an agency or instrumentality of the U.S. government; (b)
collateralized by pools of mortgages in which payment of principal and
interest is guaranteed by the issuer and such guarantee is
collateralized by U.S. government securities; or (c) collateralized by
pools of mortgages without a government guarantee as to payment of
principal and interest, but which have some form of credit
enhancement.
Real Estate Mortgage Investment Conduits. Real estate mortgage
investment conduits ("REMICs") are offerings of multiple class real
estate mortgage-backed securities which qualify and elect treatment as
such under provisions of the Internal Revenue Code. Issuers of REMICs
may take several forms, such as trusts, partnerships, corporations,
associations, or segregated pools of mortgages. Once REMIC status is
elected and obtained, the entity is not subject to federal income
taxation. Instead, income is passed through the entity and is taxed to
the person or persons who hold interests in the REMIC. A REMIC
interest must consist of one or more classes of "regular interests."
To qualify as a REMIC, substantially all the assets of the entity must
be in assets directly or indirectly secured principally by real
property.
Stripped Mortgage-Backed Securities. Some of the mortgage-related
securities purchased by the BALANCED FUND, FIXED INCOME FUND, and
SHORT-TERM FIXED INCOME FUND may represent an interest solely in the
principal repayments or solely in the interest payments on
mortgage-backed securities (stripped mortgage-backed securities or
"SMBSs"). SMBSs are derivative multi-class securities. SMBSs are
usually structured with two classes and receive different proportions
of the interest and principal distributions on the pool of underlying
mortgage-backed securities. Due to the possibility of prepayments on
the underlying mortgages, SMBSs may be more interest-rate sensitive
than other securities purchased by a Fund. If prevailing interest
rates fall below the level at which SMBSs were issued, there may be
substantial prepayments on the underlying mortgages, leading to the
relatively early prepayments of principal-only SMBSs (principal-only
or "PO" class) and a reduction in the amount of payments made to
holders of interest-only SMBSs (the interest-only or "IO" class).
Therefore, interest-only SMBSs generally increase in value as interest
rates rise and decrease in value as interest rates fall, counter to
changes in value experienced by most fixed income securities. If the
underlying mortgages experience slower than anticipated prepayments of
principal, the yield on a PO class will be affected more severely than
would be the case with a traditional mortgage-related security.
Because the yield to maturity of an IO class is extremely sensitive to
the rate of principal payments (including prepayments) on the related
underlying mortgage-backed securities, it is possible that the Fund
might not recover its original investment on interest-only SMBSs if
there are substantial prepayments on the underlying mortgages. A
Fund's inability to fully recoup its investment in these securities as
a result if a rapid rate of principal prepayments may occur even if
the securities are rated AAA by an NRSRO. In view of these
considerations, the investment adviser intends to use these
characteristics of interest-only SMBSs to reduce the effects of
interest rate changes on the value of the Fund's portfolio, while
continuing to pursue current income.
Asset-Backed Securities. The BALANCED FUND, FIXED INCOME FUND, and
SHORT-TERM FIXED INCOME FUND may invest in asset-backed securities.
Asset-backed securities have structural characteristics similar to
mortgage-backed securities but have underlying assets that are not
mortgage loans or interests in mortgage loans. A Fund may invest in
asset-backed securities rated A or higher at the time of purchase by
an NRSRO including, but not limited to, interests in pools of
receivables, such as motor vehicle installment purchase obligations
and credit card receivables. These securities may be in the form of
pass-through instruments or asset-backed bonds. The securities are
issued by non-governmental entities and carry no direct or indirect
government guarantee.
Mortgage-backed and asset-backed securities generally pay back
principal and interest over the life of the security. At the time a
Fund reinvests the payments and any unscheduled prepayments of
principal received, a Fund may receive a rate of interest which is
actually lower than the rate of interest paid on these securities
("prepayment risks"). Mortgage-backed and asset-backed securities are
subject to higher prepayment risks than most other types of debt
instruments with prepayment risks because the underlying mortgage
loans or the collateral supporting asset-backed securities may be
prepaid without penalty or premium. Prepayment risks on
mortgage-backed securities tend to increase during periods of
declining mortgage interest rates because many borrowers refinance
their mortgages to take advantage of the more favorable rates.
Prepayments on mortgage-backed securities are also affected by other
factors, such as the frequency with which people sell their homes or
elect to make unscheduled payments on their mortgages. Although
asset-backed securities generally are less likely to experience
substantial prepayments than are mortgage-backed securities, certain
of the factors that affect the rate of prepayments on mortgage-backed
securities also affect the rate of prepayments on asset-backed
securities.
Asset-backed securities present certain risks that are not presented
by mortgage-backed securities. Primarily, these securities do not have
the benefit of the same security interest in the related collateral.
Credit card receivables are generally unsecured and the debtors are
entitled to the protection of a number of state and federal consumer
credit laws, many of which give such debtors the right to set off
certain amounts owed on the credit cards, thereby reducing the balance
due. Most issuers of asset-backed securities backed by motor vehicle
installment purchase obligations permit the servicer of such
receivables to retain possession of the underlying obligations. If the
servicer sells these obligations to another party, there is a risk
that the purchaser would acquire an interest superior to that of the
holders of the related asset-backed securities. Further, if a vehicle
is registered in one state and is then reregistered because the owner
and obligor moves to another state, such reregistration could defeat
the original security interest in the vehicle in certain cases. In
addition, because of the large number of vehicles involved in a
typical issuance and technical requirements under state laws, the
trustee for the holders of asset-backed securities backed by
automobile receivables may not have a proper security interest in all
of the obligations backing such receivables. Therefore, there is the
possibility that recoveries on repossessed collateral may not, in some
cases, be available to support payments on these securities.
U.S. Government Obligations. The U.S. government obligations in which the Funds
invest are either issued or guaranteed by the U.S. government, its agencies, or
instrumentalities. These securities include, but are not limited to:
direct obligations of the U.S. Treasury, such as U.S. Treasury bills, notes,
and bonds;
and notes, bonds and discount notes of U.S. government agencies or
instrumentalities, such as: the Farm Credit System, including the National Bank
for Cooperatives and Banks for Cooperatives;
Federal Home Loan Banks; Federal Home Loan Mortgage Corporation; Fannie Mae;
Government National Mortgage Association; and
Student Loan Marketing Association.
Some of these obligations, such as Government National Mortgage Association
mortgage-backed securities, are backed by the full faith and credit of the U.S.
Treasury. No assurances can be given that the U.S. government will provide
financial support to other agencies or instrumentalities, since it is not
obligated to do so. These agencies and instrumentalities are supported by:
the issuer's right to borrow an amount limited to a specific line of credit
from the U.S. Treasury;
the discretionary authority of the U.S. government to purchase certain
obligations of an agency or instrumentality; or
the credit of the agency or instrumentality.
Some of the short-term U.S. government securities the Funds may
purchase carry variable interest rates. These securities have a rate
of interest subject to adjustment at least annually. This adjusted
rate is ordinarily tied to some objective standard, such as the 91-day
U.S. Treasury bill rate.
Demand Master Notes. The Funds (except THE WACHOVIA MUNICIPAL FUNDS)
may invest in variable amount demand master notes. Demand master notes
are short-term borrowing arrangements between a corporation or
government agency and an institutional lender (such as a Fund) payable
upon demand by either party. The notice period for demand typically
ranges from one to seven days, and the party may demand full or
partial payment. Many demand master notes give a Fund the option of
increasing or decreasing the principal amount of the master note on a
daily or weekly basis within certain limits. Demand master notes
usually provide for floating or variable rates of interest.
Temporary Investments. For temporary defensive purposes (up to 100% of
total assets) and to maintain liquidity (up to 35% of total assets),
the EQUITY FUND, QUANTITATIVE EQUITY FUND, SPECIAL VALUES FUND, and
EMERGING MARKETS FUND may invest in:
certificates of deposit, demand and time deposits, savings shares,
bankers' acceptances, and other instruments of domestic and foreign
banks and savings and loans, which institutions have capital,
surplus, and undivided profits over $100 million, or if the principal
amount of the instrument is insured in full by the Bank Insurance
Fund ("BIF"), or by the Savings Association Insurance Fund ("SAIF"),
both of which are administered by the FDIC; and commercial paper
(including Canadian Commercial Paper and Europaper) rated A-1 or
better by S&P or Prime-1 by Moody's, or, if unrated, of comparable
quality as determined by the Funds' investment adviser.
THE WACHOVIA MUNICIPAL FUNDS may invest in short-term tax-exempt or
taxable temporary investments. These temporary investments include:
notes issued by or on behalf of municipal or corporate issuers;
obligations issued or guaranteed by the U.S. government, its agencies,
or instrumentalities; other debt securities; commercial paper;
certificates of deposit of banks; shares of other investment
companies; and repurchase agreements (arrangements in which the
organization selling the Fund a bond or temporary investment agrees at
the time of sale to repurchase it at a mutually agreed upon time and
price).
There are no rating requirements applicable to temporary investments.
However, each Fund's investment adviser will limit temporary
investments to those it considers to be of comparable quality to the
Fund's acceptable investments.
Although the Funds are permitted to make taxable, temporary
investments, there is no current intention of generating income
subject to federal regular income tax. However, it is anticipated that
certain temporary investments will generate income which is subject to
Georgia or North Carolina state income taxes.
Restricted And Illiquid Securities. Each Fund may invest in restricted
securities. Restricted securities are any securities in which a Fund
may otherwise invest pursuant to its investment objective and policies
but which are subject to restriction on resale under federal
securities law. However, a Fund will limit investments in illiquid
securities, including certain restricted securities not determined by
the Trustees to be liquid, non-negotiable time deposits,
over-the-counter options, and repurchase agreements providing for
settlement in more than seven days after notice, to 15% of its net
assets.
The restriction is not applicable to commercial paper issued under
Section 4(2) of the Securities Act of 1933. Section 4(2) commercial
paper is restricted as to disposition under federal securities law,
and is generally sold to institutional investors, such as the Funds,
who agree that they are purchasing the paper for investment purposes
and not with a view to public distribution. Any resale by the
purchaser must be in an exempt transaction. Section 4(2) commercial
paper is normally resold to other institutional investors like a Fund
through or with the assistance of the issuer or investment dealers who
make a market in Section 4(2) commercial paper, thus providing
liquidity. Each Fund believes that Section 4(2) commercial paper and
possibly certain other restricted securities which meet the criteria
for liquidity established by the Trustees are quite liquid. Each Fund
intends, therefore, to treat the restricted securities which meet the
criteria for liquidity established by the Trustees, including Section
4(2) commercial paper, as determined by a Fund's investment adviser,
as liquid and not subject to the investment limitations applicable to
illiquid securities. In addition, because Section 4(2) commercial
paper is liquid, a Fund intends not to subject such paper to the
limitation applicable to restricted securities.
Repurchase Agreements. The U.S. government securities in which each
Fund invests may be purchased pursuant to repurchase agreements.
Repurchase agreements are arrangements in which banks, broker/dealers
and other recognized financial institutions sell U.S. government
securities or other securities to the Fund and agree at the time of
sale to repurchase them at a mutually agreed upon time and price. To
the extent that the original seller does not repurchase the securities
from a Fund, a Fund could receive less than the repurchase price on
any sale of such securities.
Demand Features. The Funds may acquire securities that are subject to
puts and standby commitments ("demand features") to purchase the
securities at their principal amount (usually with accrued interest)
within a fixed period (usually seven days) following a demand by a
Fund. The demand feature may be issued by the issuer of the underlying
securities, a dealer in the securities or by another third party, and
may not be transferred separately from the underlying security. A Fund
uses these arrangements to provide a Fund with liquidity and not to
protect against changes in the market value of the underlying
securities. The bankruptcy, receivership or default by the issuer of
the demand feature, or a default on the underlying security or other
event that terminates the demand feature before its exercise, will
adversely affect the liquidity of the underlying security. Demand
features that are exercisable even after a payment default on the
underlying security may be treated as a form of credit enhancement.
When-Issued And Delayed Delivery Transactions. The Funds may purchase
securities on a when-issued or delayed delivery basis. These
transactions are arrangements in which a Fund purchases securities
with payment and delivery scheduled for a future time. The seller's
failure to complete these transactions may cause a Fund to miss a
price or yield considered to be advantageous. Settlement dates may be
a month or more after entering into these transactions, and the market
values of the securities purchased may vary from the purchase prices.
Accordingly, a Fund may pay more or less than the market value of the
securities on the settlement date.
A Fund may dispose of a commitment prior to settlement if the Fund's
investment adviser deems it appropriate to do so. In addition, a Fund
may enter into transactions to sell its purchase commitments to third
parties at current market values and simultaneously acquire other
commitments to purchase similar securities at later dates. A Fund may
realize short-term profits or losses upon the sale of such
commitments.
Lending Of Portfolio Securities. In order to generate additional
income, each Fund may lend portfolio securities on a short-term or
long-term basis, or both, to broker/dealers, banks or other
institutional borrowers of securities. The Funds will only enter into
loan arrangements with broker/dealers, banks or other institutions
which a Fund's investment adviser has determined are creditworthy
under guidelines established by the Trustees and in which a Fund will
receive collateral equal to at least 100% of the value of the
securities loaned. There is the risk that when lending portfolio
securities, the securities may not be available to a Fund on a timely
basis and a Fund may, therefore, lose the opportunity to sell the
securities at a desirable price. In addition, in the event that a
borrower of securities would file for bankruptcy or become insolvent,
disposition of the securities may be delayed pending court action.
Investing In Securities Of Other Investment Companies. A Fund may
invest in the securities of other investment companies. Unless
otherwise permitted by action of the SEC, a Fund may not own more than
3% of the total outstanding voting stock of any investment company,
invest more than 5% of its total assets in any one investment company,
or invest more than 10% of its total assets in investment companies in
general. A Fund will invest in other open-end investment companies
primarily for the purpose of investing short-term cash which has not
yet been invested in other portfolio instruments. It should be noted
that investment companies incur certain expenses, such as advisory,
custodian and transfer agent fees, and therefore, any investment by a
Fund in shares of another investment company would be subject to such
duplicate expenses.
Ratings. If a security loses its rating or has its rating reduced
after a Fund purchased it, the Fund is not required to sell or
otherwise dispose of the security, but may consider doing so. If
ratings made by Moody's or S&P change because of changes in those
organizations or in their ratings systems, a Fund will attempt to
identify other rating organizations and systems with comparable
standards, in accordance with the investment policies of the Fund. A
description of rating categories is contained in the Appendix to the
Statement of Additional Information.
Municipal Leases. THE WACHOVIA MUNICIPAL FUNDS may invest in municipal leases.
Municipal leases are obligations issued by state and local governments or
authorities to finance the acquisition of equipment and facilities and may be
considered to be illiquid.
Participation Interests. The Funds may purchase participation
interests from financial institutions such as commercial banks,
savings and loan associations, and insurance companies. These
participation interests would give the Funds undivided interests in
State Municipal Securities. The financial institutions from which a
Fund purchases participation interests frequently provide or secure
irrevocable letters of credit or guarantees to assure that the
participation interests are of high quality. The Trustees will
establish guidelines pursuant to which a Fund's investment adviser
determines that participation interests meet the prescribed quality
standards for the Fund.
Variable Rate Municipal Securities. Some of the State Municipal
Securities which the Funds purchase may have variable interest rates.
Variable interest rates are ordinarily based on a published interest
rate, interest rate index or a similar standard, such as the 91-day
U.S. Treasury bill rate. Many variable rate municipal securities are
subject to payment of principal on demand by a Fund, usually in not
more than seven days. All variable rate municipal securities will meet
the quality standards for a Fund. The Fund's investment adviser
monitors the pricing, quality, and liquidity of the variable rate
municipal securities, including participation interests held by a
Fund, on the basis of published financial information and reports of
the rating agencies and other analytical services pursuant to
guidelines established by the Trustees.
MUNICIPAL BOND INSURANCE
The GEORGIA MUNICIPAL BOND FUND, NORTH CAROLINA MUNICIPAL BOND FUND,
and SOUTH CAROLINA MUNICIPAL BOND FUND may purchase municipal
securities covered by insurance which guarantees the timely payment of
principal at maturity and interest on such securities. These insured
municipal securities are either (1) covered by an insurance policy
applicable to a particular security, whether obtained by the issuer of
the security or by a third party ("Issuer-Obtained Insurance") or (2)
insured under master insurance policies issued by municipal bond
insurers, which may be purchased by a Fund (the "Policy" or
"Policies").
THE WACHOVIA MUNICIPAL FUNDS will require or obtain municipal bond
insurance when purchasing municipal securities which would not
otherwise meet a Fund's quality standards. A Fund may also require or
obtain municipal bond insurance when purchasing or holding specific
municipal securities when, in the opinion of the Fund's investment
adviser, such insurance would benefit the Fund (for example, through
improvement of portfolio quality or increased liquidity of certain
securities). The Georgia Municipal Bond Fund's and South Carolina
Municipal Bond Fund's investment adviser anticipates that between 30%
and 60% of each Fund's net assets will be invested in municipal
securities which are insured. The North Carolina Municipal Bond Fund's
investment adviser anticipates that between 10% and 50% of the Fund's
net assets will be invested in municipal securities which are insured.
Issuer-Obtained Insurance policies are noncancellable and continue in
force as long as the municipal securities are outstanding and their
respective insurers remain in business. If a municipal security is
covered by Issuer-Obtained Insurance, then such security need not be
insured by the Policies purchased by a Fund. (Please refer to the
Funds' Statement of Additional Information for more information.)
NON-DIVERSIFICATION
THE WACHOVIA MUNICIPAL FUNDS is comprised of three non-diversified
Funds. As such, there is no limit on the percentage of assets which
can be invested by a Fund in any single issuer. An investment in a
Fund, therefore, will entail greater risk than would exist in a
diversified investment company because the higher percentage of
investments among fewer issuers may result in greater fluctuation in
the total market value of a Fund's portfolio. Any economic, political,
or regulatory developments affecting the value of the securities in a
Fund's portfolio will have a greater impact on the total value of the
portfolio than would be the case if the portfolio were diversified
among more issuers. A Fund may purchase an issue of municipal
securities in its entirety.
The Funds intend to comply with Subchapter M of the Internal Revenue
Code. This undertaking requires that at the end of each quarter of the
taxable year, the aggregate value of all investments in any one issuer
(except U.S. government obligations, cash, and cash items) which
exceed 5% of a Fund's total assets shall not exceed 50% of the value
of its total assets.
DURATION
Duration is a commonly used measure of the potential volatility in the
price of a bond, or other fixed income security, or in a portfolio of
fixed income securities, prior to maturity. Volatility is the
magnitude of the change in the price of a bond relative to a given
change in the market rate of interest. A bond's price volatility
depends on three primary variables: the bond's coupon rate; maturity
date; and the level of market yields of similar fixed income
securities. Generally, bonds with lower coupons or longer maturities
will be more volatile than bonds with higher coupons or shorter
maturities. Duration combines these variables into a single measure.
Duration is calculated by dividing the sum of the time-weighted values
of the cash flows of a bond or bonds, including interest and principal
payments, by the sum of the present values of the cash flows. When a
Fund invests in mortgage pass-through securities, its duration will be
calculated in a manner which requires assumptions to be made regarding
future principal prepayments. A more complete description of this
calculation is available upon request from the Funds.
- ---------------------------------------------------------
- ---------------------------------------------------------
INVESTMENT LIMITATIONS
BORROWING MONEY
The EQUITY FUND, QUANTITATIVE EQUITY FUND, EQUITY INDEX FUND, SPECIAL
VALUES FUND, EMERGING MARKETS FUND, BALANCED FUND, FIXED INCOME FUND,
and SHORT-TERM FIXED INCOME FUND will not borrow money directly or
through reverse repurchase agreements (arrangements in which a Fund
sells a portfolio instrument for a percentage of its cash value with
an agreement to buy it back on a set date) or pledge securities
except, under certain circumstances, a Fund may borrow up to one-third
of the value of its total assets and pledge, mortgage, or hypothecate
up to 15% of the value of those assets to secure such borrowings. The
GEORGIA MUNICIPAL BOND FUND, NORTH CAROLINA MUNICIPAL BOND FUND, and
SOUTH CAROLINA MUNICIPAL BOND FUND will not borrow money or pledge
securities except, under certain circumstances, a Fund may borrow up
to one-third of the value of its total assets and pledge up to 10% of
the value of those assets to secure such borrowings.
DIVERSIFICATION
With respect to 75% of the value of its total assets, the EQUITY FUND,
QUANTITATIVE EQUITY FUND, EQUITY INDEX FUND, SPECIAL VALUES FUND,
BALANCED FUND, FIXED INCOME FUND, and SHORT-TERM FIXED INCOME FUND
will not invest more than 5% of the value of its total assets in
securities of any one issuer (other than cash, cash items, or
securities issued or guaranteed by the government of the United States
or its agencies or instrumentalities, and repurchase agreements
collateralized by such securities), or acquire more than 10% of the
outstanding voting securities of any one issuer.
The above investment limitations cannot be changed without shareholder
approval. The following limitations, however, can be changed by the
Trustees without shareholder approval. Shareholders will be notified
before any material change in these limitations becomes effective.
In addition to the above limitations, The SOUTH CAROLINA MUNICIPAL
BOND FUND will not:
invest more than 5% of its total assets in industrial development
bonds when the payment of principal and interest is the
responsibility of companies (or guarantors, where applicable) with
less than three years of continuous operations, including the
operation of any predecessor; or own securities of open-end or
closed-end investment companies, except under certain circumstances
and subject to certain limitations described in this prospectus, and,
not exceeding 10% of its net assets.
- ---------------------------------------------------------
- ---------------------------------------------------------
TRUST INFORMATION
MANAGEMENT OF THE TRUSTS
Board Of Trustees. The Trustees are responsible for managing the business
affairs of the Trusts and for exercising the Trusts' powers except those
reserved for the shareholders.
Investment Adviser. Pursuant to investment advisory contracts with the
Trusts on behalf of the Funds, and subject to direction by the
Trustees, investment decisions for THE WACHOVIA FUNDS and THE WACHOVIA
MUNICIPAL FUNDS are made by Wachovia Asset Management, a business unit
of Wachovia Bank, N.A., (the "Adviser") subject to direction by the
Trustees. The Adviser continually conducts investment research and
supervision of investments for the Funds and is responsible for the
purchase and sale of portfolio instruments, for which it receives
annual fees from the assets of the Funds.
Sub-Adviser. The QUANTITATIVE EQUITY FUND is sub-advised by Twin
Capital Management, Inc., McMurray, Pennsylvania. Pursuant to the
terms of an investment sub-advisory agreement between the Funds'
Adviser and Twin Capital Management, Inc. ("Twin Capital" or the
"Sub-Adviser"), Twin Capital furnishes certain investment advisory
services to Wachovia Asset Management, including investment research,
quantitative analysis, statistical and other factual information, and
recommendations, based on Twin Capital's analysis, and assists the
Adviser in identifying securities for potential purchase and/or sale
on behalf of the Fund's portfolio. For the services provided and the
expenses incurred by the Sub-Adviser, Twin Capital is entitled to
receive an annual fee of $55,000, payable by Wachovia Asset
Management, in quarterly installments. Twin Capital may elect to waive
some or all of its fee. In no event shall the Fund be responsible for
any fees due to the Sub-Adviser for its services to Wachovia Asset
Management. Twin Capital provides investment counsel to both
individuals and institutions, including banks, thrift institutions,
and pension and profit-sharing plans. As of December 31, 1996, Twin
Capital furnished services, substantially similar to the services it
provides to the Adviser, to other accounts with assets in excess of
$1.8 billion. The Sub-Adviser is controlled by Geoffrey Gerber, its
President.
Advisory Fees. The Adviser is entitled to receive annual investment
advisory fees equal to a percentage of each Fund's average daily net
assets as follows: 0.30 of 1% of EQUITY INDEX FUND; 0.55 of 1% of
SHORT-TERM FIXED INCOME FUND; 0.60 of 1% of FIXED INCOME FUND; 0.70 of
1% of EQUITY FUND, QUANTITATIVE EQUITY FUND, and BALANCED FUND; 0.75
of 1% of GEORGIA MUNICIPAL BOND FUND, NORTH CAROLINA MUNICIPAL BOND
FUND, and SOUTH CAROLINA MUNICIPAL BOND FUND; 0.80 of 1% of SPECIAL
VALUES FUND; and 1.00% of EMERGING MARKETS FUND. These fees are
accrued daily and paid monthly. The fees paid by THE WACHOVIA
MUNICIPAL FUNDS, SPECIAL VALUES FUND and EMERGING MARKETS FUND, while
higher than the advisory fees paid by other mutual funds in general,
are comparable to fees paid by other mutual funds with similar
policies and objectives. The Adviser may voluntarily choose to waive a
portion of its fees or reimburse a Fund for certain expenses but
reserves the right to terminate such waiver or reimbursement at any
time at its sole discretion.
Investment decisions for the Funds will be made independently from
those of any fiduciary or other accounts that may be managed by the
Adviser or its affiliates. If, however, such accounts, the Funds, or
the Adviser for its own accounts, are simultaneously engaged in
transactions involving the same securities, the transactions may be
combined and allocated to each account. This system may adversely
affect the price the Funds pay or receive, or the size of the position
they obtain.
Adviser's Background. Wachovia Asset Management and its affiliates
have served as investment adviser to THE WACHOVIA FUNDS since March 9,
1992, to the SOUTH CAROLINA MUNICIPAL BOND FUND since August 5, 1990,
and to the NORTH CAROLINA MUNICIPAL BOND FUND and GEORGIA MUNICIPAL
BOND FUND since their inception in December 1994. Wachovia Asset
Management is a business unit of Wachovia Bank, N.A. which is a
wholly-owned subsidiary of Wachovia Corporation.
Through offices in eight states, Wachovia Corporation and its
subsidiaries provide a broad range of financial services to
individuals and businesses. Wachovia Bank offers financial services
that include, but are not limited to, commercial and consumer loans,
corporate, institutional, and personal trust services, demand and time
deposit accounts, letters of credit and international financial
services.
The Adviser employs an experienced staff of professional investment
analysts, portfolio managers and traders. The Adviser uses fundamental
analysis and other investment management disciplines to identify
investment opportunities. Wachovia Bank has been managing trust assets
for over 100 years, with over $23 billion in managed assets as of
December 31, 1996. As part of its regular banking operations, Wachovia
Bank may make loans to public companies and municipalities. Thus, it
may be possible, from time to time, for a Fund to hold or acquire the
securities of issuers which are also lending clients of Wachovia Bank.
The lending relationship will not be a factor in the selection of
securities.
Jerry D. Burton is a Vice President of Wachovia Asset Management. He is a
portfolio manager of the QUANTITATIVE EQUITY FUND. Mr. Burton received a
bachelors degree from Clemson University and an MBA from the College of William
and Mary. He is a Chartered Financial Analyst.
Daniel S. Earthman is a Chartered Financial Analyst and is a Senior
Vice President and portfolio manager of the BALANCED FUND. Mr.
Earthman joined Wachovia Bank, N.A. in 1988 as an institutional
portfolio manager. Prior to joining Wachovia Bank, N.A., he was a vice
president and investment manager with Richland Asset Management in
Nashville, and an assistant vice president and portfolio manager with
North Carolina National Bank in Charlotte. Mr. Earthman received a
bachelor's degree in business from Southern Methodist University and
an MBA from the University of North Carolina at Chapel Hill.
Samuel M. Gibbs, II is the portfolio manager of the SHORT-TERM FIXED INCOME FUND
and is Senior Vice President and Manager of Fixed Income Investments for
Wachovia Asset Management. Mr. Gibbs joined Wachovia Bank, N.A. in 1969 as a
portfolio manager. He became a bond trader and fixed-income portfolio manager in
1975 and assumed his current position in 1977. Mr. Gibbs is a graduate of
Davidson College and has an MBA from the University of South Carolina.
Alfred R. Guenthner is Senior Vice President and Manager of Research for
Wachovia Asset Management and is a portfolio manager of the BALANCED FUND. Mr.
Guenthner joined Wachovia Bank, N.A. in 1972 as an economist and became senior
economist in 1978. From 1978 to 1982, he was the fixed income strategist for
Wachovia Asset Management. Mr. Guenthner is a graduate of Concord College and is
completing a dissertation for a doctorate degree in economics from the
University of Georgia. He is a member of the North Carolina Society of Financial
Analysts and the United Shareholders Association. Mr. Guenthner is a former
president of the North Carolina Association of Business Economists.
John F. Hageman is a Chartered Financial Analyst and is a Senior Vice President
and Institutional Portfolio Manager. He is a portfolio manager of the EQUITY
FUND. Mr. Hageman is responsible for managing employee benefit, foundation and
endowment portfolios. Prior to joining Wachovia Bank, N.A. in 1986, Mr. Hageman
was Vice President and head of Institutional Investment Management at Michigan
National Investment Corporation from 1977 to 1986, and an account executive with
Merrill Lynch from 1975 to 1977. Mr. Hageman is a graduate of Wabash College
with a bachelor's degree in political science.
Paige C. Henderson is a Vice President of Wachovia Asset Management. Ms.
Henderson is an equity analyst in the Investment Asset Group and a portfolio
manager of the EMERGING MARKETS FUND. Ms. Henderson joined Wachovia Bank, N.A.
in 1991 as an equity analyst. Ms. Henderson received a Bachelor of Science in
Business Administration in 1986 and an MBA from the University of North Carolina
at Chapel Hill in 1991. Ms. Henderson is a Chartered Financial Analyst and a
Certified Public Accountant.
Michael W. Holt is the Portfolio Manager of THE WACHOVIA MUNICIPAL FUNDS. Mr.
Holt joined South Carolina National Bank in February 1991 and assumed his
present position as fixed income portfolio manager for Wachovia Asset Management
in January 1992. He is a graduate of the University of Tennessee where he
majored in economics and received an MBA in Finance. Mr. Holt is a Chartered
Financial Analyst.
Russell L. Kimbro, Jr. is a Senior Vice President and Portfolio
Manager for Personal Financial Services and is a portfolio manager of
the EQUITY FUND. Having been with Wachovia since 1985, Mr. Kimbro
worked previously as an account executive and operations manager at
Prudential Bache Securities and as an instructor of corporate finance
at the University of North Carolina at Greensboro. He received a
bachelor's degree in economics from Virginia Polytechnical Institute
and State University and an MBA from UNCG. Mr. Kimbro is a member of
the North Carolina Society of Financial Analysts.
F. Stanley King is a Chartered Financial Analyst and a Senior Vice President of
Wachovia Bank, N.A. Mr. King is a portfolio manager of the EQUITY FUND. He
serves as manager of institutional portfolio management for Wachovia Asset
Management. Mr. King joined Wachovia Bank, N.A. in 1985 as a securities analyst
and assumed his current position in 1991. He has both bachelor and master of
science degrees from North Carolina State University.
George E. McCall is a Certified Financial Planner and Vice President
of Wachovia Asset Management. He is a portfolio manager of the
QUANTITATIVE EQUITY FUND. He is a graduate of Presbyterian College and
received his MBA from the University of South Carolina.
Michael O. Mercer is Senior Vice President, Wachovia Bank, N.A., and, in
addition to being a portfolio manager of the EQUITY FUND, manages the Wachovia
Equity Investment Fund and other large institutional accounts. Mr. Mercer is a
graduate of Catawba College and received an MBA from Florida State University.
Mr. Mercer is a Chartered Financial Analyst and has been with Wachovia Bank,
N.A. since 1983.
Harold (Rick) Nelson III is a Senior Vice President and fixed-income portfolio
manager of Wachovia Asset Management in Atlanta. Mr. Nelson joined Wachovia in
June, 1985 as a fixed income portfolio manager. He became a portfolio manager of
the BALANCED FUND in May, 1996. Mr. Nelson is a native of Mountainside, New
Jersey. He received a bachelor of science degree in Management from St. Francis
College and an MBA in Finance at Mercer University in 1990.
R. Emery Pike is a Chartered Financial Analyst and Vice President of Wachovia
Asset Management. He is the portfolio manager of the FIXED INCOME FUND. He holds
both a bachelors degree and an MBA from Wake Forest University.
B. Scott Sadler is a portfolio manager of the EMERGING MARKETS FUND. He is a
Vice President of Wachovia Asset Management. He joined Wachovia Bank, N.A. in
1987. Mr. Sadler is a graduate of the University of Virginia's McIntire School
of Commerce with a bachelor's degree in economics. Mr. Sadler is a Chartered
Financial Analyst.
Timothy L. Swanson is a Vice President of Wachovia Asset Management. He joined
Wachovia Bank, N.A. in 1991. Mr. Swanson is a portfolio manager of the EMERGING
MARKETS FUND. Mr. Swanson is a graduate of Wake Forest University with a
bachelor's degree in mathematical economics, and of the University of Rochester
with a master's degree in economics. Mr. Swanson is a Chartered Financial
Analyst.
Michael J. Tierney is an Executive Vice President of Wachovia Bank, N.A. and
Chief Investment Officer with Wachovia Asset Management. He joined Wachovia
Bank, N.A. in 1981. Mr. Tierney is a portfolio manager of the EMERGING MARKETS
FUND and the SPECIAL VALUES FUND. Mr. Tierney is a graduate of the University of
Connecticut, and has more than 25 years of experience managing equity and fixed
income investments.
Joseph H. Waterfill is a Senior Vice President of Wachovia Asset Management. Mr.
Waterfill is the portfolio manager of the BALANCED FUND, EQUITY FUND, and the
QUANTITATIVE EQUITY FUND. He joined Wachovia in 1976 as an employee benefit
portfolio manager. He was elected Senior Vice President in 1990. Mr. Waterfill
received a bachelor of science degree from the U.S. Naval Academy in 1963 and an
MBA from Vanderbilt University in 1973.
DISTRIBUTION OF SHARES
Federated Securities Corp., Federated Investors Tower, Pittsburgh, Pennsylvania
15222-3779 is the distributor for Shares of the Funds. It is a Pennsylvania
corporation organized on November 14, 1969, and is the distributor for a number
of investment companies. Federated Securities Corp. is a subsidiary of Federated
Investors.
Distribution Plan. Class B Shares of the EQUITY FUND, the QUANITATIVE
EQUITY FUND, the BALANCED FUND, and the FIXED INCOME FUND have adopted
a plan for distribution of Class B Shares permitted by Rule 12b-1
under the Investment Company Act of 1940 (the "Plan"), whereby each of
these Funds have authorized a daily expense ("Rule 12b-1 fee") at an
annual rate of up to 0.75 of 1% of the average daily net asset value
of that Fund's Class B Shares to finance the sale of Class B Shares.
The distributor may pay all or a portion of the Rule 12b-1 fee to
compensate selected brokers and financial institutions for selling
Class B Shares or for administrative services rendered in connection
with the Class B Shares.
The Funds make no payments in connection with the sale of Class B
Shares other than the Rule 12b-1 fees paid to the distributor. The
distributor, however, may pay a sales commission to brokers in
connection with the sale of Class B Shares. Except as set forth in the
next paragraph, the Funds do not pay for unreimbursed expenses of the
distributor. Since the Funds' Plan is a "compensation" type plan,
however, future Rule 12b-1 fees may permit recovery of such amounts or
may result in a profit to the distributor.
The distributor may sell, assign or pledge its right to receive Rule
12b-1 fees and contingent deferred sales charges to finance payments
made to brokers in connection with the sale of Class B Shares. Actual
distribution expenses for Class B Shares at any given time may exceed
the Rule 12b-1 fees and payments received pursuant to contingent
deferred sales charges. These unrecovered amounts, plus interest
thereon, will be carried forward and paid from future Rule 12b-1 fees
and payments received through contingent deferred sales charges. If a
Plan were terminated or not continued, the Funds would not be
contractually obligated to pay for any expenses not previously
reimbursed by the Funds or recovered through contingent deferred sales
charges.
Federated Securities Corp., from time to time, may pay brokers
additional sums of cash or promotional incentives based upon the
amount of Class B Shares sold. Such payments, if made, will be in
addition to amounts paid under the Plans and will not be an expense of
the Funds.
ADMINISTRATIVE ARRANGEMENTS
The distributor may pay financial institutions and other financial
service providers such as banks, fiduciaries, custodians for public
funds, investment advisers, and broker/dealers a fee based upon the
average net asset value of shares of their customers for providing
administrative services to the Funds. This fee, if paid, will be
reimbursed by the Adviser or its affiliates and not the Funds.
SHAREHOLDER SERVICING ARRANGEMENTS
Federated Administrative Services, Pittsburgh, Pennsylvania, a
subsidiary of Federated Investors, is shareholder servicing agent (the
"Shareholder Servicing Agent") for Class A Shares of each Fund and for
the EQUITY FUND, the QUANTITATIVE EQUITY FUND, the BALANCED FUND, and
the FIXED INCOME FUND Class B Shares. The Funds may pay the
Shareholder Servicing Agent a fee based on the average daily net asset
value of Shares for which it provides shareholder services. These
shareholder services include, but are not limited to, distributing
prospectuses and other information, providing shareholder assistance
and communicating or facilitating purchases and redemptions of Shares.
This fee will be computed at an annual rate equal to 0.25 of 1% of
each Class' average daily net assets for which the Shareholder
Servicing Agent provides services; however, the Shareholder Servicing
Agent may choose voluntarily to waive all or a portion of its fee at
any time or pay all or some of its fees to financial institutions or
other financial service providers.
ADMINISTRATION OF THE FUNDS
Federated Administrative Services also provides the Funds with the
administrative personnel and services necessary to operate the Funds.
Such services include legal, accounting and other administrative
services. Federated Administrative Services provides these at an
annual rate, computed and payable daily, as specified below:
<TABLE>
<CAPTION>
MAXIMUM AVERAGE AGGREGATE DAILY NET
ADMINISTRATIVE ASSETS OF THE WACHOVIA FUNDS
FEE AND THE WACHOVIA MUNICIPAL FUNDS
<S> <C>
.15 of 1% on the first $250 million
.125 of 1% on the next $250 million
.10 of 1% on the next $250 million
.075 of 1% on assets in excess of $750 million
</TABLE>
The administrative fee received during any fiscal year shall aggregate
at least $75,000 for each portfolio of THE WACHOVIA FUNDS and at least
$50,000 for each portfolio of THE WACHOVIA MUNICIPAL FUNDS. Federated
Administrative Services may choose voluntarily to waive or reimburse a
portion of its fee at any time.
EXPENSES OF THE FUNDS AND CLASS A SHARES
AND CLASS B SHARES
Holders of Class A Shares and Class B Shares pay their allocable
portion of Trust and respective Fund expenses. The Trust expenses for
which holders of Shares pay their allocable portion include, but are
not limited to: the cost of organizing the Trust and continuing its
existence; the cost of registering the Trust; Trustees' fees;
auditors' fees; the cost of meetings of Trustees; legal fees of the
Trust; association membership dues and such non-recurring and
extraordinary items as may arise.
Fund expenses for which holders of Shares pay their allocable portion
based on average daily net assets include, but are not limited to:
registering a Fund and Shares of that Fund; investment advisory
services; taxes and commissions; custodian fees; insurance premiums;
auditors' fees; and such non-recurring and extraordinary items as may
arise.
The Funds' expenses under the Rule 12b-1 Plans are incurred solely by
the Class B Shares. In addition, the Funds' expenses under a
shareholder services plan are incurred by the Class A Shares and Class
B Shares. The Trustees reserve the right to allocate certain other
expenses to Classes of Shares as they deem appropriate ("Class
Expenses"). These Class Expenses would be limited to: transfer agent
fees as identified by the transfer agent as attributable to holders of
shares of a Class; printing and postage expenses related to preparing
and distributing materials such as shareholder reports, prospectuses
and proxies to current shareholders of a Class; registration fees paid
to the Securities and Exchange Commission and to state securities
commissions for shares of a Class; expenses related to administrative
personnel and services as required to support holders of shares of a
Class; legal fees relating solely to a Class; and Trustees fees
incurred as a result of issues relating solely to a Class.
BROKERAGE TRANSACTIONS
The Funds may engage in brokerage transactions. When selecting brokers
and dealers to handle the purchase and sale of portfolio instruments,
the Adviser looks for prompt execution of the order at a favorable
price. In working with dealers, the Adviser will generally utilize
those who are recognized dealers in specific portfolio instruments,
except when a better price and execution of the order can be obtained
elsewhere. In selecting among firms believed to meet these criteria,
the Adviser may give consideration to those firms which have sold or
are selling shares of the Funds. The Adviser makes decisions on
portfolio transactions and selects brokers and dealers subject to
review by the Trustees.
- ---------------------------------------------------------
- ---------------------------------------------------------
NET ASSET VALUE
Each Fund's net asset value per share fluctuates. It is determined by
dividing the sum of the market value of all securities and other
assets, less liabilities, by the number of shares outstanding. The net
asset value of Class A Shares and Class B Shares of a Fund may differ
slightly from that of Class Y Shares of the same Fund due to the
variability in daily net income resulting from different distribution
charges and shareholder services fees. The net asset value for each
Fund will fluctuate for its classes.
The net asset value is determined as of the close of trading (normally
4:00 p.m., Eastern time) on the New York Stock Exchange, Monday
through Friday, except on: (i) days on which there are not sufficient
changes in the value of a Fund's portfolio securities that its net
asset value might be materially affected; (ii) days during which no
shares are tendered for redemption and no orders to purchase shares
are received; or (iii) the following holidays: New Year's Day, Martin
Luther King Day, Presidents' Day, Good Friday, Memorial Day,
Independence Day, Labor Day, Columbus Day, Veterans' Day, Thanksgiving
Day and Christmas Day.
- ---------------------------------------------------------
- ---------------------------------------------------------
INVESTING IN THE FUNDS
SHARE PURCHASES
Fund Shares are sold on days on which Wachovia Bank, the New York
Stock Exchange and the Federal Reserve Wire System are open for
business. Shares may be purchased through the Trust Division of
Wachovia Bank, Wachovia Investments, Inc. or authorized broker/dealers
that have a sales agreement with the distributor. All purchase orders
must be transmitted to a Fund by 5:00 p.m. (Eastern time) and will be
purchased at the public offering price next determined after a Fund
receives the purchase request. Texas residents must purchase Shares
through Federated Securities Corp. at 1-800-618-8573. In connection
with the sale of Shares, the distributor may from time to time offer
certain items of nominal value to any shareholder or investor. Each
Fund and the distributor reserve the right to reject any purchase
request.
Through The Trust Division Of Wachovia Bank. Trust customers of
Wachovia Bank may purchase Shares of a Fund by telephoning, sending
written instructions, or placing the order in person with their
account officer in accordance with the procedures established by
Wachovia Bank and as set forth in the relevant account agreement.
Payment may be made by check, by wire of federal funds, or by debiting
a customer's account with Wachovia Bank. Purchase orders must normally
be received by Wachovia Bank by 3:00 p.m. (Eastern time), in order for
Shares to be purchased at that day's price. It is the responsibility
of Wachovia Bank to transmit orders promptly to the Fund.
Through Wachovia Investments, Inc. Customers of Wachovia Investments,
Inc. or Wachovia Brokerage Service may place an order to purchase
Shares by telephoning the Funds at 1-800-994-4414, sending written
instructions, or placing an order in person. Payment may be made by
check or by debiting a customer's account at Wachovia Investments,
Inc. Wachovia Investments, Inc., a wholly-owned subsidiary of Wachovia
Corporation, is a registered broker/dealer and member of the National
Association of Securities Dealers, Inc. Wachovia Brokerage Service is
a business unit of Wachovia Investments, Inc. Shares may also be
purchased through authorized broker/dealers that have a sales
agreement with the distributor. All purchase orders must normally be
received by Wachovia Investments, Inc. before 3:30 p.m. (Eastern time)
in order for Shares to be purchased at that day's offering price.
By Mail. To purchase Shares of a Fund through Wachovia Investments, Inc. by
mail, send a check made payable to (Name of Fund), 101 Greystone Boulevard,
SC-9215, Columbia, South Carolina 29226. Orders by mail are considered
received after payment by check is converted by Wachovia Investments, Inc.
into federal funds. This is normally the next business day after Wachovia
Investments, Inc. receives the check.
MINIMUM INVESTMENT REQUIRED
The minimum initial investment in Shares of THE WACHOVIA FUNDS is
$250, and $500 for THE WACHOVIA MUNICIPAL FUNDS. Subsequent
investments in THE WACHOVIA FUNDS must be in amounts of at least $50,
and for the THE WACHOVIA MUNICIPAL FUNDS, subsequent investments must
be in amounts of at least $100. Minimum initial investments may be
waived from time to time for purchases by the Trust Division of
Wachovia Bank for its fiduciary or custodial accounts. An
institutional investor's minimum investment will be calculated by
combining all accounts it maintains with the Funds.
WHAT SHARES COST
This prospectus offers investors two classes of Shares that carry
sales charges and contingent deferred sales charges in different forms
and amounts and which bear different levels of expenses.
Class A Shares. Most investors who purchase Class A Shares pay a
maximum sales charge of 4.50% at the time of purchase. As a result,
Class A Shares are not subject to any charges when they are redeemed.
Certain purchases of Class A Shares qualify for reduced sales charges.
See "Reducing the Initial Sales Charge." Class A Shares have no
conversion feature. Class A Shares of all Funds except the SHORT-TERM
FIXED INCOME FUND are sold at their net asset value next determined
after an order is received, plus a sales charge as follows:
<TABLE>
<CAPTION>
SALES LOAD AS SALES LOAD AS
A PERCENTAGE A PERCENTAGE
OF PUBLIC OF NET AMOUNT
AMOUNT OF TRANSACTION OFFERING PRICE INVESTED
<S> <C> <C>
Less than $100,000 4.50% 4.71%
$100,000 but less than
$250,000 3.75% 3.90%
$250,000 but less than
$500,000 2.50% 2.56%
$500,000 but less than
$750,00 2.00% 2.04%
$750,000 but less than
$1 million 1.00% 1.01%
$1 million or more 0.25% 0.25%
</TABLE>
Shares of the SHORT-TERM FIXED INCOME FUND are sold at their net asset
value next determined after an order is received, plus a sales charge
as follows:
<TABLE>
<CAPTION>
SALES LOAD AS SALES LOAD AS
A PERCENTAGE A PERCENTAGE
OF PUBLIC OF NET AMOUNT
AMOUNT OF TRANSACTION OFFERING PRICE INVESTED
<S> <C> <C>
Less than $100,000 2.50% 2.56%
$100,000 but less than
$250,000 1.75% 1.78%
$250,000 but less than
$500,000 1.25% 1.27%
$500,000 but less than
$750,000 0.75% 0.76%
$750,000 but less than
$1 million 0.50% 0.50%
$1 million or more 0.25% 0.25%
</TABLE>
Purchases At Net Asset Value. Class A Shares of a Fund may be
purchased at net asset value, without an initial sales charge, by
investment advisers registered under the Investment Advisers Act of
1940, purchasing on behalf of their clients, by Wachovia Bank or
affiliates for funds which are held in a fiduciary, advisory, agency,
custodial, or similar capacity, and for which Wachovia Bank, or an
affiliate or a third party will provide shareholder services for a fee
paid by one of the Funds, and by trustees, officers, directors and
retired directors, advisory board members, employees and retired
employees of a Fund, Wachovia Bank, the spouses and children under the
age of 21 of such persons, and any trusts, or individual retirement
accounts operated for such persons. Class A Shares may also be
purchased at net asset value by participants in qualified retirement
plans for which Wachovia Bank had previously, but no longer, serves as
administrator. Purchases made by or through qualified retirement plans
(each a "Delaware/Wachovia Qualified Retirement Plan" or "Plan") which
have in excess of an aggregate investment of $500,000 in certain
Delaware Group Funds ("Eligible Delaware Funds") and any portfolios of
THE WACHOVIA FUNDS that are available through that Plan ("Eligible
Wachovia Funds" together, the "Eligible Funds") and purchases made by
companies participating in the Plan that have at least 100 employees
will be made at net asset value, without the imposition of the sales
charge otherwise provided in the table above. No sales charge is
imposed on Class A Shares purchased through "wrap accounts" or similar
programs under which clients pay a fee for services. In addition,
trustees, officers, directors and employees of the distributor and its
affiliates, and any bank or investment dealer who has a sales
agreement with the distributor may also purchase shares at their net
asset value.
Reducing the Initial Sales Charge. The initial sales charge can be reduced on
the purchase of shares of a Fund through:
quantity discounts and accumulated purchases; signing a 13-month
letter of intent; using the reinvestment privilege; or concurrent
purchases.
Quantity Discounts And Accumulated Purchases. As shown in the table
above, larger purchases reduce the sales charge paid. Funds will
combine purchases made on the same day by the investor, the investor's
spouse, and the investor's children under age 21 when it calculates
the sales charge.
A Fund may also consider the previous purchases still invested in any
of THE WACHOVIA FUNDS or THE WACHOVIA MUNICIPAL FUNDS if an additional
purchase is made. For example, if a shareholder already owns shares of
the EQUITY FUND having a current value at the public offering price of
$90,000 and then purchases $10,000 more at the current public offering
price, the sales charge of the additional purchase according to the
schedule now in effect would be 3.75%, not 4.50%.
To receive the sales charge reduction, Wachovia Bank, Wachovia
Investments, Inc. or the distributor must be notified by the
shareholder at the time the purchase is made that Fund shares are
already owned or that purchases are being combined. The Fund will
reduce the sales charge after it confirms the purchases.
Letter Of Intent. If a shareholder intends to purchase shares of the
Funds equal in value to at least $100,000 over the next 13 months, the
sales charge may be reduced by signing a letter of intent to that
effect. This letter of intent includes a provision for a sales charge
adjustment depending on the amount actually purchased within the
13-month period and a provision for the Custodian to hold up to 4.50%
of the total amount intended to be purchased in escrow (in shares of a
Fund) until such purchase is completed.
The amount held in escrow will be applied to the shareholder's account
at the end of the 13-month period, unless the amount specified in the
letter of intent is not purchased. In this event, an appropriate
number of escrowed shares may be redeemed in order to realize the
difference in the sales charge.
This letter of intent will not obligate the shareholder to purchase
shares, but if the shareholder does, each purchase during the period
will be at the sales charge applicable to the total amount intended to
be purchased. This letter may be dated as of a prior date to include
all account balances in any Wachovia Fund toward the dollar
fulfillment of the letter of intent. Prior trade prices will not be
adjusted.
Reinvestment Privilege. If shares in a Fund have been redeemed, the shareholder
has a one-time right, within 90 days, to reinvest the redemption proceeds at the
next-determined net asset value without any sales charge. Wachovia Bank,
Wachovia Investments, Inc. or the distributor must be notified by the
shareholder in writing or by his financial institution of the reinvestment in
order to eliminate a sales charge. If the shareholder redeems his shares in a
Fund, there may be tax consequences.
Concurrent Purchases. For purposes of qualifying for a sales charge
reduction, a shareholder has the privilege of combining concurrent
purchases of Fund shares. For example, if a shareholder concurrently
invested $70,000 in one Fund, and $30,000 in another Fund, the sales
charge would be reduced.
To receive this sales charge reduction, Wachovia Bank, Wachovia
Investments, Inc. or the distributor must be notified at the time the
concurrent purchases are made. The sales charge will be reduced after
the purchase is confirmed.
Plan Right Of Accumulation. Purchases of the Eligible Wachovia Funds
by a Delaware/Wachovia Qualified Retirement Plan will be aggregated
with the current value of all shares of the Eligible Funds already
held by, and being concurrently purchased by, the Plan in order to
compute reduced sales charges. Participants in a Delaware/Wachovia
401(k) Plan or any other employee benefit plan may combine their
holdings in, or purchases through, the Plan with Fund purchases made
outside the Plan for the purpose of obtaining reduced sales charges.
However, such investors must request the reduction in sales charge and
provide adequate proof of their plan holdings to the Fund.
Class B Shares. Class B Shares are sold without an initial sales
charge, but are subject to a contingent deferred sales charge of up to
5.00% if redeemed within seven full years following purchase. Class B
Shares also bear a Rule 12b-1 fee. Class B Shares will automatically
convert into Class A Shares, based on relative net asset value, on or
around the fifteenth of the month, eight full years after the purchase
date. Class B Shares provide an investor the benefit of putting all of
the investor's dollars to work from the time the investment is made,
but, until conversion, will have a higher expense ratio and pay lower
dividends than Class A Shares due to the Rule 12b-1 fee.
Class B Shares are sold at net asset value per Share without the
imposition of a sales charge at the time of purchase. Shares redeemed
within seven years of their purchase will be subject to a contingent
deferred sales charge according to the following schedule:
<TABLE>
<CAPTION>
YEAR OF REDEMPTION CONTINGENT DEFERRED
AFTER PURCHASE SALES CHARGE
<S> <C>
First 5%
Second 4%
Third 3%
Fourth 3%
Fifth 2%
Sixth 1%
Seventh and thereafter 0%
</TABLE>
No contingent deferred sales charge will be imposed on: (1) the
portion of redemption proceeds attributable to increases in the value
of the account due to increases in the net asset value per Share, (2)
Shares acquired through reinvestment of dividends and capital gains,
(3) Shares held for more than seven years after the end of the
calendar month of acquisition, (4) accounts following the death or
disability of any shareholder in the account, or (5) minimum required
distributions to a shareholder over the age of 70-1/2 from an IRA or
other retirement plan.
CONVERSION FEATURE
Class B Shares include all Shares purchased pursuant to the deferred
sales charge alternative which have been outstanding for less than the
period ending eight years after the end of the month in which the
shareholder's order to purchase Class B Shares was accepted. At the
end of this eight year period, Class B Shares will automatically
convert to Class A Shares, in which case the Shares will no longer be
subject to the Rule 12b-1 distribution fee which is assessed on Class
B Shares. Such conversion will be on the basis of the relative net
asset values of the two classes, without the imposition of any sales
load, fee or other charge. The purpose of the conversion feature is to
relieve the holders of the Class B Shares that have been outstanding
for a period of time sufficient for the distributor to have been
compensated for distribution expenses related to the Class B Shares
from most of the burden of such distribution-related expenses.
For purposes of conversion to Class A Shares, Class B Shares purchased
through the reinvestment of dividends and distributions paid on Class
B Shares in a shareholder's Fund acount will be considered to be held
in a separate sub-account. Each time any Class B Shares in the
shareholder's Fund account (other than those in the sub-account)
convert to Class A Shares, an equal pro rata portion of the Class B
Shares in the sub-account will also convert to Class A Shares.
Sales Charge Reallowance. For Class A Shares and Class B Shares sold
with an initial or contingent deferred sales charge, Wachovia Bank or
an affiliated broker/dealer will receive up to 100% of the applicable
sales charge for purchases of Fund shares made directly through
Wachovia Bank or such broker/dealer. Any portion of the sales charge
which is not paid to a dealer will be retained by the distributor. The
sales charge for shares sold other than through Wachovia Investments,
Inc., Wachovia Bank or a registered broker/dealer will be retained by
the distributor. However, the distributor, at its sole discretion, may
uniformly offer to pay cash, or promotional incentives in the form of
trips to sales seminars at luxury resorts, tickets or other items, to
all dealers selling Shares of a Fund. Such payments will be predicated
upon the amount of Shares of a Fund that are sold by the dealers.
SYSTEMATIC INVESTMENT PROGRAM
Shareholders in any of the Funds may participate in a Systematic
Investment Program. Once a Fund account has been opened, shareholders
in THE WACHOVIA FUNDS and THE WACHOVIA MUNCIPAL FUNDS may add to their
investment on a regular basis in a minimum amount of $25. Under this
program, funds may be automatically withdrawn periodically from the
shareholder's checking account and invested in Fund shares at the net
asset value next determined after an order is received by a Fund,
plus, in the case of Class A Shares, the applicable sales charge. A
shareholder may apply for participation in this program through
Wachovia Bank, Wachovia Investments, Inc. or through the distributor.
CERTIFICATES AND CONFIRMATIONS
As the transfer agent, Federated Shareholder Services Company
maintains a share account for each shareholder of record. Share
certificates are not issued unless requested in writing to a Fund.
Detailed confirmations of each purchase or redemption are sent to each
shareholder of record. Annual statements are sent to report dividends
paid during the year for THE WACHOVIA FUNDS, and monthly confirmations
are sent to report dividends paid during that month for THE WACHOVIA
MUNICIPAL FUNDS.
SUBACCOUNTING SERVICES
Institutions are encouraged to open single master accounts; however,
certain institutions may wish to use the Transfer Agent's
subaccounting system to minimize their internal recordkeeping
requirements. The Transfer Agent may charge a fee based on the level
of subaccounting services rendered. Institutions holding Shares of a
Fund in a fiduciary, agency, custodial, or similar capacity may charge
or pass through subaccounting fees as part of or in addition to normal
trust or agency account fees. They may also charge fees for other
services provided which may be related to the ownership of Fund
Shares. This prospectus should, therefore, be read together with any
agreement between the customer and the institution with regard to the
services provided, the fees charged for those services, and any
restrictions and limitations imposed.
DIVIDENDS AND CAPITAL GAINS
Dividends are declared and paid quarterly to shareholders invested in
the EQUITY FUND, the QUANTITATIVE EQUITY FUND, EQUITY INDEX FUND and
the BALANCED FUND on the record date. Dividends are declared and paid
monthly to all shareholders invested in the FIXED INCOME FUND and the
SHORT-TERM FIXED INCOME FUND on the record date. Dividends are
declared daily and paid monthly to all shareholders invested in THE
WACHOVIA MUNICIPAL FUNDS on the record date. Dividends are declared
and paid annually to all shareholders of the EMERGING MARKETS FUND and
SPECIAL VALUES FUND on the record date. Unless shareholders request
cash payments by writing to a Fund, dividends are automatically
reinvested in additional Shares of a Fund on the payment dates at the
ex-dividend date net asset value without a sales charge.
Dividends are declared just prior to determining net asset value. If
an order for Shares is placed on the preceding business day, Shares
purchased by wire begin earning dividends on the business day wire
payment is received by the Custodian. If the order for Shares and
payment by wire are received on the same day, Shares begin earning
dividends on the next business day. Shares purchased by check begin
earning dividends on the business day after the check is converted
into federal funds.
Capital gains, when realized by a Fund, will be distributed at least
once every 12 months.
- ---------------------------------------------------------
- ---------------------------------------------------------
EXCHANGE PRIVILEGE
Shareholders of the Funds have easy access to the other Funds
comprising the Trusts through a telephone exchange program. Class A
Shares and Class B Shares, respectively, of a Fund may be exchanged
for Class A Shares and Class B Shares, respectively, of another Fund
at net asset value without a sales charge (if a sales charge was
previously paid). An exchange of Class B Shares for Class B Shares of
another Wachovia Fund or for Investment Shares of the Wachovia U.S.
Treasury Money Market Fund ("Money Fund") will not be subject to a
contingent deferred sales charge. However, if the shareholder redeems
the exchanged-for shares within seven years of the original purchase
of Class B Shares, a contingent deferred sales charge will be imposed.
For purposes of computing the contingent deferred sales charge, the
length of time the shareholder has owned Class B Shares will be
measured from the date of original purchase and will not be affected
by the exchange. The exchange privilege is available to shareholders
residing in any state in which the Shares being acquired may be
legally sold. Prior to any exchange, a shareholder should review a
copy of the current prospectus of the Fund into which an exchange is
to be effected. Shareholders contemplating exchanges into THE WACHOVIA
MUNICIPAL FUNDS should consult their tax advisers, since the tax
advantages of each Fund may vary.
Shareholders using this privilege must exchange Shares having a net
asset value at least equal to the minimum investment of the Fund into
which they are exchanging. An exchange order must comply with the
requirements for a redemption and purchase order and must specify the
dollar value or number of Shares to be exchanged. Shareholders who
desire to automatically exchange Shares of a predetermined amount on a
monthly, quarterly, or annual basis may take advantage of a systematic
exchange privilege. A shareholder may obtain further information or
give instructions for exchange between Funds by calling the Fund,
Wachovia Investments, Inc., or in the case of customers of Wachovia
Bank, the shareholder's account officer. Shares may be exchanged by
telephone only between Fund accounts having identical shareholder
registrations.
Shares of the Funds with a sales charge may be exchanged at net asset
value for shares of other Funds with an equal sales charge or no sales
charge. Exchanges are made at net asset value, plus the difference
between the sales charge already paid on the exchanged-from Fund's
shares and any sales charge of the Fund into which the shares are to
be exchanged, if higher. Shares of Funds with no sales charge acquired
by direct purchase or reinvestment of dividends on such shares may be
exchanged for shares of Funds at net asset value.
Upon receipt of proper instructions and all necessary supporting
documents, Shares submitted for exchange will be redeemed at the
next-determined net asset value. Written exchange instructions may
require a signature guarantee. Exercise of this privilege is treated
as a sale for federal income tax purposes and, depending on the
circumstances, a short or long-term capital gain or loss may be
realized. The exchange privilege may be modified or terminated at any
time. Shareholders will be notified of the modification or termination
of the exchange privilege.
Exchange By Telephone. Telephone exchange instructions must be
received before 3:30 p.m. (Eastern time) for Shares to be exchanged
the same day. Exchange instructions given by telephone may be
electronically recorded. If reasonable procedures are not followed by
the Fund, it may be liable for losses due to unauthorized or
fraudulent telephone instructions. The telephone exchange privilege
may be modified or terminated at any time. Shareholders will be
notified of such modification or termination. Shareholders may have
difficulty in making exchanges by telephone through banks, brokers,
and other financial institutions during times of drastic economic or
market changes. If a shareholder cannot contact his bank, broker, or
financial institution by telephone, it is recommended that an exchange
request be made in writing and sent by overnight mail.
In addition to the exchange privilege described above, participants in
a Delaware/Wachovia Qualified Retirement Plan are, with respect to the
Plan, permitted to: (1) exchange all or part of their Class A Shares
of other Eligible Delaware Funds, as well as Eligible Wachovia Funds,
at net asset value; and (2) exchange all or part of their Eligible
Wachovia Fund shares into Class A Shares of the Eligible Delaware
Funds, at net asset value, without payment of a front-end sales
charge. However, a participant in any Plan that has an aggregate
investment of $1 million or less in the Eligible Funds who exchanges
into an Eligible Fund from the Money Fund must pay the applicable
front-end sales charge at the time of the exchange (unless the Money
Fund shares were acquired in an exchange from an Eligible Fund subject
to a front-end sales charge or by reinvestment of dividends).
- ---------------------------------------------------------
- ---------------------------------------------------------
REDEEMING SHARES
Each Fund redeems Shares at its net asset value next determined after
the Fund receives the redemption request. Redemptions will be made on
days on which the Fund computes its net asset value. Telephone or
written requests for redemptions must be received in proper form and
can be made through Wachovia Bank or directly to a Fund.
By Telephone. A shareholder may redeem Shares of a Fund by contacting
their trust officer or calling the Funds (call toll-free
1-800-994-4414) to request the redemption. Redemption requests made
through Wachovia Bank must be received before 3:30 p.m. (Eastern time)
in order for Shares to be redeemed at that day's net asset value.
Wachovia Bank is responsible for promptly submitting redemption
requests and providing proper written redemption instructions to the
Funds. Registered broker/dealers may charge customary fees and
commissions for this service. Telephone redemption instructions may be
recorded. If reasonable procedures are not followed by a Fund, it may
be liable for losses due to unauthorized or fraudulent telephone
instructions.
A shareholder who is a customer of Wachovia Investments, Inc. may
redeem Shares of a Fund by calling the Funds at 1-800-994-4414.
Redemption requests must be received by 3:30 p.m. (Eastern time) in
order for Shares to be redeemed at that day's net asset value. In no
event will proceeds be credited more than seven days after a proper
request for redemption has been received. In the event of drastic
economic or market changes, a shareholder may experience difficulty in
redeeming by telephone. If such a case should occur, another method of
redemption should be considered.
By Mail. A shareholder may redeem Fund Shares by sending a written
request to Wachovia Bank or Wachovia Investments, Inc., as
appropriate. The written request should include the shareholder's
name, the Fund name, the account number or brokerage account numbers,
and the share or dollar amount requested. If share certificates have
been issued, they must be properly endorsed and should be sent by
registered or certified mail with the written request to a Fund.
Shareholders should call Wachovia Bank or the Funds for assistance in
redeeming by mail.
A shareholder who is a customer of Wachovia Investments, Inc. may
redeem Shares by sending a written request to Wachovia Investments,
Inc. The written request should include the shareholder's name and
address, the Fund name, the brokerage account number, and the share or
dollar amount requested. Shareholders should call Wachovia
Investments, Inc. for assistance in redeeming by mail. Normally, a
check for the proceeds is mailed within three business days, but in no
event more than seven days, after receipt of a proper written
redemption request.
Signatures. Shareholders requesting a redemption to be sent to an
address other than that on record with a Fund or a redemption payable
other than to the shareholder of record must have signatures on
written redemption requests guaranteed by:
a trust company or commercial bank whose deposits are insured by the BIF;
a member of the New York, American, Boston, Midwest, or Pacific Stock Exchange;
a savings bank or savings association whose deposits are insured by the SAIF;
or
any other "eligible guarantor institution," as defined in the Securities
Exchange Act of 1934.
The Funds do not accept signatures guaranteed by a notary public. The
Funds and the transfer agent have adopted standards for accepting
signature guarantees from the above institutions. A Fund may elect in
the future to limit eligible signature guarantors to institutions that
are members of a signature guarantee program. The Funds and the
transfer agent reserve the right to amend these standards at any time
without notice.
SYSTEMATIC WITHDRAWAL PROGRAM
Class A Shareholders having an account value of at least $10,000 and
who desire to receive payments of a predetermined amount may take
advantage of the Systematic Withdrawal Program. Under this program,
shares are redeemed to provide for monthly or quarterly withdrawal
payments in a minimum of $100 as directed by the shareholder.
Depending upon the amount of the withdrawal payments, the amount of
dividends paid and capital gains distributions, and the fluctuation of
net asset value of shares redeemed under this program, redemptions may
reduce, and eventually deplete, the shareholder's investment in a
Fund. For this reason, payments under this program should not be
considered as yield or income on the shareholder's investment in a
Fund. A shareholder may apply for participation in this program
through his financial institution. Due to the fact that Shares are
sold with an initial sales charge, it is not advisable for
shareholders to be purchasing shares while participating in this
program.
ACCOUNTS WITH LOW BALANCES
Due to the high cost of maintaining accounts with low balances, each
Fund may redeem Shares in any account and pay the proceeds to the
shareholder if, due to shareholder redemptions, the account balance
falls below the required minimum value of $250 for THE WACHOVIA FUNDS
and $500 for THE WACHOVIA MUNICIPAL FUNDS. This requirement does not
apply, however, if the balance falls below the required minimum
because of changes in a Fund's net asset value. Before Shares are
redeemed to close an account, the shareholder is notified in writing
and allowed 30 days to purchase additional Shares to meet the minimum
requirement.
- ---------------------------------------------------------
- ---------------------------------------------------------
SHAREHOLDER INFORMATION
VOTING RIGHTS
Each Share of a Fund gives the shareholder one vote in Trustee
elections and other matters submitted to shareholders for vote. All
shares of all classes of each Fund in a Trust have equal voting
rights, except that in matters affecting only a particular Fund or
class, only shares of that Fund or class are entitled to vote.
As Massachusetts business trusts, neither Trust is required to hold
annual shareholder meetings. Shareholder approval will be sought only
for certain changes in a Trust or a Fund's operation and for the
election of Trustees under certain circumstances.
As of January 3, 1997, Wachovia Bank and its various affiliates and
subsidiaries, acting in various capacities for numerous accounts,
together were the owners of record of in excess of 25% of the
outstanding shares of the Quantitative Equity Fund, Equity Index Fund,
Special Values Fund, Fixed Income Fund, and Short-Term Fixed Income
Fund, and therefore may, for certain purposes, be deemed to control
these Funds and be able to affect the outcome of certain matters
presented for a vote of shareholders.
Trustees may be removed by the Trustees or by shareholders at a
special meeting. A special meeting of a Trust's shareholders shall be
called by the Trustees upon the written request of shareholders owning
at least 10% of a Trust's outstanding shares.
- ---------------------------------------------------------
- ---------------------------------------------------------
EFFECT OF BANKING LAWS
The Glass-Steagall Act and other banking laws and regulations
presently prohibit a bank holding company registered under the Bank
Holding Company Act of 1956 or any bank or non-bank affiliate thereof
from sponsoring, organizing, controlling or distributing the shares of
a registered open-end investment company continuously engaged in the
issuance of its shares, and prohibit banks generally from issuing,
underwriting or distributing most securities. However, such banking
laws and regulations do not prohibit such a holding company or its
bank and non-bank affiliates generally from acting as investment
adviser, transfer agent or custodian to such an investment company or
from purchasing shares of such a company as agent for and upon the
order of their customers.
Some entities providing services to the Funds are subject to such
banking laws and regulations. Wachovia Bank believes, based on the
advice of its counsel, that it may perform the services for a Fund
contemplated by its investment advisory contracts and custodian
agreements with the Trusts without violating those laws or
regulations. Changes in either federal or state statutes and
regulations relating to the permissible activities of banks and their
subsidiaries or affiliates, as well as further judicial or
administrative decisions or interpretations of present or future
statutes and regulations, could prevent Wachovia Bank from continuing
to perform all or a part of the above services for its customers
and/or a Fund. If this happens, the Trustees would consider
alternative means of continuing available investment services. In such
event, changes in the operation of a Fund may occur, including the
possible termination of any automatic or other Fund share investment
and redemption services then being provided by Wachovia Bank. It is
not expected that existing Fund shareholders would suffer any adverse
financial consequences (if another service provider with equivalent
abilities to Wachovia Bank is found) as a result of any of these
occurrences.
The Glass-Steagall Act prohibits a depository institution (such as a
commercial bank or a savings association) from being an underwriter or
distributor of most securities. In the event the Glass-Steagall Act is
deemed to prohibit depository institutions from acting in the
administrative capacities described above, or should Congress relax
current restrictions on depository institutions, the Trustees will
consider appropriate changes in the services.
State securities laws governing the ability of depository institutions
to act as underwriters or distributors of securities may differ from
interpretations given to the Glass-Steagall Act and, therefore, banks
and financial institutions may be required to register as dealers
pursuant to state law.
- ---------------------------------------------------------
- ---------------------------------------------------------
TAX INFORMATION
The Funds expect to pay no federal income tax because each intends to
continue to meet requirements of the Internal Revenue Code applicable
to regulated investment companies and to receive the special tax
treatment afforded to such companies.
Each Fund will be treated as a single, separate entity for federal
income tax purposes so that income (including capital gains) and
losses earned and realized by any Fund will not be combined for tax
purposes with those of any other Fund.
Unless otherwise exempt, shareholders of THE WACHOVIA FUNDS are
subject to federal income tax on any dividends and other
distributions, including capital gains distributions, received. This
applies whether dividends and distributions are received in cash or as
additional shares. The Funds will provide shareholders with tax
information for reporting purposes. Distributions representing
long-term capital gains, if any, will be taxable to shareholders as
long-term capital gains no matter how long the shareholders have held
the shares.
Shareholders are urged to consult their own tax advisers regarding the
status of their accounts under state and local tax laws.
- ---------------------------------------------------------
- ---------------------------------------------------------
THE WACHOVIA_ MUNICIPAL FUNDS TAX INFORMATION
FEDERAL INCOME TAX
Shareholders of THE WACHOVIA MUNICIPAL FUNDS are not required to pay
federal regular income tax on any dividends received from the Fund
that represent net interest on tax-exempt municipal bonds
("exempt-interest dividends"). However, dividends representing net
interest income earned on some municipal bonds may be included in
calculating the federal alternative minimum tax.
The alternative minimum tax, equal to up to 28% of alternative minimum
taxable income for individuals and 20% for corporations, applies when
it exceeds the regular tax for the taxable year. Alternative minimum
taxable income is equal to the regular taxable income of the taxpayer
increased by certain "tax preference" items not included in regular
taxable income and increased or reduced by certain alternative minimum
tax adjustments.
Interest on certain "private activity" bonds issued after August 7,
1986, is a tax preference item for both individuals and corporations.
Unlike traditional governmental purpose municipal bonds, which finance
roads, schools, libraries, prisons, and other public facilities,
private activity bonds provide benefits to private parties. A Fund may
purchase all types of municipal bonds, including private activity
bonds. If a Fund purchases any such bonds, a portion of its dividends
may be treated as a tax preference item.
In addition, in the case of a corporate shareholder, exempt-interest
dividends may become subject to the 20% corporate alternative minimum
tax because the dividends are included in a corporations's "adjusted
current earnings." The corporate alternative minimum tax treats 75% of
the excess of the taxpayer's "adjusted current earnings" over the
taxpayer's preadjustment alternative minimum taxable income as an
alternative minimum tax adjustment. "Adjusted current earnings" is
based upon the concept of a corporation's "earnings and profits".
Since "earnings and profits" generally includes the full amount of any
Fund dividend (including exempt-interest dividends), and preadjustment
alternative minimum taxable income does not include exempt-interest
dividend to municipal bonds which are not private activity bonds, 75%
of the difference will be included in the calculation of the
corporation's alternative minimum tax.
Shareholders should consult with their tax advisers to determine
whether they are subject to the alternative minimum tax and, if so,
the tax treatment of dividends paid by a Fund.
Dividends of a Fund representing net interest income earned on some
taxable temporary investments and any realized net short-term gains
are taxed as ordinary income. Distributions representing net long-term
capital gains realized by a Fund, if any, will be taxable to its
shareholders as long-term capital gains regardless of the length of
time the shareholders have held their shares. These tax consequences
apply whether dividends are received in cash or as additional shares.
Information on the tax status of dividends and other distributions is
provided annually.
GEORGIA AND NORTH CAROLINA TAXES
Under existing Georgia and North Carolina laws, shareholders of the
GEORGIA MUNICIPAL BOND FUND and NORTH CAROLINA MUNICIPAL BOND FUND
will not be subject to Georgia or North Carolina income taxes,
respectively, on Fund dividends to the extent that such dividends
represent exempt-interest dividends as defined in the Internal Revenue
Code of 1986, as amended, which are directly attributable to (i)
interest on obligations issued by or on behalf of the States of
Georgia or North Carolina, respectively, or their respective political
subdivisions; or (ii) interest on obligations of the United States or
any other issuer whose obligations are exempt from state income taxes
under federal law.
To the extent that Fund dividends are attributable to other sources,
such dividends will be subject to the relevant state's income taxes.
SOUTH CAROLINA TAXES
Under current South Carolina law, shareholders of the SOUTH CAROLINA
MUNICIPAL BOND FUND will not be subject to South Carolina income taxes
on Fund dividends to the extent that such dividends qualify as either
(1) exempt-interest dividends under the Internal Revenue Code, which
are derived from interest on obligations of the state of South
Carolina or any of its political subdivisions; (2) dividends derived
from interest on certain obligations of the United States; and (3)
dividends derived from interest on obligations of any agency or
instrumentality of the United States that is prohibited by federal law
from being taxed by a state or any political subdivision of a state.
To the extent that Fund dividends are attributable to other sources,
such dividends will be subject to South Carolina taxes.
OTHER STATE AND LOCAL TAXES
Income from THE WACHOVIA MUNICIPAL FUNDS is not necessarily free from
state income taxes in states other than Georgia, North Carolina, or
South Carolina, respectively, or from personal property taxes. State
laws differ on this issue, and shareholders are urged to consult their
own tax advisers regarding the status of their accounts under state
and local tax laws.
- ---------------------------------------------------------
- ---------------------------------------------------------
OTHER CLASSES OF SHARES
THE WACHOVIA FUNDS and THE WACHOVIA MUNICIPAL FUNDS offer three
classes of shares: Class Y Shares, Class A Shares and Class B Shares
of the Equity Fund, the Quantitative Equity Fund, the Balanced Fund,
and the Fixed Income Fund for individuals and other customers of
Wachovia Bank.
Class Y Shares are sold to accounts for which Wachovia Bank or its
affiliates act in a fiduciary, advisory, agency, custodial or similar
capacity at net asset value without a sales charge. Class Y Shares are
not distributed pursuant to a Rule 12b-1 Plan and are not subject to a
shareholder services fee.
The stated advisory fee is the same for all classes of the Funds.
Financial institutions and brokers providing sales and/or
administrative services may receive different compensation with
respect to one class of shares than with respect to another class of
shares of the same Fund.
The amount of dividends payable to Class A Shares and Class B Shares
will be less than those payable to Class Y Shares by the difference
between Class Expenses and distribution and shareholder services
expenses borne by the shares of each respective class.
- ---------------------------------------------------------
- ---------------------------------------------------------
PERFORMANCE INFORMATION
From time to time, the Funds advertise their total return, yield, and
if applicable, tax-equivalent yield.
Total return represents the change, over a specified period of time,
in the value of an investment in a Fund after reinvesting all income
and capital gain distributions. It is calculated by dividing that
change by the initial investment and is expressed as a percentage.
The yield of each Fund is calculated by dividing the net investment
income per share (as defined by the Securities and Exchange
Commission) earned by the Fund over a thirty-day period by the maximum
offering price per share of the Fund on the last day of the period.
This number is then annualized using semi-annual compounding.
The tax-equivalent yield of THE WACHOVIA MUNICIPAL FUNDS is calculated
similarly to the yield, but is adjusted to reflect the taxable yield
that the Fund would have had to earn to equal its actual yield,
assuming a specific tax rate.
The yield and the tax-equivalent yield do not necessarily reflect
income actually earned by a Fund and, therefore, may not correlate to
the dividends or other distributions paid to shareholders.
Total return and yield will be calculated separately for Class A
Shares, Class B Shares, and Class Y Shares of a Fund. Because Class A
Shares and Class B Shares are subject to a shareholder services fee
and Class B Shares are subject to a Rule 12b-1 fee, the yield will be
lower than that of Class Y Shares. The sales load applicable to Class
A Shares also contributes to a lower total return for Class A Shares.
The performance information reflects the effect of the maximum sales
load which, if excluded, would increase the total return, yield, and,
as applicable, tax-equivalent yield. In addition, Class B Shares are
subject to similar non-recurring charges, such as the contingent
deferred sales charge, which, if excluded, would increase the total
return for Class B Shares.
From time to time, advertisements for a Fund may refer to ratings,
rankings, and other information in certain financial publications
and/or compare a Fund's performance to certain indices.
THE WACHOVIA FUNDS &
THE WACHOVIA MUNICIPAL FUNDS
CLASS A SHARES
ALL PORTFOLIOS
CLASS B SHARES
EQUITY FUND
QUANTITATIVE EQUITY FUND
BALANCED FUND
FIXED INCOME FUND
ADDRESSES
WACHOVIA EQUITY FUND 101 GREYSTONE BOULEVARD
WACHOVIA QUANTITATIVE EQUITY FUND SC-9215
WACHOVIA EQUITY INDEX FUND COLUMBIA, SC 29226
WACHOVIA SPECIAL VALUES FUND WACHOVIA EMERGING MARKETS FUND WACHOVIA
BALANCED FUND WACHOVIA FIXED INCOME FUND WACHOVIA SHORT-TERM FIXED
INCOME FUND WACHOVIA GA MUNICIPAL BOND FUND WACHOVIA NC MUNICIPAL BOND
FUND WACHOVIA SC MUNICIPAL BOND FUND
INVESTMENT ADVISER
(THE WACHOVIA FUNDS) WACHOVIA ASSET MANAGEMENT
(THE WACHOVIA MUNICIPAL FUNDS) 100 NORTH MAIN STREET
WINSTON-SALEM, NC 27101
COUNSEL TO THE WACHOVIA FUNDS AND KIRKPATRICK & LOCKHART LLP
THE WACHOVIA MUNICIPAL FUNDS 1800 MASSACHUSETTS AVENUE, NW
WASHINGTON, DC 20036-1800
COUNSEL TO THE INDEPENDENT TRUSTEES PIPER & MARBURY LLP
1200 NINETEENTH STREET, NW
WASHINGTON, DC 20036-2430
JULY 31,1997
822-27 (7/97) G01513-01 (7/97)
THE WACHOVIA FUNDS &
THE WACHOVIA MUNICIPAL FUNDS
CLASS Y SHARES
PROSPECTUS
JULY 31, 1997
[GRAPHIC]
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
THE WACHOVIA_ FUNDS AND THE WACHOVIA_ MUNICIPAL FUNDS
(FORMERLY,_ THE_ BILTMORE_ FUNDS_ AND_ THE_ BILTMORE_ MUNICIPAL_
FUNDS)
The Wachovia Funds and The Wachovia Municipal Funds (individually
referred to as the "Trust" or collectively as the "Trusts") are
open-end management investment companies which offer separate
investment portfolios, each having its own investment objective and
policies for different investor needs. The shares offered by this
prospectus represent interests in the following portfolios
(individually referred to as the "Fund" or collectively as the
"Funds"):
- ---------------------------------------------------------
- ---------------------------------------------------------
- ---------------------------------------------------------
- ---------------------------------------------------------
<TABLE>
<S> <C>
THE WACHOVIA FUNDS THE WACHOVIA MUNICIPAL FUNDS
WACHOVIA EQUITY FUND WACHOVIA GEORGIA MUNICIPAL BOND FUND
WACHOVIA QUANTITATIVE EQUITY FUND WACHOVIA NORTH CAROLINA MUNICIPAL BOND FUND
WACHOVIA EQUITY INDEX FUND WACHOVIA SOUTH CAROLINA MUNICIPAL BOND FUND
WACHOVIA SPECIAL VALUES FUND
WACHOVIA EMERGING MARKETS FUND
WACHOVIA BALANCED FUND
WACHOVIA FIXED INCOME FUND
WACHOVIA SHORT-TERM FIXED INCOME FUND
</TABLE>
In addition, The Wachovia Funds offers through separate prospectuses the
following money market portfolios, each having a distinct investment objective
and policies: Wachovia Money Market Fund, Wachovia Prime Cash Management Fund,
Wachovia Tax-Free Money Market Fund, and Wachovia U.S. Treasury Money Market
Fund.
THE SHARES OFFERED BY THIS PROSPECTUS ARE NOT DEPOSITS OR OBLIGATIONS
OF, OR ENDORSED OR GUARANTEED BY, WACHOVIA BANK, N.A., OR ANY OF ITS
AFFILIATES OR SUBSIDIARIES, AND ARE NOT INSURED BY THE FEDERAL DEPOSIT
INSURANCE CORPORATION (THE "FDIC"), THE FEDERAL RESERVE BOARD, OR ANY
OTHER GOVERNMENT AGENCY. INVESTMENT IN THESE SHARES INVOLVES
INVESTMENT RISKS, INCLUDING THE POSSIBLE LOSS OF PRINCIPAL AMOUNT
INVESTED.
This prospectus provides you with information specific to the Class Y
Shares of the Funds. It contains the information you should read and
know before you invest in the Class Y Shares of the Funds. The Funds
also offer Class A and, in some cases, Class B Shares. Keep this
prospectus for future reference.
The Funds have also filed a Statement of Additional Information dated
January 31, 1997, revised on July 31, 1997, with the Securities and
Exchange Commission ("SEC"). The information contained in the
Statement of Additional Information is incorporated by reference into
this prospectus. To request a copy of the Statement of Additional
Information free of charge, obtain other information, or make
inquiries about the Funds, call 1-800-994-4414 or write the Funds at
(Name of Fund), 101 Greystone Boulevard, SC-9215, Columbia, South
Carolina 29226. The Statement of Additional Information, material
incorporated by reference into this document, and other information
regarding the Funds is maintained electronically with the SEC at
Internet Web site (http://www.sec.gov).
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION PASSED UPON
THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
TABLE OF CONTENTS
- ----------------------------------------------------------
SUMMARY OF INVESTMENT INFORMATION 1
- ----------------------------------------------------------
SUMMARY OF FUND EXPENSES 2
- ----------------------------------------------------------
FINANCIAL HIGHLIGHTS 4
- ----------------------------------------------------------
GENERAL INFORMATION 6
- ----------------------------------------------------------
THE WACHOVIA FUNDS 6
Wachovia Equity Fund 6
Wachovia Quantitative Equity Fund 6
Wachovia Equity Index Fund 6
Wachovia Special Values Fund 7
Wachovia Emerging Markets Fund 7
Wachovia Balanced Fund 7
Wachovia Fixed Income Fund 8
Wachovia Short-Term Fixed Income Fund 8
Additional Acceptable Investments 8
- ----------------------------------------------------------
THE WACHOVIA MUNICIPAL FUNDS 8
Wachovia Georgia Municipal Bond Fund 8
Wachovia North Carolina Municipal Bond Fund 9
Wachovia South Carolina Municipal Bond Fund 9
Acceptable Investments 9
State Municipal Securities 9
- ----------------------------------------------------------
PORTFOLIO INVESTMENTS AND STRATEGIES 10
Investment Considerations 10
Equity Investments 10
Securities of Foreign Issuers 10
Securities in Emerging Markets 10
Investments in Debt Obligations 11
Investments in Lower-Rated Debt Obligations 11
Municipal Security Investments 11
Investment Processes 12
Quantitative Equity Fund 12
Equity Index Fund 12
S&P 500 Index 13
Emerging Markets Fund 13
Fixed Income Funds 13
Portfolio Investments 14
Corporate Debt Obligations 14
Fixed Rate Corporate Debt Obligations 14
Floating Rate Corporate Debt Obligations 14
Convertible Securities 14
Put and Call Options 15
Stock Index Futures and Options 15
Forward Foreign Currency Exchange
Contracts 16
Index Participation Contracts 16
Mortgage-Backed Securities 16
Adjustable Rate Mortgage Securities 16
Collateralized Mortgage Obligations 16
Real Estate Mortgage Investment Conduits 17
Stripped Mortgage-Backed Securities 17
Asset-Backed Securities 17
U.S. Government Obligations 18
Demand Master Notes 18
Temporary Investments 18
Restricted and Illiquid Securities 18
Repurchase Agreements 19
Demand Features 19
When-Issued and Delayed Delivery
Transactions 19
Lending of Portfolio Securities 19
Investing in Securities of Other Investment
Companies 19
Ratings 19
Municipal Leases 20
Participation Interests 20
Variable Rate Municipal Securities 20
Municipal Bond Insurance 20
Non-Diversification 20
Duration 20
- ----------------------------------------------------------
INVESTMENT LIMITATIONS 21
Borrowing Money 21
Diversification 21
- ----------------------------------------------------------
TRUST INFORMATION 21
Management of the Trusts 21
Board of Trustees 21
Investment Adviser 21
Sub-Adviser 21
Advisory Fees 21
Adviser's Background 22
Distribution of Shares 23
Administrative Arrangements 23
Administration of the Funds 24
Expenses of the Funds and Class Y Shares 24
Brokerage Transactions 24
- ----------------------------------------------------------
NET ASSET VALUE 24
- ----------------------------------------------------------
INVESTING IN THE FUNDS 24
Share Purchases 24
Minimum Investment Required 25
Systematic Investment Program 25
Certificates and Confirmations 25
Subaccounting Services 25
Dividends and Capital Gains 25
- ----------------------------------------------------------
EXCHANGE PRIVILEGE 25
Exchange by Telephone 26
- ----------------------------------------------------------
REDEEMING SHARES 26
By Telephone 26
By Mail 26
Signatures 26
Systematic Withdrawal Program 26
Accounts with Low Balances 27
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
TABLE OF CONTENTS (CONT'D)
- ----------------------------------------------------------
SHAREHOLDER INFORMATION 27
Voting Rights 27
- ----------------------------------------------------------
EFFECT OF BANKING LAWS 27
- ----------------------------------------------------------
TAX INFORMATION 27
- ----------------------------------------------------------
THE WACHOVIA MUNICIPAL FUNDS TAX INFORMATION 28
Federal Income Tax 28
Georgia and North Carolina Taxes 28
South Carolina Taxes 28
Other State and Local Taxes 29
- ----------------------------------------------------------
OTHER CLASSES OF SHARES 29
- ----------------------------------------------------------
PERFORMANCE INFORMATION 29
- ----------------------------------------------------------
ADDRESSES BACK COVER
- ---------------------------------------------------------
- ---------------------------------------------------------
SUMMARY OF INVESTMENT
INFORMATION
WHO MAY WANT TO INVEST IN THE WACHOVIA_ FUNDS AND THE WACHOVIA_
MUNICIPAL FUNDS?
THE WACHOVIA FUNDS and THE WACHOVIA MUNICIPAL FUNDS offer investment
opportunities to a wide range of investors, from those who may be
investing for the short-term to those with long-term goals. In
addition to certain money market portfolios offered pursuant to
separate prospectuses, the Trusts currently offer the following eight
professionally managed diversified portfolios and three
non-diversified portfolios:
WACHOVIA EQUITY FUND ("EQUITY FUND")--seeks to produce growth of principal and
income;
WACHOVIA QUANTITATIVE EQUITY FUND ("QUANTITATIVE EQUITY FUND")--seeks to
provide growth of principal and income;
WACHOVIA EQUITY INDEX FUND ("EQUITY INDEX FUND")-- seeks to provide a
total return that approximates that of the stock market as measured
by the Standard & Poor's Composite Index of 500 Stocks (the "S&P 500
Index" or "Index");
WACHOVIA SPECIAL VALUES FUND ("SPECIAL VALUES FUND")-- seeks to produce growth
of principal;
WACHOVIA EMERGING MARKETS FUND ("EMERGING MARKETS FUND")--seeks to produce
long-term capital appreciation;
WACHOVIA BALANCED FUND ("BALANCED FUND")-- seeks to provide long-term
growth of principal and current income;
WACHOVIA FIXED INCOME FUND ("FIXED INCOME FUND")-- seeks a high level
of total return;
WACHOVIA SHORT-TERM FIXED INCOME FUND ("SHORT-TERM FIXED INCOME
FUND")--seeks to produce a high level of current income;
WACHOVIA GEORGIA MUNICIPAL BOND FUND ("GEORGIA MUNICIPAL BOND
FUND")--seeks to provide current income which is exempt from federal
regular income tax and the personal income taxes imposed by the State
of Georgia;
WACHOVIA NORTH CAROLINA MUNICIPAL BOND FUND ("NORTH CAROLINA
MUNICIPAL BOND FUND")--seeks to provide current income which is
exempt from federal regular income tax and the income tax imposed by
the State of North Carolina; and
WACHOVIA SOUTH CAROLINA MUNICIPAL BOND FUND ("SOUTH CAROLINA
MUNICIPAL BOND FUND")--seeks to provide current income which is
exempt from federal regular income tax and the South Carolina state
income taxes.
WHO MANAGES THE FUNDS?
Wachovia Asset Management, a business unit of Wachovia Bank, N.A., serves as
investment adviser to THE WACHOVIA FUNDS and THE WACHOVIA MUNICIPAL FUNDS. Twin
Capital Management, Inc. serves as sub-adviser to the QUANTITATIVE EQUITY FUND.
HOW TO BUY AND SELL SHARES
You may buy and sell shares of any of the Funds by telephone, by mail,
or in person. Except as indicated below, all shares are sold with
sales charges. Fund shares are redeemed at net asset value. The Trusts
also offer you the privilege of exchanging shares of one Fund for
another. For more information, please see "Investing in the Funds,"
"Exchange Privilege," and "Redeeming Shares."
RISK FACTORS
Investors should be aware of general risks associated with investment
in mutual funds. Market values of fixed income securities, which
constitute a major part of the investments of several Funds, may vary
inversely in response to change in prevailing interest rates. Foreign
securities in which some of the Funds (particularly the EMERGING
MARKETS FUND) may invest may be subject to certain risks in addition
to those inherent in U.S. investments. One or more of the Funds may
make certain investments and employ certain investment techniques that
involve other risks, including entering into repurchase agreements,
lending portfolio securities, entering into futures contracts and
related options, entering into foreign currency transactions and
forward foreign currency exchange contracts, and borrowing money for
investment purposes. These risks and those associated with investing
in mortgage-backed securities, foreign securities, when-issued
securities, variable rate securities, and equity securities are
described under "Portfolio Investments and Strategies."
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SUMMARY OF FUND EXPENSES
THE WACHOVIA_ FUNDS
THE WACHOVIA_ MUNICIPAL FUNDS
CLASS Y SHARES
SHAREHOLDER TRANSACTION EXPENSES
<TABLE>
<CAPTION>
QUANTITATIVE EQUITY SPECIAL EMERGING
EQUITY EQUITY INDEX VALUES MARKETS
FUND FUND FUND FUND FUND
<S> <C> <C> <C> <C> <C>
Maximum Sales Charge Imposed on Purchases
(as a percentage of offering price) None None None None None
Maximum Sales Charge on Reinvested Dividends
(as a percentage of offering price) None None None None None
Contingent Deferred Sales Charge (as a percentage of
original purchase price or redemption proceeds, as
applicable) None None None None None
Redemption Fees (as a percentage of amount redeemed,
if applicable) None None None None None
Exchange Fee None None None None None
<CAPTION>
BALANCED
FUND
<S> <C>
Maximum Sales Charge Imposed on Purchases
(as a percentage of offering price) None
Maximum Sales Charge on Reinvested Dividends
(as a percentage of offering price) None
Contingent Deferred Sales Charge (as a percentage of
original purchase price or redemption proceeds, as
applicable) None
Redemption Fees (as a percentage of amount redeemed,
if applicable) None
Exchange Fee None
</TABLE>
ANNUAL CLASS Y SHARES OPERATING EXPENSES
(As a percentage of projected average net assets)
<TABLE>
<S> <C> <C> <C> <C> <C>
Management Fee (after waiver, if applicable) (1) 0.60% 0.59% 0.25% 0.72% 1.00%
12b-1 Fees None None None None None
Other Expenses (after reimbursement, if applicable)(2) 0.30% 0.28% 0.23% 0.43% 0.60%
Total Class Y Shares Operating Expenses
(after waivers if applicable) (3) 0.90% 0.87% 0.48% 1.15% 1.60%
</TABLE>
<TABLE>
<S> <C>
Management Fee (after waiver, if applicable) (1) 0.53%
12b-1 Fees None
Other Expenses (after reimbursement, if applicable) (2) 0.23%
Total Class Y Shares Operating Expenses
(after waivers if applicable) (3) 0.76%
</TABLE>
SHAREHOLDER TRANSACTION EXPENSES
<TABLE>
<CAPTION>
SHORT-TERM GEORGIA NORTH CAROLINA
FIXED INCOME FIXED-INCOME MUNI BOND MUNI BOND
FUND FUND FUND FUND
<S> <C> <C> <C> <C>
Maximum Sales Charge Imposed on Purchases
(as a percentage of offering price) None None None None
Maximum Sales Charge Imposed on Reinvested
Dividends
(as a percentage of offering price) None None None None
Contingent Deferred Sales Charge (as a
percentage of original purchase price or
redemption proceeds, as applicable) None None None None
Redemption Fees (as a percentage of amount
redeemed, if applicable) None None None None
Exchange Fee None None None None
<CAPTION>
SOUTH CAROLINA
MUNI BOND
FUND
<S> <C>
Maximum Sales Charge Imposed on Purchases
(as a percentage of offering price) None
Maximum Sales Charge Imposed on Reinvested Dividends (as a percentage
of offering price) None Contingent Deferred Sales Charge (as a
percentage of original purchase price or redemption proceeds, as
applicable) None
Redemption Fees (as a percentage of amount
redeemed, if applicable) None
Exchange Fee None
</TABLE>
ANNUAL FUND OPERATING EXPENSES
(As a percentage of projected average net assets)
<TABLE>
<S> <C> <C> <C> <C>
Management Fee (after waiver, if applicable)
(1) 0.48% 0.32% 0.00% 0.31% 0.26%
12b-1 Fees None None None None None
Other Expenses (after reimbursement,
if applicable) (2) 0.26% 0.31% 0.92% 0.54% 0.32%
Total Class Y Shares Operating Expenses
(after waivers and reimbursement, if
applicable) (3) 0.74% 0.63% 0.92% 0.85% 0.58%
</TABLE>
(1) The management fee has been reduced to reflect the voluntary waiver by the
investment adviser. The adviser can terminate this voluntary waiver at any
time at its sole discretion. The maximum management fee is 0.30% for the
EQUITY INDEX FUND, 0.55% for the SHORT-TERM FIXED INCOME FUND, 0.60% for
the FIXED INCOME FUND, 0.70% for the EQUITY FUND, QUANTITATIVE EQUITY FUND
and BALANCED FUND, 0.75% for the GEORGIA MUNICIPAL BOND FUND, NORTH
CAROLINA MUNICIPAL BOND FUND, and SOUTH CAROLINA MUNICIPAL BOND FUND, 0.80%
for the SPECIAL VALUES FUND, and 1.00% for the EMERGING MARKETS FUND.
(2) For the fiscal year ending November 30, 1997, other expenses are
expected to be 1.49% for the GEORGIA MUNICIPAL BOND FUND, absent
an anticipated reimbursement of other operating expenses.
(3) The Annual Class Y Shares Operating Expenses and the Operating Expenses
absent the voluntary waivers/ reimbursements were 0.90% and 1.09% for the
EQUITY FUND, 0.87% and 0.98% for the QUANTITATIVE EQUITY FUND, 0.48% and
0.54% for the EQUITY INDEX FUND, 1.15% and 1.39% for the SPECIAL VALUES
FUND, 0.63% and 0.76% for the EMERGING MARKETS FUND, 0.76% and 0.92% for
the BALANCED FUND, 0.75% and 0.89% for the FIXED INCOME FUND, 0.64% and
0.83% for the SHORT-TERM FIXED INCOME FUND, 0.89% and 2.46% for the GEORGIA
MUNICIPAL BOND FUND, 0.84% and 1.49% for the NORTH CAROLINA MUNICIPAL BOND
FUND, and 0.57% and 1.11% for the South Carolina Municipal Bond Fund for
the fiscal year ended November 30, 1996. For the fiscal year ending
November 30, 1997, the Annual Class Y Shares Operating Expenses are
expected to be 1.00% for the EQUITY FUND, 0.98% for the QUANTITATIVE EQUITY
FUND, 0.53% for the EQUITY INDEX FUND, 1.23% for the SPECIAL VALUES FUND,
0.93% for the BALANCED FUND, 0.86% for the FIXED INCOME FUND and the
SHORT-TERM FIXED INCOME FUND, 2.24% for the GEORGIA MUNICIPAL BOND FUND,
1.29% for the NORTH CAROLINA MUNICIPAL BOND FUND, and 1.07% for the SOUTH
CAROLINA MUNICIPAL BOND FUND, absent the voluntary waivers/reimbursement
described above in Notes 1 and 2.
The purpose of this table is to assist an investor in understanding
the various costs and expenses that a shareholder of the Funds will
bear either directly or indirectly. For more complete descriptions of
the various costs and expenses, see "TRUST INFORMATION" and "INVESTING
IN THE FUNDS."
EXAMPLE
You would pay the following expenses on a $1,000 investment assuming
(1) 5% annual return and (2) redemption at the end of each time
period. As noted in the table above, the Fund's Class Y Shares charge
no sales charges or redemption fees.
<TABLE>
<CAPTION>
QUANTITATIVE EQUITY SPECIAL EMERGING
EQUITY EQUITY INDEX VALUES MARKETS BALANCED
FUND FUND FUND FUND FUND FUND
<S> <C> <C> <C> <C> <C> <C>
1 Year $ 9 $ 9 $ 5 $ 12 $ 16 $ 8
3 Years $ 29 $ 28 $ 15 $ 37 $ 51 $ 24
</TABLE>
<TABLE>
<CAPTION>
FIXED SHORT-TERM GEORGIA NORTH CAROLINA SOUTH CAROLINA
INCOME FIXED-INCOME MUNI BOND MUNI BOND MUNI BOND
FUND FUND FUND FUND FUND
<S> <C> <C> <C> <C> <C>
1 Year $ 8 $ 6 $ 9 $ 9 $ 6
3 Years $ 24 $ 20 $ 29 $ 27 $ 19
</TABLE>
THE ABOVE EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE
EXPENSES. ACTUAL EXPENSES MAY BE GREATER OR LESS THAN THOSE SHOWN.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
THE WACHOVIA_ FUNDS AND THE WACHOVIA_ MUNICIPAL FUNDS
FINANCIAL HIGHLIGHTS--CLASS Y SHARES
(For a Class Y Share outstanding throughout each period)
The following table has been audited by Ernst & Young LLP, the Fund's
independent auditors. Their report dated January 17, 1997, on the
Funds' financial statements for the year ended November 30, 1996, and
on the following table for the periods presented, is included in the
Fund's Annual Report to shareholders dated November 30, 1996, which is
incorporated herein by reference. This table should be read in
conjunction with the Fund's financial statements and notes thereto,
which may be obtained free of charge from the Trust.
<TABLE>
<CAPTION>
NET REALIZED AND
UNREALIZED GAIN/
(LOSS) ON
INVESTMENTS,
NET ASSET FUTURES DISTRIBUTIONS
VALUE, NET CONTRACTS, AND TOTAL FROM FROM NET NET ASSET
PERIOD ENDED BEGINNING INVESTMENT FOREIGN CURRENCY INVESTMENT INVESTMENT VALUE,
NOVEMBER 30, OF PERIOD INCOME TRANSACTIONS OPERATIONS INCOME END OF PERIOD
<S> <C> <C> <C> <C> <C> <C>
- --------------------------------------------------------------------------------------------------------------------
WACHOVIA EQUITY FUND
1996(a) $ 12.43 0.03 2.40 2.43 (0.05) $ 14.81
WACHOVIA QUANTITATIVE EQUITY FUND
1996(a) $ 13.09 0.04 2.60 2.64 (0.06) $ 15.67
WACHOVIA EQUITY INDEX FUND
1996(a) $ 13.37 0.09(d) 2.60 2.69 (0.08) $ 15.98
WACHOVIA SPECIAL VALUES FUND
1996(a) $ 13.62 0.03 2.02 2.05 -- $ 15.67
WACHOVIA EMERGING MARKETS FUND
1996(a) $ 11.92 0.01(d) (0.26) (0.25) -- $ 11.67
WACHOVIA BALANCED FUND
1996(a) $ 11.68 0.08 1.63 1.71 (0.09) $ 13.30
WACHOVIA FIXED INCOME FUND
1996(a) $ 9.45 0.17 0.40 0.57 (0.19) $ 9.83
WACHOVIA SHORT-TERM FIXED INCOME FUND
1996(a) $ 9.67 0.11(d) 0.18 0.29 (0.17) $ 9.79
WACHOVIA GEORGIA MUNICIPAL BOND FUND
1996(a) $ 10.71 0.17 0.29 0.46 (0.17) $ 11.00
WACHOVIA NORTH CAROLINA MUNICIPAL BOND FUND
1996(a) $ 10.71 0.16 0.32 0.48 (0.16) $ 11.03
WACHOVIA SOUTH CAROLINA MUNICIPAL BOND FUND
1996(a) $ 10.73 0.20 0.32 0.52 (0.20) $ 11.05
</TABLE>
* Computed on an annualized basis.
(a) Reflects operations for the period from July 22, 1996 (date of
initial public investment) to November 30, 1996.
(b) Based on net asset value, which does not reflect the sales charge
or contingent deferred sales charge, if applicable.
(c) This voluntary expense decrease is reflected in both the expense
and net investment income ratios shown above.
(d) Per share information is based on average shares outstanding.
(e)_ On July 22, 1996, the Funds created Class Y Shares for certain
institutional investors. Certain of these investors' shares were
converted from Class A to Class Y Shares, which accounts for a
portion of the decrease in Class A Shares' assets.
Further information about the Funds' performance is contained in the
Funds' Annual Report for the fiscal year ended November 30, 1996,
which can be obtained free of charge.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
RATIOS TO AVERAGE NET ASSETS
NET NET ASSETS, END AVERAGE
TOTAL INVESTMENT EXPENSE WAIVER/ OF PERIOD (000 COMMISSION PORTFOLIO
RETURN(B) EXPENSES INCOME REIMBURSEMENT(C) OMITTED)(E) RATE PAID TURNOVER RATE
<S> <C> <C> <C> <C> <C> <C>
- -----------------------------------------------------------------------------------------------------------------
19.57% 0.90%* 0.91%* 0.19%* $ 129,205 $ 0.0652 64%
20.19% 0.87%* 1.19%* 0.11%* $ 152,571 $ 0.0532 44%
20.14% 0.48%* 1.92%* 0.06%* $ 213,833 $ 0.0137 12%
15.05% 1.15%* 1.76%* 0.24%* $ 58,697 $ 0.0650 38%
(2.10%) 0.63%* 0.45%* 0.13%* $ 123,036 $ 0.0009 30%
14.69% 0.76%* 2.85%* 0.16%* $ 235,791 $ 0.0545 99%
6.12% 0.75%* 6.33%* 0.14%* $ 175,836 -- 181%
3.00% 0.64%* 5.77%* 0.19%* $ 116,138 -- 145%
4.31% 0.89%* 4.84%* 1.57%* $ 6,803 -- 14%
4.55% 0.84%* 4.16%* 0.65%* $ 28,283 -- 7%
4.86% 0.57%* 5.56%* 0.54%* $ 36,511 -- 20%
</TABLE>
- ---------------------------------------------------------
- ---------------------------------------------------------
GENERAL INFORMATION
THE WACHOVIA FUNDS was established as a Massachusetts business trust
under a Declaration of Trust dated November 19, 1991. (For purposes of
this prospectus, "THE WACHOVIA FUNDS" refers only to those portfolios
of the Trust that are included in this combined prospectus.) THE
WACHOVIA MUNICIPAL FUNDS was established as a Massachusetts business
trust under a Declaration of Trust dated August 15, 1990. Each
Declaration of Trust permits the respective Trust to offer separate
series of shares of beneficial interest representing interests in
separate portfolios of securities. As of the date of this prospectus,
the Trusts offer three classes of shares: Class A Shares, Class Y
Shares, and for the Equity Fund, the Quantitative Equity Fund, the
Balanced Fund and the Fixed Income Fund, Class B Shares. Class Y
Shares are offered to certain accounts held by Wachovia Bank, N.A.,
("Wachovia Bank") and its affiliates in a fiduciary, advisory, agency,
custodial, or similar capacity. Class A Shares and Class B Shares are
sold to those customers as well as other individuals and customers of
Wachovia Bank. This prospectus relates only to Class Y Shares
("Shares") of the Funds. The investment objective and policies of
each Fund appear below. The investment objective of a Fund cannot be
changed without shareholder approval. While a Fund cannot assure that
it will achieve its investment objective, it attempts to do so by
following the investment policies described below.
Unless indicated otherwise, the investment policies of a Fund may be
changed by the Trustees without shareholder approval. However,
shareholders will be notified before any material change in these
policies becomes effective.
For additional information about investment limitations, strategies,
and certain investment policies, please refer to the "Portfolio
Investments and Strategies" section of this prospectus.
- ---------------------------------------------------------
- ---------------------------------------------------------
THE WACHOVIA_ FUNDS
WACHOVIA_ EQUITY FUND
The investment objective of the EQUITY FUND is to produce growth of
principal and income. The Fund pursues its investment objective by
investing primarily in a professionally-managed and diversified
portfolio of common stock of companies with an established market.
Under normal market conditions, the Fund intends to invest at least
65% of its total assets in equity securities. These securities will be
primarily quality mid- to large-capitalization common stocks. The
Fund's investment adviser seeks undervalued stocks with improving
prospects by integrating two disciplines to capture both growth and
value opportunities. The Fund's investment adviser will integrate
value and growth management techniques in attempting to select
undervalued stocks that have prospects for improving fundamentals
while evening out the price volatility often associated with high
growth investments.
Acceptable investments include:
common or preferred stocks of U.S. companies which are either listed
on the New York or American Stock Exchange or traded in
over-the-counter markets and are considered by the Fund's investment
adviser to have an established market; convertible securities;
investments in American Depositary Receipts ("ADRs") of foreign
companies traded on the New York Stock Exchange or in
over-the-counter markets. The Fund may not invest more than 20% of
its assets in ADRs. In addition, the Fund may invest up to 10% of its
assets in other securities of foreign issuers ("Non-ADRs"). (See
"Securities of Foreign Issuers."); and domestic issues of corporate
debt obligations rated A or better by Moody's Investors Service, Inc.
("Moody's") or Standard & Poor's Ratings Group ("S&P").
WACHOVIA_ QUANTITATIVE EQUITY FUND
The investment objective of the QUANTITATIVE EQUITY FUND is to provide
growth of principal and income. The Fund pursues its investment
objective by investing in a professionally managed and diversified
portfolio consisting primarily of large capitalization common stocks.
The average market capitalization of the stocks in the Fund's universe
will be in excess of $1 billion. These securities will primarily be
composed of issues of domestic companies. Stocks are selected by the
Fund's sub-adviser using a quantitative computer valuation model
described below under "Investment Processes." The Fund intends to hold
a broadly diversified portfolio of common stocks that, in the
aggregate, exhibit investment characteristics similar to the stocks
found in the S&P 500 Index. However, the Fund will not limit its
investments solely to stocks represented in the Index. There can be no
assurance that the Fund's investment performance will match or exceed
that of the Index. Under normal market conditions, the Fund intends to
invest at least 65% of its total assets in equity securities.
Although the Fund normally seeks to remain substantially fully
invested in the common stocks in the universe identified by the Fund's
investment adviser, the Fund may also invest in the acceptable
investments listed under "WACHOVIA EQUITY FUND" above.
WACHOVIA_ EQUITY INDEX FUND
The investment objective of the EQUITY INDEX FUND is to provide a
total return that approximates that of the stock market as measured by
the S&P 500 Index. The Fund pursues its investment objective by
investing in a broadly diversified portfolio of common stocks that
make up the Index. The Fund will normally seek to be invested in all
the stocks that comprise the Index and achieve a correlation between
the performance of its
portfolio and that of the Index of at least 0.95 of 1%; a figure of
1.00 would represent perfect correlation. The Fund is managed by
utilizing a computer program that identifies which stocks should be
purchased or sold in order to approximate, as much as possible, the
investment return of the securities that comprise the S&P 500 Index.
Under normal circumstances, at least 95% of the value of the Fund's
total assets will be invested in stocks represented in the Index and
S&P 500 Index futures contracts. However, the Fund is not required to
sell securities if the 95% investment level changes due to increases
or decreases in the market value of portfolio securities.
In addition, the Fund may hold cash reserves which may be invested in,
but not limited to, the following:
commercial paper rated, at the time of purchase, at least Prime-1 or
A-1 by Moody's or S&P or, if unrated, of comparable quality as
determined by the Fund's investment adviser;
time and savings deposits (including certificates of deposit) in domestic,
commercial and savings banks; and
index participation contracts.
WACHOVIA_ SPECIAL VALUES FUND
The investment objective of the SPECIAL VALUES FUND is to produce
growth of principal. The Fund pursues its investment objective by
investing primarily in a portfolio of equity securities comprising the
small capitalization sector of the United States equity market which
the investment adviser believes to be significantly undervalued with
potential for above-average capital appreciation commensurate with
increased risk. Typical investments are in stocks that have low
price-to-earnings ratios, are generally out of favor in the
marketplace, are selling significantly below their stated or
replacement book value or are undergoing a reorganization or other
corporate action that may create above-average price appreciation.
Under normal market conditions, the Fund intends to invest at least
65% of its total assets in equity securities of companies that have a
market value capitalization of up to $1 billion. The Fund will limit
its investments to up to 20% of total assets in securities of foreign
issuers which are freely traded on United States securities exchanges
or in the over-the-counter market in the form of ADRs and up to 10% of
total assets in other securities of foreign issuers.
Acceptable investments include, but are not limited to:
common stocks of U.S. companies which are either listed on the New York or
American Stock Exchange or traded in over-the-counter markets and are
considered by the Fund's investment adviser to have potential for above-average
appreciation;
domestic issues of corporate debt obligations (including convertible bonds);
securities of foreign issuers; and
master limited partnerships.
In addition, the Fund may invest in high yield corporate bonds
(commonly known as junk bonds) and speculative grade preferred stocks.
WACHOVIA_ EMERGING MARKETS FUND
The investment objective of the EMERGING MARKETS FUND is to produce
long-term capital appreciation. The Fund pursues its investment
objective by investing primarily in a professionally managed and
diversified portfolio of securities of issuers and companies located
in countries that are generally considered to be developing or
emerging countries by the International Bank for Reconstruction and
Development (more commonly known as the World Bank) and the
International Finance Corporation, as well as countries that are
classified by the United Nations or otherwise regarded by their
authorities as developing. Many investments in emerging markets can be
considered speculative, and therefore may offer higher potential for
gains and losses than investments in the developed markets of the
world. Because investing in emerging markets can involve significant
risks, the Fund is designed for aggressive investors. Under normal
market conditions, the Fund intends to invest at least 65% of its
total assets in securities of issuers and companies located in
countries having emerging markets. Although the Fund will focus its
investment on the common stocks of foreign companies located in
emerging market countries, the Fund may also invest in other
securities, including debt securities.
Acceptable investments may also include, but will not be limited to:
preferred stocks of foreign companies;
convertible securities and warrants of foreign companies;
investments in ADRs of foreign countries traded on the New York Stock
Exchange or in over-the-counter markets, and investments in European
Depositary Receipts ("EDRs," sometimes also referred to as
Continental Depositary Receipts), which are receipts issued in
Europe, typically by foreign banks and trust companies, that evidence
ownership of either foreign or domestic underlying securities and
Global Depositary Receipts; fixed-income obligations of foreign
governments, supranational entities and corporate debt obligations
denominated in currencies other than U.S. dollars, rated B or better
at the time of purchase by Moody's or S&P; and U.S. equity and debt
securities rated, at the time of purchase, B or better by Moody's or
S&P.
In addition, the Fund may enter into foreign currency transactions and
may maintain reserves in foreign or U.S. money market instruments.
WACHOVIA_ BALANCED FUND
The investment objective of the BALANCED FUND is to provide long-term
growth of principal and current income. The Fund pursues its
investment objective by
investing primarily in a professionally-managed, diversified portfolio
of equity securities and debt securities. The Fund's investment
approach, as related to equity securities, is to produce long-term
growth of principal and income by investing in a diversified portfolio
of common stocks. The Fund will seek undervalued stocks with improving
prospects in an attempt to capture both growth and value
opportunities. With regard to debt securities, the Fund's investment
approach will be to maximize total return (which consists of capital
appreciation and income) available from a diversified portfolio of
fixed income securities while providing relative stability of
principal and income as compared to other fixed income securities.
Under normal market circumstances, the Fund will invest at least 65%
of its assets in equity securities and debt securities. As a matter of
operating policy, the asset mix of the Fund will normally range
between 50-70% in common stocks and convertible securities, 30-50% in
preferred stocks and bonds, and 0-20% in money market instruments. The
Fund will maintain at least 25% of its assets in fixed income senior
securities (including the value of convertible senior securities
attributable to their fixed income characteristics). Acceptable
investments include but are not limited to:
common or preferred stocks of U.S. companies which are either listed
on the New York or American Stock Exchange or traded in the
over-the-counter markets and are considered by the Fund's investment
adviser to have an established market; convertible securities;
investments in ADRs of foreign companies traded on the New York Stock
Exchange or in the over-the-counter market. The Fund may not invest
more than 20% of its assets in ADRs. In addition, the Fund may invest
up to 10% of its assets in Non-ADRs. (See "Securities of Foreign
Issuers."); domestic issues of corporate debt obligations (including
convertible bonds) rated, at the time of purchase, A or better by S&P
or Moody's or, if not rated, are determined by the Fund's investment
adviser to be of comparable quality; mortgage-backed and asset-backed
securities; commercial paper rated not less than A-1 by S&P or
Prime-1 by Moody's and unrated commercial paper that is deemed by the
Fund's investment adviser to be of comparable quality; and time and
savings deposits (including certificates of deposit) in commercial or
savings banks.
WACHOVIA_ FIXED INCOME FUND
The investment objective of the FIXED INCOME FUND is to seek a high
level of total return. As a secondary investment objective, the Fund
will attempt to minimize volatility of principal relative to the fixed
income markets. Total return consists of income and capital gains. The
Fund pursues its investment objectives by investing primarily in a
diversified portfolio of fixed income securities that, at the time of
purchase, are rated in the top three investment categories by a
nationally recognized statistical rating organization (NRSRO) or, if
unrated, are of comparable quality to securities with such ratings.
The Fund will maintain an average dollar-weighted maturity of between
6 to 10 years. The Fund will invest, under normal circumstances, at
least 65% of the value of its total assets in fixed income securities.
Acceptable investments include:
domestic issues of corporate debt obligations, including demand
master notes rated at the time of purchase Aaa, Aa, or A by Moody's
or AAA, AA, or A by S&P or, if unrated, of comparable quality as
determined by the Fund's investment adviser; convertible securities;
mortgage-backed and asset-backed securities; commercial paper that at
the time of purchase is rated not less than Prime-1 or A-1, by
Moody's or S&P, respectively, or, if unrated, of comparable quality
as determined by the Fund's investment adviser; and time and savings
deposits (including certificates of deposit) in commercial or savings
banks.
WACHOVIA_ SHORT-TERM FIXED INCOME FUND
The investment objective of the SHORT-TERM FIXED INCOME FUND is to
produce a high level of current income with a minimum of principal
volatility. The Fund pursues its investment objective by investing
primarily in a diversified portfolio of short-term, high-grade, fixed
income securities. Under normal market circumstances, the Fund will
invest at least 65% of its assets in such securities. The Fund will
maintain an average dollar-weighted maturity of between one to three
years. Otherwise, the Fund may invest in the acceptable investments
listed under "WACHOVIA FIXED INCOME FUND" above.
ADDITIONAL ACCEPTABLE INVESTMENTS
In addition to the acceptable investments discussed above, each of the
Funds may borrow money, enter into repurchase agreements, lend
portfolio securities, invest in money market instruments, restricted
and illiquid securities, securities issued or guaranteed by the U.S.
government, its agencies or instrumentalities, securities of other
investment companies, warrants, demand master notes and engage in
when-issued and delayed delivery transactions. The Funds may also
engage in put and call options, futures, and options on futures for
hedging purposes.
- ---------------------------------------------------------
- ---------------------------------------------------------
THE WACHOVIA_ MUNICIPAL FUNDS
WACHOVIA_ GEORGIA MUNICIPAL BOND FUND
The investment objective of the GEORGIA MUNICIPAL BOND FUND is to
provide current income which is exempt from federal regular income tax
and the personal income taxes imposed by the State of Georgia. As a
matter of investment policy which may not be changed without
shareholder approval, the Fund will invest its assets so that, under
normal circumstances,
at least 80% of its total assets are invested in obligations, the
interest income from which is exempt from federal regular income tax
and the personal income taxes imposed by the State of Georgia
("Georgia Municipal Securities").
WACHOVIA_ NORTH CAROLINA MUNICIPAL BOND FUND
The investment objective of the NORTH CAROLINA MUNICIPAL BOND FUND is
to provide current income which is exempt from federal regular income
tax and the income tax imposed by the State of North Carolina. As a
matter of investment policy which may not be changed without
shareholder approval, the Fund will invest its assets so that, under
normal circumstances, at least 80% of its total assets are invested in
obligations, the interest income from which is exempt from federal
regular income tax and the income tax imposed by the State of North
Carolina ("North Carolina Municipal Securities").
WACHOVIA_ SOUTH CAROLINA MUNICIPAL BOND FUND
The investment objective of the SOUTH CAROLINA MUNICIPAL BOND FUND is
to provide current income which is exempt from federal regular income
tax and South Carolina state income taxes. As a matter of investment
policy which may not be changed without shareholder approval, the Fund
will invest its assets so that, under normal circumstances, at least
80% of its interest income is exempt from federal regular income tax
and South Carolina state income taxes or that at least 80% of its
total assets are invested in obligations, the interest income from
which is exempt from federal regular income tax and South Carolina
state income taxes ("South Carolina Municipal Securities").
The Funds' investment adviser may consider the potential for capital
appreciation in the selection of portfolio investments for each of THE WACHOVIA
MUNICIPAL FUNDS.
ACCEPTABLE INVESTMENTS
The Funds invest primarily in Georgia Municipal Securities, North
Carolina Municipal Securities, and South Carolina Municipal
Securities, respectively (collectively, "State Municipal Securities").
These securities are:
obligations, including industrial development bonds, issued on behalf
of the states of Georgia, North Carolina, and South Carolina,
respectively, and their respective political subdivisions or
agencies; obligations issued by or on behalf of any state, territory
or possession of the United States, including the District of
Columbia, or any political subdivision or agency of any of these; and
participation interests, as described below, in any of the above
obligations, the interest from which is, in the opinion of bond
counsel for the issuers or in the opinion of officers of the Trust
and/or the investment advisers to the Funds, exempt from both federal
regular income tax and the personal income tax imposed by the states
of Georgia, North Carolina, and South Carolina, respectively. It is
likely that shareholders who are subject to alternative minimum tax
will be required to include interest from a portion of the municipal
securities owned by the Fund in calculating the federal individual
alternative minimum tax or the federal alternative minimum tax for
corporations.
STATE MUNICIPAL SECURITIES
State Municipal Securities are generally issued to finance public
works, such as airports, bridges, highways, housing, hospitals,
schools, streets, and water and sewer works. They are also issued to
repay outstanding obligations, to raise funds for general operating
expenses, and to make loans to other public institutions and
facilities. State Municipal Securities include industrial development
bonds issued by or on behalf of public authorities to provide
financing aid to acquire sites or construct or equip facilities for
privately or publicly owned corporations. The availability of this
financing encourages these corporations to locate within the
sponsoring communities and thereby increases local employment.
The two principal classifications of municipal securities are "general
obligation" and "revenue" bonds. General obligation bonds are secured
by the issuer's pledge of its full faith and credit and taxing power
for the payment of principal and interest. However, interest on and
principal of revenue bonds are payable only from the revenue generated
by the facility financed by the bond or other specified sources of
revenue.
Revenue bonds do not represent a pledge of credit or create any debt
of or charge against the general revenues of a municipality or public
authority. Industrial development bonds are typically classified as
revenue bonds; the industry which is the beneficiary of such bonds is
generally the only source of payment for the bonds.
Characteristics. State Municipal Securities are subject to one or more of the
following quality standards:
rated A or above by Moody's or S&P at time of purchase;
insured by a municipal bond insurance company which is rated AAA by S&P or Aaa
by Moody's;
secured by an irrevocable escrow of direct obligations of the U.S. government;
or
unrated if determined to be of comparable quality to one of the foregoing
rating categories by the Fund's investment adviser.
(A description of the rating categories is contained in the Appendix
to the Funds' Statement of Additional Information).
- ---------------------------------------------------------
- ---------------------------------------------------------
PORTFOLIO INVESTMENTS
AND STRATEGIES
INVESTMENT CONSIDERATIONS
Equity Investments. As with other mutual funds that invest in equity
securities, the EQUITY FUND, QUANTITATIVE EQUITY FUND, EQUITY INDEX
FUND, SPECIAL VALUES FUND and BALANCED FUND are subject to market
risks. That is, the possibility exists that common stocks will decline
over short or even extended periods of time. The United States equity
market tends to be cyclical, experiencing both periods when stock
prices generally increase and periods when stock prices generally
decrease.
Because the SPECIAL VALUES FUND invests primarily in small
capitalization stocks, there are some additional risk factors
associated with investments in the Fund. In particular, stocks in the
small capitalization sector of the United States equity market have
historically been more volatile in price than larger capitalization
stocks, such as those included in the S&P 500 Index. This is because,
among other things, small companies have less certain growth prospects
than larger companies; have a lower degree of liquidity in the equity
market; and tend to have a greater sensitivity to changing economic
conditions. Further, in addition to exhibiting greater volatility, the
stocks of small companies may, to some degree, fluctuate independently
of the stocks of large companies. That is, the stocks of small
companies may decline in price as the prices of large company stocks
rise or vice versa. Therefore, investors should expect that the Fund
will be more volatile than, and may fluctuate independently of, broad
stock market indices such as the S&P 500 Index.
Securities Of Foreign Issuers. THE EQUITY FUND, QUANTITATIVE EQUITY
FUND, SPECIAL VALUES FUND, EMERGING MARKETS FUND, and BALANCED FUND
may invest in the securities of foreign issuers. There may be certain
risks associated with investing in foreign securities. These include
risks of adverse political and economic developments (including
possible governmental seizure or nationalization of assets), the
possible imposition of exchange controls or other governmental
restrictions, less uniformity in accounting and reporting
requirements, and the possibility that there will be less information
on such securities and their issuers available to the public. In
addition, there are restrictions on foreign investments in other
jurisdictions and there tends to be difficulty in obtaining judgments
from abroad and affecting repatriation of capital invested abroad.
Delays could occur in settlement of foreign transactions, which could
adversely affect shareholder equity. Foreign securities may be subject
to foreign taxes, which reduce yield, and may be less marketable than
comparable United States securities. As a matter of practice, a Fund
will not invest in the securities of a foreign issuer if any risk
identified above appears to a Fund's investment adviser to be
substantial.
Securities In Emerging Markets. Investing in the EMERGING MARKETS FUND
entails a substantial degree of risk. Because of the special risks
associated with investing in emerging markets, an investment in the
EMERGING MARKETS FUND should be considered speculative. Investors are
strongly advised to carefully consider the special risks involved in
emerging markets, which are in addition to the usual risks of
investing in domestic markets and in developed markets around the
world. By itself, an investment in the EMERGING MARKETS FUND does not
constitute a balanced investment plan. Investors should be willing to
assume a higher degree of risk and accept a higher level of volatility
than is generally associated with investment in more developed
markets.
These risks include a possibility of expropriation, nationalization or
confiscatory taxation, taxation of income earned in foreign nations
(including, for example, withholding taxes on interest and dividends)
or other taxes imposed with respect to investments in foreign nations,
foreign exchange controls (which may include suspension of the ability
to transfer currency from a given country and repatriation of
investments), default in foreign government securities, political or
social instability or diplomatic developments which could adversely
affect investment in securities of issuers in foreign nations. (Please
refer to the Statement of Additional Information for an expanded
discussion of sovereign debt obligations.) In addition, there is often
less publicly available information about foreign issuers than those
in the United States. Emerging market companies are not generally
subject to uniform accounting, auditing and financial reporting
standards, and auditing practices and requirements may not be
comparable to those applicable to U.S. companies. Further, the
EMERGING MARKETS FUND may encounter difficulties or be unable to
pursue legal remedies and obtain judgments in foreign courts.
Because the EMERGING MARKETS FUND'S securities will generally be
denominated in foreign currencies, the value of such securities to the
Fund will be affected by changes in currency exchange rates and in
exchange control regulations, and costs will be incurred in connection
with conversion between currencies. A change in the value of a foreign
currency against the U.S. dollar will result in corresponding change
in the U.S. dollar value of the Fund's securities denominated in the
currency. Such changes will also affect the Fund's income and
distributions to shareholders. The Fund may be affected, either
favorably or unfavorably, by the fluctuations in the relative rates of
exchange between the currencies of different nations, and the Fund
therefore may engage in certain hedging strategies. Such strategies
involve certain investment risks and transaction costs to which the
Fund might not otherwise be subject. These risks include dependence
on the investment adviser's ability to predict movements in exchange
rates, and imperfect movements between exchange rates and currency
hedges.
Brokerage commissions, fees for custodial services, and other costs
relating to investments in emerging market countries are generally
greater than in the United States. Such markets have different
clearance and settlement procedures, and in certain markets, there
have been occasions when settlements have been unable to keep pace
with the volume of securities transactions, making it difficult to
effect certain transactions. The inability of the EMERGING MARKETS
FUND to make intended security purchases due to settlement problems
could cause the Fund to miss attractive investment opportunities.
Inability to sell a portfolio security due to settlement problems
could result in either losses to the Fund, if the value of the
portfolio security subsequently declines, or, if the Fund has entered
into a contract to sell the security, could result in possible claims
against the Fund.
In certain emerging market countries, there is less government
supervision and regulation of business and industry practices, stock
exchanges, brokers, and listed companies than in the United States.
The economies of emerging market countries may be predominantly based
on a few industries and may be highly vulnerable to change in local or
global trade conditions. The securities markets of many of the
countries in which the Fund may invest also may be smaller, less
liquid, and subject to greater price volatility than those in the
United States. Some emerging market countries also may have fixed or
managed currencies which are not free-floating against the U.S.
dollar. Further, certain emerging market country currencies may not be
internationally traded. Certain of these currencies have experienced a
steady devaluation relative to the U.S. dollar. Any devaluations in
the currencies in which the Fund's portfolio securities are
denominated may have an adverse impact on the Fund. Finally, many
emerging market countries have experienced substantial, and in some
periods, extremely high, rates of inflation for many years. Inflation
and rapid fluctuations in inflation rates have had, and may continue
to have, negative effects on the economies for individual emerging
market countries. Moreover, the economies of individual emerging
market countries may differ favorably or unfavorably from the U.S.
economy in such respects as the rate of growth of domestic product,
inflation, capital reinvestment, resource self-sufficiency and balance
of payments position.
Investments In Debt Obligations. The market value of debt obligations,
and therefore a Fund's net asset value, will fluctuate due to changes
in economic conditions and other market factors, such as interest
rates, which are beyond the control of the Fund's investment adviser.
In the debt market, prices generally move inversely to interest rates.
A decline in market interest rates results in a rise in the market
prices of outstanding debt obligations. Conversely, an increase in
market interest rates results in a decline in market prices. In either
case, the amount of change in market prices of debt obligations in
response to changes in market interest rates generally depends on the
maturity of the debt obligations. Although debt obligations with
longer maturities offer potentially greater returns, they will
generally experience the greatest market price changes. Consequently,
to the extent a Fund is significantly invested in debt obligations
with longer maturities, there is a greater possibility of fluctuation
in the Fund's net asset value. The Fund's investment adviser will
attempt to minimize the fluctuation of each Fund's net asset value by
predicting the direction of interest rates; however, the investment
adviser could be incorrect in its expectations about the direction and
the extent of these market factors.
Investments In Lower-Rated Debt Obligations. From time to time, a
portion of the EMERGING MARKETS FUND'S and the SPECIAL VALUES FUND'S
portfolios may consist of lower-rated debt obligations (i.e., rated
below BBB by S&P or Baa by Moody's) which are commonly referred to as
"junk bonds." The Funds will not invest more than 35% of its total
assets in such securities. Lower-rated securities will usually offer
higher yields than higher-rated securities. However, there is more
risk associated with these investments. These lower-rated bonds may be
more susceptible to real or perceived adverse economic conditions than
investment grade bonds. These lower-rated bonds are regarded as
predominantly speculative with regard to each issuer's continuing
ability to make principal and interest payments. In addition, the
secondary trading market for lower-rated bonds may be less liquid than
the market for investment grade bonds. Purchasers should carefully
assess the risks associated with an investment in the EMERGING MARKETS
FUND and the SPECIAL VALUES FUND.
Many corporate debt obligations, including many lower-rated bonds,
permit the issuers to call the security and thereby redeem their
obligations earlier than the stated maturity dates. Issuers are more
likely to call bonds during periods of declining interest rates. In
these cases, if the EMERGING MARKETS FUND owns a bond which is called,
the Fund will receive its return of principal earlier than expected
and would likely be required to reinvest the proceeds at lower
interest rates, thus reducing income to the Fund.
Municipal Security Investments. Yields on State Municipal Securities
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 the respective
state or its municipalities could impact a Fund's portfolio. A
municipal bond fund's concentration in securities issued by a specific
state and its political subdivisions provides a greater level of risk
than a fund which is diversified across numerous states and municipal
entities. A state's dependence on
agriculture, manufacturing, tourism, and service industries leaves it
vulnerable to both the business cycle and long term national economic
trends.
(Please refer to the Funds' Statement of Additional Information for an
expanded discussion of Georgia, North Carolina, or South Carolina
investment risks, as appropriate.)
The ability of a Fund to achieve its investment objective also depends
on the continuing ability of the issuers of State Municipal Securities
and participation interests, or the guarantors of either, to meet
their obligations for the payment of interest and principal when due.
Investing in State Municipal Securities which meet the Fund's quality
standards may not be possible if the state or its municipalities do
not maintain their current credit ratings. In addition, the issuance,
tax exemption and liquidity of State Municipal Securities may be
adversely affected by judicial, legislative or executive action,
including, but not limited to, rulings of state and federal courts,
amendments to the state and federal constitutions, changes in
statutory law, and changes in administrative regulations, as well as
voter initiatives.
INVESTMENT PROCESSES
Quantitative Equity Fund. To select stocks for the QUANTITATIVE EQUITY
FUND, the Fund's sub-adviser initially identifies a broad universe of
approximately 900 common stocks. The sub-adviser utilizes four
criteria when determining what common stocks will be included in the
Fund's universe: each stock must be highly capitalized, each stock
must be traded on the New York or American Stock Exchange or in the
over-the-counter markets, each stock must be among the most liquid and
highly traded stocks on its respective exchange, and each stock must
be actively followed by a minimum of three industry analysts.
The Fund's sub-adviser then screens the stocks in the universe, using
a quantitative computer valuation model, to evaluate the relative
attractiveness of each stock. The sub-adviser's model focuses on two
measurement factors: the relative value of the stocks (including their
present and historical price-to-earnings and market price-to-book
value ratios, and the present value of each stock's projected dividend
income) and the stock's growth prospects and earnings momentum
(including changes, over time, in analysts' earning forecasts, and
positive or negative surprises in reported earnings). The Fund's
sub-adviser will vary the importance placed on each factor, depending
on market trends.
Using the valuation model described above, the Fund's investment
adviser then ranks each stock in the universe by decile. The stocks
are classified by industry group, based on industry categories and
weightings found in the S&P 500 Index. In managing the Fund, the
investment adviser continuously monitors the rankings of the stocks in
the universe and employs an active selling discipline, replacing less
attractive stocks (as determined by the valuation model) with more
attractive stocks to maintain a high average rank for the portfolio.
In maintaining the diversification of the portfolio, the investment
adviser gives consideration to the industry weightings found in the
Index.
Although the QUANTITATIVE EQUITY FUND intends to hold a broadly
diversified portfolio of common stocks that, in the aggregate, exhibit
investment characteristics similar to the stocks found in the Index,
the Fund will not limit its investments solely to stocks represented
in the Index. By investing in those common stocks that are included in
the universe described above (a large number of which are not included
in the Index), the Fund will seek to provide a higher rate of total
return than the Index. There can be no assurance that the Fund's
investment performance will match or exceed that of the Index.
Equity Index Fund. The EQUITY INDEX FUND is managed passively, in the
sense that the traditional management functions of economic,
financial, and market analysis are limited to the extent that the Fund
seeks to duplicate the composition of the S&P 500 Index. Furthermore,
a company's adverse financial circumstance will not require its
elimination from the Fund's portfolio, unless the company's stock is
removed from the Index by S&P. The Fund is managed by utilizing a
computer program that identifies which stocks should be purchased or
sold in order to approximate, as much as possible, the investment
return of the securities that comprise the Index. The Fund will select
a stock for purchase into its investment portfolio based on the
stock's inclusion and weighting in the Index, starting with the
heaviest-weighted stock. Thus, the proportion of Fund assets invested
in any one stock comprising the Index may not be identical to the
percentage the particular stock represents in the Index.
On occasion, so as to respond to changes in the Index's composition,
as well as corporate mergers, tender offers, and other circumstances,
additional adjustments will be made in the EQUITY INDEX FUND'S
portfolio. However, it is anticipated that these adjustments will
occur infrequently, and the costs will be minimized. As a result,
portfolio turnover is expected to be below that encountered in other
investment company portfolios. Therefore, the accompanying costs,
including accounting costs, brokerage fees, custodial expenses, and
transfer taxes, are expected to be relatively low. While the cash
flows into and out of the Fund will impact the Fund's portfolio
turnover rate and the Fund's ability to duplicate the composition of
the Index and approximate its performance, investment adjustments will
be made, as practicably as possible, to account for these
circumstances.
Since the EQUITY INDEX FUND will seek to duplicate the Index's stock
composition precisely, it is anticipated that the Fund's performance
will approximate the performance of the Index. Factors such as the
size of the Fund's portfolio, the size and timing of cash flows into
and out of the Fund, changes in the securities markets
and the Index itself, and the normal costs of a mutual fund, discussed
herein, will account for the difference between the performances of
the Fund and the Index.
In order to accommodate cash flows and maintain adequate liquidity to
meet redemption requests, the Fund may enter into stock index futures
contracts, options, options on futures contracts, and index
participation interests. This will allow the Fund to simultaneously
maximize the level of the Fund assets that are tracking the
performance of the S&P 500 Index. The Fund can sell futures contracts
and options in order to close out a previously established position.
The Fund will not enter into any stock index futures contract for the
purpose of speculation.
S&P 500 Index. The S&P 500 Index consists of 500 selected common
stocks, most of which are listed on the New York Stock Exchange.
S&P designates the stocks to be included in the Index on a
statistical basis. A particular stock's weighting in the Index is
based on its relative total market value; that is, its market
price per share times the number of shares outstanding. From time
to time, S&P may add or delete stocks from the Index. The
QUANTITATIVE EQUITY and EQUITY INDEX FUNDS utilize the Index as
the standard performance benchmark because it represents
approximately 70% of the total market value of all common stocks.
In addition, it is familiar to investors, and is recognized as a
barometer of common stock investment returns.
The Index is an unmanaged, statistical measure of stock market
performance. As such, it does not reflect the actual cost of
investing in common stocks. By contrast, the QUANTITATIVE EQUITY
and EQUITY INDEX FUNDS incur the normal costs of a mutual fund,
including brokerage and execution costs, advisory fees, and
administrative and custodial costs and expenses. S&P selects the
common stocks to be included in the Index solely on a statistical
basis. Inclusion of a particular security in the Index in no way
implies an opinion by S&P as to the stock's appropriateness as an
investment. The Funds are not sponsored, endorsed, sold or
promoted by, or affiliated with, S&P.
Emerging Markets Fund. The investment adviser will consider the
following securities as permissable investments for the EMERGING
MARKETS FUND: (i) securities of companies the principal securities
trading market for which is an emerging market country; (ii)
securities, traded in any market, of companies or issuers that derive
50% or more of their total revenue from either goods or services
produced in such emerging market countries or sales made in such
emerging market countries; or (iii) securities of companies organized
under the laws of, and with a principal office in, an emerging market
country. In selecting equity securities for the EMERGING MARKETS FUND,
the investment adviser focuses on a broad diversification of emerging
market countries. Initially, the adviser identifies those emerging
market countries that, in the investment adviser's judgment, have
made, or are currently making, progress toward improving their
economies and market environments through financial and/or political
reform, and which are likely to produce premium returns. Second, the
investment adviser then uses a disciplined allocation process to
classify the emerging market countries that it has identified into one
of two categories (or "Tiers"). The first, Tier 1, is comprised of the
most established and liquid of emerging market countries. The second,
Tier 2, represents those emerging market countries which are less
established, smaller, and less liquid than those in Tier 1. Examples
of countries classified in Tier 1 are Argentina, Brazil, Mexico and
Thailand; examples of countries which are classified in Tier 2 include
Colombia, the Philippines, Greece, Peru and Portugal.
In constructing the EMERGING MARKETS FUND'S investment portfolio, the
investment adviser normally gives the Tier 1 emerging market countries
a greater weighting than is afforded to the Tier 2 emerging market
countries. Within each Tier, each emerging market country is equally
weighted and then its weight is adjusted to reflect the investment
adviser's investment judgments regarding the particular country. The
investment adviser will consider economic factors, political
conditions and currency and market valuation levels, in deciding upon
which emerging market countries to include in the portfolio and how
those countries should be classified and weighted.
The number of emerging market countries represented in the EMERGING
MARKETS FUND'S portfolio will vary over time. It is the investment
adviser's intention that the Fund remain broadly diversified across
many emerging market countries, companies, and geographic regions.
Under normal market conditions, the investment adviser expects to
invest in the securities of issuers located in a minimum of six
different emerging market countries, with up to 25% of the Fund's
total assets invested in any one country.
In selecting securities in each emerging market country for purchase
by the EMERGING MARKETS FUND, the investment adviser will focus on the
most prominent and largest capitalized companies. The investment
adviser will seek to construct the Fund's investment portfolio in a
manner that maintains adequate liquidity for trading purposes, and
will attempt to utilize the low historical correlation of returns
among emerging market countries to moderate the portfolio's
volatility, wherever feasible.
Fixed Income Funds. The FIXED INCOME FUND'S and the SHORT-TERM FIXED
INCOME FUND'S investment adviser does not select securities purely to
maximize the current yield of the Funds. The Funds' investment adviser
attempts to manage the Funds' total performance, which includes both
changes in principal value of the Funds' portfolios and interest
income earned, to anticipate the opportunities and risks of changes in
market interest rates. When the Funds' investment adviser
expects that market interest rates may decline, which would cause
prices of outstanding debt obligations to rise, it generally extends
the average maturity of the Funds' portfolios. When, in the investment
adviser's judgment, market interest rates may rise, which would cause
market prices of outstanding debt obligations to decline, it generally
shortens the average maturity of the Funds' portfolios. Further, the
Funds' investment adviser attempts to improve the Funds' total return
by weighing the relative value of fixed income securities issues
having similar maturities in selecting portfolio securities. By
actively managing the Funds' portfolios in this manner, the Funds'
investment adviser seeks to provide capital appreciation during
periods of falling interest rates and protection against capital
depreciation during periods of rising rates.
PORTFOLIO INVESTMENTS
Corporate Debt Obligations. The Funds (except the EQUITY INDEX FUND
and THE WACHOVIA MUNICIPAL FUNDS) may invest in corporate debt
obligations, including corporate bonds, notes, and debentures, which
may have floating or fixed rates of interest. These obligations have
the requisite ratings as described above. However, if a security loses
its rating or has its rating reduced, the Fund is not required to drop
the security from its portfolio, but may consider doing so.
Fixed Rate Corporate Debt Obligations. The Funds may invest in fixed
rate corporate securities, including fixed rate securities with
short-term characteristics. Fixed rate securities with short-term
characteristics are long-term debt obligations but are treated in the
market as having short maturities because call features of the
securities may make them callable within a short period of time. A
fixed rate security with short-term characteristics would include a
fixed income security priced close to call or redemption price or a
fixed income security approaching maturity, where the expectation of
call or redemption is high.
Fixed rate securities tend to exhibit more price volatility during
times of rising or falling interest rates than securities with
floating rates of interest. This is because floating rate securities,
as described below, behave like short-term instruments in that the
rate of interest they pay is subject to periodic adjustments based on
a designated interest rate index. Fixed rate securities pay a fixed
rate of interest and are more sensitive to fluctuating interest rates.
In periods of rising interest rates the value of a fixed rate security
is likely to fall. Fixed rate securities with short-term
characteristics are not subject to the same price volatility as fixed
rate securities without such characteristics. Therefore, they behave
more like floating rate securities with respect to price volatility.
Floating Rate Corporate Debt Obligations. The Funds (except THE
WACHOVIA MUNICIPAL FUNDS) may invest in floating rate corporate debt
obligations, including increasing rate securities. Floating rate
securities are generally offered at an initial interest rate which is
at or above prevailing market rates. The interest rate paid on these
securities is then reset periodically (commonly every 90 days) to an
increment over some predetermined interest rate index. Commonly
utilized indices include the three-month Treasury bill rate, the
180-day Treasury bill rate, the one-month or three-month London
Interbank Offered Rate (LIBOR), the prime rate of a bank, the
commercial paper rates, or the longer-term rates on U.S. Treasury
securities. An example of floating and fixed rate corporate debt
obligations in which a Fund can invest include Yankee bonds, which are
U.S. dollar-denominated bonds issued in the United States by foreign
banks or corporations.
Some of the floating rate corporate debt obligations in which the
FIXED INCOME FUND may invest include floating rate corporate debt
securities issued by savings associations collateralized by adjustable
rate mortgage loans, also known as collateralized thrift notes. Many
of these collateralized thrift notes have received AAA ratings from
NRSROs. Collateralized thrift notes differ from traditional
"pass-through" certificates in which payments made are linked to
monthly payments made by individual borrowers net of any fees paid to
the issuer or guarantor of such securities.
Convertible Securities. The Funds (except THE WACHOVIA MUNICIPAL
FUNDS) may invest in convertible securities. Convertible securities
are fixed income securities which may be exchanged or converted into a
predetermined number of the issuer's underlying common stock at the
option of the holder during a specified time period. Convertible
securities may take the form of convertible bonds, convertible
preferred stock or debentures, units consisting of "usable" bonds and
warrants or a combination of the features of several of these
securities. The investment characteristics of each convertible
security vary widely, which allows convertible securities to be
employed for different investment objectives.
Convertible bonds and convertible preferred stocks are fixed income
securities that generally retain the investment characteristics of
fixed income securities until they have been converted but also react
to movements in the underlying equity securities. The holder is
entitled to receive the fixed income of a bond or the dividend
preference of a preferred stock until the holder elects to exercise
the conversion privilege. Usable bonds are corporate bonds that can be
used in whole or in part, customarily at full face value, in lieu of
cash to purchase the issuer's common stock. When owned as part of a
unit along with warrants, which entitle the holder to buy the common
stock, they function as convertible bonds, except that the warrants
generally will expire before the bonds' maturity. Convertible
securities are senior to equity securities, and therefore have a claim
to assets of the corporation prior to the holders of common stock in
the case of
liquidation. However, convertible securities are generally
subordinated to similar non-convertible securities of the same
company. The interest income and dividends from convertible bonds and
preferred stocks provide a stable stream of income with generally
higher yields than common stocks, but lower than non-convertible
securities of similar quality. A Fund will exchange or convert the
convertible securities held in its portfolio into shares of the
underlying common stocks when, in the Fund's investment adviser's
opinion, the investment characteristics of the underlying common
shares will assist a Fund in achieving its investment objective.
Otherwise, a Fund will hold or trade the convertible securities. In
selecting convertible securities for a Fund, the Fund's investment
adviser evaluates the investment characteristics of the convertible
security as a fixed income instrument, and the investment potential of
the underlying equity security for capital appreciation. In evaluating
these matters with respect to a particular convertible security, the
Fund's investment adviser considers numerous factors, including the
economic and political outlook, the value of the security relative to
other investment alternatives, trends in the determinants of the
issuer's profits, and the issuer's management capability and
practices.
Put And Call Options. The Funds (except THE WACHOVIA MUNICIPAL FUNDS)
may purchase put options on their portfolio securities. These options
will be used only as a hedge to attempt to protect securities which a
Fund holds against decreases in value. A Fund may purchase these put
options as long as they are listed on a recognized options exchange
and the underlying stocks are held in its portfolio. A Fund may also
write call options on securities either held in its portfolio or which
it has the right to obtain without payment of further consideration or
for which it has segregated cash in the amount of any additional
consideration. The call options which a Fund writes and sells must be
listed on a recognized options exchange. The writing of calls by a
Fund is intended to generate income for a Fund and thereby protect
against price movements in particular securities in a Fund's
portfolio.
Prior to exercise or expiration, an option position can only be
terminated by entering into a closing purchase or sale transaction.
This requires a secondary market on an exchange which may or may not
exist for any particular call or put option at any specific time. The
absence of a liquid secondary market also may limit the Fund's ability
to dispose of the securities underlying an option. The inability to
close options also could have an adverse impact on the Fund's ability
to effectively hedge its portfolio. These instruments may not be
available with regard to the securities of certain emerging markets in
which the EMERGING MARKETS FUND may invest.
The effective use of futures and options as hedging techniques depends
on the correlation between their prices and the behavior of a Fund's
portfolio securities as well as the investment adviser's ability to
accurately predict the direction of stock prices, interest rates and
other relevant economic factors. In addition, daily limits on the
fluctuation of futures and options prices could cause a Fund to be
unable to timely liquidate its futures or options position and cause
it to suffer greater losses than would otherwise be the case. In this
regard, a Fund may be unable to anticipate the extent of its losses
from futures transactions. These instruments may not be available with
regard to the securities of certain emerging markets in which the
EMERGING MARKETS FUND may invest.
Stock Index Futures And Options. The EQUITY FUND, QUANTITATIVE EQUITY
FUND, EQUITY INDEX FUND, SPECIAL VALUES FUND, EMERGING MARKETS FUND,
and BALANCED FUND may utilize stock index futures contracts, options,
and options on futures contracts, subject to the limitation that the
value of these futures contracts and options will not exceed 20% of a
Fund's total assets. Also, a Fund will not purchase options to the
extent that more than 5% of the value of a Fund's total assets would
be invested in premiums on open put option positions (and, in the case
of the SPECIAL VALUES FUND and EMERGING MARKETS FUND, margin deposits
on open positions). These futures contracts and options will be used
to handle cash flows into and out of a Fund and to potentially reduce
transactional costs, since transactional costs associated with futures
and options contracts can be lower than costs stemming from direct
investment in stocks. The Funds will not enter into these transactions
for speculative purposes.
There are several risks accompanying the utilization of futures
contracts to effectively anticipate market movements. First, positions
in futures contracts may be closed only on an exchange or board of
trade that furnishes a secondary market for such contracts. While the
Funds plan to utilize futures contracts only if there exists an active
market for such contracts, there is no guarantee that a liquid market
will exist for the contracts at a specified time. Furthermore,
because, by definition, futures contracts look to projected price
levels in the future, and not to current levels of valuation, market
circumstances may result in there being a discrepancy between the
price of the stock index future and the movement in the corresponding
stock index. The absence of a perfect price correlation between the
futures contract and its underlying stock index could stem from
investors choosing to close futures contracts by offsetting
transactions rather than satisfying additional margin requirements.
This could result in a distortion of the relationship between the
index and the futures market. In addition, because the futures market
imposes less burdensome margin requirements than the securities
market, an increased amount of participation by speculators in the
futures market could result in price fluctuations.
Forward Foreign Currency Exchange Contracts. The EMERGING MARKETS FUND
may enter into forward foreign currency exchange contracts. A forward
foreign currency exchange contract ("forward contract") is an
obligation to purchase or sell an amount of a particular currency at a
specific price and on a future date agreed upon by the parties.
Generally, no commission charges or deposits are involved. At the time
the Fund enters into a forward contract, Fund assets with a value
equal to the Fund's obligation under the forward contract are
segregated on the Fund's records and are maintained until the forward
contract has been settled. The Fund will not enter into a forward
contract with a term of more than one year. The Fund will generally
enter into a forward contract to provide the proper currency to settle
a securities transaction at the time the transaction occurs ("trade
date"). The period between the trade date and settlement date will
vary between 24 hours and 30 days, depending upon local custom.
The EMERGING MARKETS FUND may also protect against the decline of a
particular foreign currency by entering into a forward contract to
sell an amount of that currency approximating the value of all or a
portion of the Fund's assets denominated in that currency ("hedging").
The success of this type of short-term hedging strategy is highly
uncertain due to the difficulties of predicting short-term currency
market movements and of precisely matching forward contract amounts
and the constantly changing value of the securities involved. Although
the investment adviser will consider the likelihood of changes in
currency values when making investment decisions, the investment
adviser believes that it is important to be able to enter into forward
contracts when it believes the interest of the Fund will be served.
The Fund will only enter into forward contracts for hedging purposes
and will not enter into forward contracts in a particular currency in
an amount in excess of the Fund's assets denominated in that currency.
No more than 30% of the Fund's assets will be committed to forward
contracts at any time. (This restriction does not include forward
contracts entered into to settle securities transactions.)
Index Participation Contracts. The EQUITY INDEX FUND may participate
in the purchasing and selling of index participation contracts based
on the S&P 500 Index. The Fund will utilize index participation
contracts to aid in the management of cash flows into and out of the
Fund and not for speculative purposes. These contracts provide the
equivalent of a position in the stocks of the Index, where each stock
is represented in the same proportion as it is represented in the
Index. Unlike futures contracts, positions in these instruments may
last indefinitely, with no expiration date and will pay dividends
implied by the underlying stocks in the Index. Generally, the value of
an Index participation contract will rise and fall as the value of the
Index rises and falls. Index participation contracts have lower
transaction costs than those associated with the purchase and sale of
individual stocks. The Fund will invest in index participation
contracts only if there exists an active market for such contracts.
The value of these contracts, together with the value of the EQUITY
INDEX FUND'S investment in stock index futures contracts, options and
options on futures contracts will not exceed 20% of the Fund's total
assets. The Fund's use of these investments will be to accommodate
cash flows and maintain adequate liquidity to meet redemption
requests, while simultaneously maximizing the level of Fund assets
which are tracking the performance of the S&P 500 Index.
Mortgage-Backed Securities. The EMERGING MARKETS FUND, BALANCED FUND,
FIXED INCOME FUND, and SHORT-TERM FIXED INCOME FUND may invest in
mortgage-backed securities. Mortgage-backed securities are securities
that directly or indirectly represent a participation in, or are
secured by and payable from, mortgage loans on real property. There
are currently three basic types of mortgage-backed securities: (i)
those issued or guaranteed by the U.S. government or one of its
agencies or instrumentalities, such as the Government National
Mortgage Association ("Ginnie Mae"), Fannie Mae and the Federal Home
Loan Mortgage Corporation ("Freddie Mac"); (ii) those issued by
private issuers that represent an interest in or are collateralized by
mortgage-backed securities issued or guaranteed by the U.S. government
or one of its agencies or instrumentalities; and (iii) those issued by
private issuers that represent an interest in or are collateralized by
whole loans or mortgage-backed securities without a government
guarantee but usually having some form of private credit enhancement.
Adjustable Rate Mortgage Securities. Adjustable rate mortgage
securities ("ARMS") are pass-through mortgage securities representing
interests in adjustable rather than fixed interest rate mortgages. The
ARMS in which a Fund invests are issued by Ginnie Mae, Fannie Mae or
Freddie Mac, and are actively traded. The underlying mortgages which
collateralize ARMS issued by Ginnie Mae are fully guaranteed by the
Federal Housing Administration or Veterans Administration, while those
collateralizing ARMS issued by Fannie Mae or Freddie Mac are typically
conventional residential mortgages conforming to strict underwriting
size and maturity constraints.
Collateralized Mortgage Obligations. Collateralized mortgage
obligations ("CMOs") are debt obligations collateralized by mortgage
loans or mortgage pass-through securities. Typically, CMOs are
collateralized by Ginnie Mae, Fannie Mae or Freddie Mac Certificates,
but may be collateralized by whole loans or private pass-through
securities.
A Fund will only invest in CMOs which are rated AAA by an NRSRO or are
of comparable quality as determined by a Fund's investment adviser,
and which may be: (a) collateralized by pools of mortgages in which
each mortgage is guaranteed as to payment of principal and interest by
an agency or instrumentality of the
U.S. government; (b) collateralized by pools of mortgages in which payment of
principal and interest is guaranteed by the issuer and such guarantee is
collateralized by U.S. government securities; or (c) collateralized by pools of
mortgages without a government guarantee as to payment of principal and
interest, but which have some form of credit enhancement.
Real Estate Mortgage Investment Conduits. Real estate mortgage
investment conduits ("REMICs") are offerings of multiple class real
estate mortgage-backed securities which qualify and elect treatment as
such under provisions of the Internal Revenue Code. Issuers of REMICs
may take several forms, such as trusts, partnerships, corporations,
associations, or segregated pools of mortgages. Once REMIC status is
elected and obtained, the entity is not subject to federal income
taxation. Instead, income is passed through the entity and is taxed to
the person or persons who hold interests in the REMIC. A REMIC
interest must consist of one or more classes of "regular interests."
To qualify as a REMIC, substantially all the assets of the entity must
be in assets directly or indirectly secured principally by real
property.
Stripped Mortgage-Backed Securities. Some of the mortgage-related
securities purchased by the BALANCED FUND, FIXED INCOME FUND, and
SHORT-TERM FIXED INCOME FUND may represent an interest solely in the
principal repayments or solely in the interest payments on
mortgage-backed securities (stripped mortgage-backed securities or
"SMBSs"). SMBSs are derivative multi-class securities. SMBSs are
usually structured with two classes and receive different proportions
of the interest and principal distributions on the pool of underlying
mortgage-backed securities. Due to the possibility of prepayments on
the underlying mortgages, SMBSs may be more interest-rate sensitive
than other securities purchased by a Fund. If prevailing interest
rates fall below the level at which SMBSs were issued, there may be
substantial prepayments on the underlying mortgages, leading to the
relatively early prepayments of principal-only SMBSs (principal-only
or "PO" class) and a reduction in the amount of payments made to
holders of interest-only SMBSs (the interest-only or "IO" class).
Therefore, interest-only SMBSs generally increase in value as interest
rates rise and decrease in value as interest rates fall, counter to
changes in value experienced by most fixed income securities. If the
underlying mortgages experience slower than anticipated prepayments of
principal, the yield on a PO class will be affected more severely than
would be the case with a traditional mortgage-related security.
Because the yield to maturity of an IO class is extremely sensitive to
the rate of principal payments (including prepayments) on the related
underlying mortgage-backed securities, it is possible that the Fund
might not recover its original investment on interest-only SMBSs if
there are substantial prepayments on the underlying mortgages. A
Fund's inability to fully recoup its investment in these securities as
a result if a rapid rate of principal prepayments may occur even if
the securities are rated AAA by an NRSRO. In view of these
considerations, the investment adviser intends to use these
characteristics of interest-only SMBSs to reduce the effects of
interest rate changes on the value of the Fund's portfolio, while
continuing to pursue current income.
Asset-Backed Securities. The BALANCED FUND, FIXED INCOME FUND, and
SHORT-TERM FIXED INCOME FUND may invest in asset-backed securities.
Asset-backed securities have structural characteristics similar to
mortgage-backed securities but have underlying assets that are not
mortgage loans or interests in mortgage loans. A Fund may invest in
asset-backed securities rated A or higher at the time of purchase by
an NRSRO including, but not limited to, interests in pools of
receivables, such as motor vehicle installment purchase obligations
and credit card receivables. These securities may be in the form of
pass-through instruments or asset-backed bonds. The securities are
issued by non-governmental entities and carry no direct or indirect
government guarantee.
Mortgage-backed and asset-backed securities generally pay back
principal and interest over the life of the security. At the time a
Fund reinvests the payments and any unscheduled prepayments of
principal received, a Fund may receive a rate of interest which is
actually lower than the rate of interest paid on these securities
("prepayment risks"). Mortgage-backed and asset-backed securities are
subject to higher prepayment risks than most other types of debt
instruments with prepayment risks because the underlying mortgage
loans or the collateral supporting asset-backed securities may be
prepaid without penalty or premium. Prepayment risks on
mortgage-backed securities tend to increase during periods of
declining mortgage interest rates because many borrowers refinance
their mortgages to take advantage of the more favorable rates.
Prepayments on mortgage-backed securities are also affected by other
factors, such as the frequency with which people sell their homes or
elect to make unscheduled payments on their mortgages. Although
asset-backed securities generally are less likely to experience
substantial prepayments than are mortgage-backed securities, certain
of the factors that affect the rate of prepayments on mortgage-backed
securities also affect the rate of prepayments on asset-backed
securities.
Asset-backed securities present certain risks that are not presented
by mortgage-backed securities. Primarily, these securities do not have
the benefit of the same security interest in the related collateral.
Credit card receivables are generally unsecured and the debtors are
entitled to the protection of a number of state and federal consumer
credit laws, many of which give such debtors the right to set off
certain amounts owed on the credit cards, thereby reducing the balance
due. Most issuers of asset-backed securities backed by motor vehicle
installment purchase obligations permit the servicer of such
receivables to retain possession of
the underlying obligations. If the servicer sells these obligations to
another party, there is a risk that the purchaser would acquire an
interest superior to that of the holders of the related asset-backed
securities. Further, if a vehicle is registered in one state and is
then reregistered because the owner and obligor moves to another
state, such reregistration could defeat the original security interest
in the vehicle in certain cases. In addition, because of the large
number of vehicles involved in a typical issuance and technical
requirements under state laws, the trustee for the holders of
asset-backed securities backed by automobile receivables may not have
a proper security interest in all of the obligations backing such
receivables. Therefore, there is the possibility that recoveries on
repossessed collateral may not, in some cases, be available to support
payments on these securities.
U.S. Government Obligations. The U.S. government obligations in which the Funds
invest are either issued or guaranteed by the U.S. government, its agencies, or
instrumentalities. These securities include, but are not limited to:
direct obligations of the U.S. Treasury, such as U.S. Treasury bills, notes,
and bonds;
and notes, bonds and discount notes of U.S. government agencies or
instrumentalities, such as: the Farm Credit System, including the National Bank
for Cooperatives and Banks for Cooperatives;
Federal Home Loan Banks; Federal Home Loan Mortgage Corporation; Fannie Mae,
Government National Mortgage Association; and
Student Loan Marketing Association.
Some of these obligations, such as Government National Mortgage Association
mortgage-backed securities, are backed by the full faith and credit of the U.S.
Treasury. No assurances can be given that the U.S. government will provide
financial support to other agencies or instrumentalities, since it is not
obligated to do so. These agencies and instrumentalities are supported by:
the issuer's right to borrow an amount limited to a specific line of credit
from the U.S. Treasury;
the discretionary authority of the U.S. government to purchase certain
obligations of an agency or instrumentality; or
the credit of the agency or instrumentality.
Some of the short-term U.S. government securities the Funds may
purchase carry variable interest rates. These securities have a rate
of interest subject to adjustment at least annually. This adjusted
rate is ordinarily tied to some objective standard, such as the 91-day
U.S. Treasury bill rate.
Demand Master Notes. The Funds (except THE WACHOVIA MUNICIPAL FUNDS)
may invest in variable amount demand master notes. Demand master notes
are short-term borrowing arrangements between a corporation or
government agency and an institutional lender (such as a Fund) payable
upon demand by either party. The notice period for demand typically
ranges from one to seven days, and the party may demand full or
partial payment. Many demand master notes give a Fund the option of
increasing or decreasing the principal amount of the master note on a
daily or weekly basis within certain limits. Demand master notes
usually provide for floating or variable rates of interest.
Temporary Investments. For temporary defensive purposes (up to 100% of
total assets) and to maintain liquidity (up to 35% of total assets),
the EQUITY FUND, QUANTITATIVE EQUITY FUND, SPECIAL VALUES FUND, and
EMERGING MARKETS FUND may invest in:
certificates of deposit, demand and time deposits, savings shares,
bankers' acceptances, and other instruments of domestic and foreign
banks and savings and loans, which institutions have capital,
surplus, and undivided profits over $100 million, or if the principal
amount of the instrument is insured in full by the Bank Insurance
Fund ("BIF"), or by the Savings Association Insurance Fund ("SAIF"),
both of which are administered by the FDIC; and commercial paper
(including Canadian Commercial Paper and Europaper) rated A-1 or
better by S&P or Prime-1 by Moody's or, if unrated, of comparable
quality as determined by the Funds' investment adviser.
THE WACHOVIA MUNICIPAL FUNDS may invest in short-term tax-exempt or
taxable temporary investments. These temporary investments include:
notes issued by or on behalf of municipal or corporate issuers;
obligations issued or guaranteed by the U.S. government, its agencies,
or instrumentalities; other debt securities; commercial paper;
certificates of deposit of banks; shares of other investment
companies; and repurchase agreements (arrangements in which the
organization selling the Fund a bond or temporary investment agrees at
the time of sale to repurchase it at a mutually agreed upon time and
price).
There are no rating requirements applicable to temporary investments.
However, each Fund's investment adviser will limit temporary
investments to those it considers to be of comparable quality to the
Fund's acceptable investments.
Although the Funds are permitted to make taxable, temporary
investments, there is no current intention of generating income
subject to federal regular income tax. However, it is anticipated that
certain temporary investments will generate income which is subject to
Georgia or North Carolina state income taxes.
Restricted And Illiquid Securities. Each Fund may invest in restricted
securities. Restricted securities are any securities in which a Fund
may otherwise invest pursuant to its investment objective and policies
but which are subject to restriction on resale under federal
securities law. However, a Fund will limit investments in illiquid
securities, including certain restricted securities not determined by
the Trustees to be liquid, non-negotiable time deposits,
over-the-counter options, and repurchase agreements providing for
settlement in
more than seven days after notice, to 15% of its net assets.
The restriction is not applicable to commercial paper issued under
Section 4(2) of the Securities Act of 1933. Section 4(2) commercial
paper is restricted as to disposition under federal securities law,
and is generally sold to institutional investors, such as the Funds,
who agree that they are purchasing the paper for investment purposes
and not with a view to public distribution. Any resale by the
purchaser must be in an exempt transaction. Section 4(2) commercial
paper is normally resold to other institutional investors like a Fund
through or with the assistance of the issuer or investment dealers who
make a market in Section 4(2) commercial paper, thus providing
liquidity. Each Fund believes that Section 4(2) commercial paper and
possibly certain other restricted securities which meet the criteria
for liquidity established by the Trustees are quite liquid. Each Fund
intends, therefore, to treat the restricted securities which meet the
criteria for liquidity established by the Trustees, including Section
4(2) commercial paper, as determined by a Fund's investment adviser,
as liquid and not subject to the investment limitations applicable to
illiquid securities. In addition, because Section 4(2) commercial
paper is liquid, a Fund intends not to subject such paper to the
limitation applicable to restricted securities.
Repurchase Agreements. The U.S. government securities in which each
Fund invests may be purchased pursuant to repurchase agreements.
Repurchase agreements are arrangements in which banks, broker/dealers
and other recognized financial institutions sell U.S. government
securities or other securities to the Fund and agree at the time of
sale to repurchase them at a mutually agreed upon time and price. To
the extent that the original seller does not repurchase the securities
from a Fund, a Fund could receive less than the repurchase price on
any sale of such securities.
Demand Features. The Funds may acquire securities that are subject to
puts and standby commitments ("demand features") to purchase the
securities at their principal amount (usually with accrued interest)
within a fixed period (usually seven days) following a demand by a
Fund. The demand feature may be issued by the issuer of the underlying
securities, a dealer in the securities or by another third party, and
may not be transferred separately from the underlying security. A Fund
uses these arrangements to provide a Fund with liquidity and not to
protect against changes in the market value of the underlying
securities. The bankruptcy, receivership or default by the issuer of
the demand feature, or a default on the underlying security or other
event that terminates the demand feature before its exercise, will
adversely affect the liquidity of the underlying security. Demand
features that are exercisable even after a payment default on the
underlying security may be treated as a form of credit enhancement.
When-Issued And Delayed Delivery Transactions. The Funds may purchase
securities on a when-issued or delayed delivery basis. These
transactions are arrangements in which a Fund purchases securities
with payment and delivery scheduled for a future time. The seller's
failure to complete these transactions may cause a Fund to miss a
price or yield considered to be advantageous. Settlement dates may be
a month or more after entering into these transactions, and the market
values of the securities purchased may vary from the purchase prices.
Accordingly, a Fund may pay more or less than the market value of the
securities on the settlement date.
A Fund may dispose of a commitment prior to settlement if the Fund's
investment adviser deems it appropriate to do so. In addition, a Fund
may enter into transactions to sell its purchase commitments to third
parties at current market values and simultaneously acquire other
commitments to purchase similar securities at later dates. A Fund may
realize short-term profits or losses upon the sale of such
commitments.
Lending Of Portfolio Securities. In order to generate additional
income, each Fund may lend portfolio securities on a short-term or
long-term basis, or both, to broker/dealers, banks or other
institutional borrowers of securities. The Funds will only enter into
loan arrangements with broker/dealers, banks or other institutions
which a Fund's investment adviser has determined are creditworthy
under guidelines established by the Trustees and in which a Fund will
receive collateral equal to at least 100% of the value of the
securities loaned.There is a risk that when lending portfolio
securities, the securities may not be available to a Fund in a timely
basis and a Fund may, therefore, lose the opportunity to sell the
securities at a desirable price. In addition, in the event that a
borrower of securities would file for bankruptcy or become insolvent,
disposition of the securities may be delayed pending court action.
Investing In Securities Of Other Investment Companies. A Fund may
invest in the securities of other investment companies. Unless
otherwise permitted by action of the SEC, a Fund may not own more than
3% of the total outstanding voting stock of any investment company,
invest more than 5% of its total assets in any one investment company,
or invest more than 10% of its total assets in investment companies in
general. A Fund will invest in other open-end investment companies
primarily for the purpose of investing short-term cash which has not
yet been invested in other portfolio instruments. It should be noted
that investment companies incur certain expenses, such as advisory,
custodian and transfer agent fees, and therefore, any investment by a
Fund in shares of another investment company would be subject to such
duplicate expenses.
Ratings. If a security loses its rating or has its rating reduced after a Fund
purchased it, the Fund is not required to sell or otherwise dispose of the
security, but may consider doing so. If ratings made by Moody's
or S&P change because of changes in those organizations or in their
ratings systems, a Fund will attempt to identify other rating
organizations and systems with comparable standards, in accordance
with the investment policies of the Fund. A description of rating
categories is contained in the Appendix to the Statement of Additional
Information.
Municipal Leases. THE WACHOVIA MUNICIPAL FUNDS may invest in municipal leases.
Municipal leases are obligations issued by state and local governments or
authorities to finance the acquisition of equipment and facilities and may be
considered to be illiquid.
Participation Interests. The Funds may purchase participation
interests from financial institutions such as commercial banks,
savings and loan associations, and insurance companies. These
participation interests would give the Funds undivided interests in
State Municipal Securities. The financial institutions from which a
Fund purchases participation interests frequently provide or secure
irrevocable letters of credit or guarantees to assure that the
participation interests are of high quality. The Trustees will
establish guidelines pursuant to which a Fund's investment adviser
determines that participation interests meet the prescribed quality
standards for the Fund.
Variable Rate Municipal Securities. Some of the State Municipal
Securities which the Funds purchase may have variable interest rates.
Variable interest rates are ordinarily based on a published interest
rate, interest rate index or a similar standard, such as the 91-day
U.S. Treasury bill rate. Many variable rate municipal securities are
subject to payment of principal on demand by a Fund, usually in not
more than seven days. All variable rate municipal securities will meet
the quality standards for a Fund. The Fund's investment adviser
monitors the pricing, quality, and liquidity of the variable rate
municipal securities, including participation interests held by a
Fund, on the basis of published financial information and reports of
the rating agencies and other analytical services pursuant to
guidelines established by the Trustees.
MUNICIPAL BOND INSURANCE
The GEORGIA MUNICIPAL BOND FUND, NORTH CAROLINA MUNICIPAL BOND FUND,
and SOUTH CAROLINA MUNICIPAL BOND FUND may purchase municipal
securities covered by insurance which guarantees the timely payment of
principal at maturity and interest on such securities. These insured
municipal securities are either (1) covered by an insurance policy
applicable to a particular security, whether obtained by the issuer of
the security or by a third party ("Issuer-Obtained Insurance") or (2)
insured under master insurance policies issued by municipal bond
insurers, which may be purchased by a Fund (the "Policy" or
"Policies").
THE WACHOVIA MUNICIPAL FUNDS will require or obtain municipal bond
insurance when purchasing municipal securities which would not
otherwise meet a Fund's quality standards. A Fund may also require or
obtain municipal bond insurance when purchasing or holding specific
municipal securities when, in the opinion of the Fund's investment
adviser, such insurance would benefit the Fund (for example, through
improvement of portfolio quality or increased liquidity of certain
securities). The Georgia Municipal Bond Fund's and South Carolina
Municipal Bond Fund's investment adviser anticipates that between 30%
and 60% of each Fund's net assets will be invested in municipal
securities which are insured. The North Carolina Municipal Bond Fund's
investment adviser anticipates that between 10% and 50% of the Fund's
net assets will be invested in municipal securities which are insured.
Issuer-Obtained Insurance policies are noncancellable and continue in
force as long as the municipal securities are outstanding and their
respective insurers remain in business. If a municipal security is
covered by Issuer-Obtained Insurance, then such security need not be
insured by the Policies purchased by a Fund. (Please refer to the
Fund's Statement of Additional Information for more information.)
NON-DIVERSIFICATION
THE WACHOVIA MUNICIPAL FUNDS is comprised of three non-diversified
Funds. As such, there is no limit on the percentage of assets which
can be invested by a Fund in any single issuer. An investment in a
Fund, therefore, will entail greater risk than would exist in a
diversified investment company because the higher percentage of
investments among fewer issuers may result in greater fluctuation in
the total market value of a Fund's portfolio. Any economic, political,
or regulatory developments affecting the value of the securities in a
Fund's portfolio will have a greater impact on the total value of the
portfolio than would be the case if the portfolio were diversified
among more issuers. A Fund may purchase an issue of municipal
securities in its entirety.
The Funds intend to comply with Subchapter M of the Internal Revenue
Code. This undertaking requires that at the end of each quarter of the
taxable year, the aggregate value of all investments in any one issuer
(except U.S. government obligations, cash, and cash items) which
exceed 5% of a Fund's total assets shall not exceed 50% of the value
of its total assets.
DURATION
Duration is a commonly used measure of the potential volatility in the
price of a bond, or other fixed income security, or in a portfolio of
fixed income securities, prior to maturity. Volatility is the
magnitude of the change in the price of a bond relative to a given
change in the market rate of interest. A bond's price volatility
depends on three primary variables: the bond's coupon rate; maturity
date; and the level of market yields of similar fixed income
securities. Generally, bonds with
lower coupons or longer maturities will be more volatile than bonds
with higher coupons or shorter maturities. Duration combines these
variables into a single measure.
Duration is calculated by dividing the sum of the time-weighted values
of the cash flows of a bond or bonds, including interest and principal
payments, by the sum of the present values of the cash flows. When a
Fund invests in mortgage pass-through securities, its duration will be
calculated in a manner which requires assumptions to be made regarding
future principal prepayments. A more complete description of this
calculation is available upon request from the Funds.
- ---------------------------------------------------------
- ---------------------------------------------------------
INVESTMENT LIMITATIONS
BORROWING MONEY
The EQUITY FUND, QUANTITATIVE EQUITY FUND, EQUITY INDEX FUND, SPECIAL
VALUES FUND, EMERGING MARKETS FUND, BALANCED FUND, FIXED INCOME FUND,
and SHORT-TERM FIXED INCOME FUND will not borrow money directly or
through reverse repurchase agreements (arrangements in which a Fund
sells a portfolio instrument for a percentage of its cash value with
an agreement to buy it back on a set date) or pledge securities
except, under certain circumstances, a Fund may borrow up to one-third
of the value of its total assets and pledge, mortgage, or hypothecate
up to 15% of the value of those assets to secure such borrowings. The
GEORGIA MUNICIPAL BOND FUND, NORTH CAROLINA MUNICIPAL BOND FUND, and
SOUTH CAROLINA MUNICIPAL BOND FUND will not borrow money or pledge
securities except, under certain circumstances, a Fund may borrow up
to one-third of the value of its total assets and pledge up to 10% of
the value of those assets to secure such borrowings.
DIVERSIFICATION
With respect to 75% of the value of its total assets, the EQUITY FUND,
QUANTITATIVE EQUITY FUND, EQUITY INDEX FUND, SPECIAL VALUES FUND,
BALANCED FUND, FIXED INCOME FUND, and SHORT-TERM FIXED INCOME FUND
will not invest more than 5% of the value of its total assets in
securities of any one issuer (other than cash, cash items, or
securities issued or guaranteed by the government of the United States
or its agencies or instrumentalities, and repurchase agreements
collateralized by such securities), or acquire more than 10% of the
outstanding voting securities of any one issuer.
The above investment limitations cannot be changed without shareholder
approval. The following limitations, however, can be changed by the
Trustees without shareholder approval. Shareholders will be notified
before any material change in these limitations becomes effective.
In addition to the above limitations, The SOUTH CAROLINA MUNICIPAL
BOND FUND will not:
invest more than 5% of its total assets in industrial development
bonds when the payment of principal and interest is the
responsibility of companies (or guarantors, where applicable) with
less than three years of continuous operations, including the
operation of any predecessor; or own securities of open-end or
closed-end investment companies, except under certain circumstances
and subject to certain limitations described in this prospectus, and,
not exceeding 10% of its net assets.
- ---------------------------------------------------------
- ---------------------------------------------------------
TRUST INFORMATION
MANAGEMENT OF THE TRUSTS
Board Of Trustees. The Trustees are responsible for managing the business
affairs of the Trusts and for exercising the Trusts' powers except those
reserved for the shareholders.
Investment Adviser. Pursuant to investment advisory contracts with the
Trusts on behalf of the Funds, and subject to direction by the
Trustees, investment decisions for THE WACHOVIA FUNDS and THE WACHOVIA
MUNICIPAL FUNDS are made by Wachovia Asset Management, a business unit
of Wachovia Bank, N.A. (the "Adviser") subject to direction by the
Trustees. The Adviser continually conducts investment research and
supervision of investments for the Funds and is responsible for the
purchase and sale of portfolio instruments, for which it receives
annual fees from the assets of the Funds.
Sub-Adviser. The QUANTITATIVE EQUITY FUND is sub-advised by Twin
Capital Management, Inc., McMurray, Pennsylvania. Pursuant to the
terms of an investment sub-advisory agreement between the Funds'
Adviser and Twin Capital Management, Inc. ("Twin Capital" or the
"Sub-Adviser"), Twin Capital furnishes certain investment advisory
services to Wachovia Asset Management, including investment research,
quantitative analysis, statistical and other factual information, and
recommendations, based on Twin Capital's analysis, and assists the
Adviser in identifying securities for potential purchase and/or sale
on behalf of the Fund's portfolio. For the services provided and the
expenses incurred by the Sub-Adviser, Twin Capital is entitled to
receive an annual fee of $55,000, payable by Wachovia Asset
Management, in quarterly installments. Twin Capital may elect to waive
some or all of its fee. In no event shall the Fund be responsible for
any fees due to the Sub-Adviser for its services to Wachovia Asset
Management. Twin Capital provides investment counsel to both
individuals and institutions, including banks, thrift institutions,
and pension and profit-sharing plans. As of December 31, 1996, Twin
Capital furnished services, substantially similar to the services it
provides to the Adviser, to other accounts with assets in excess of
$1.8 billion. The Sub-Adviser is controlled by Geoffrey Gerber, its
President.
Advisory Fees. The Adviser is entitled to receive annual investment
advisory fees equal to a percentage of each Fund's average daily net
assets as follows:
0.30 of 1%
of EQUITY INDEX FUND; 0.55 of 1% of SHORT-TERM FIXED INCOME FUND; 0.60
of 1% of FIXED INCOME FUND; 0.70 of 1% of EQUITY FUND, QUANTITATIVE
EQUITY FUND, and BALANCED FUND; 0.75 of 1% of GEORGIA MUNICIPAL BOND
FUND, NORTH CAROLINA MUNICIPAL BOND FUND, and SOUTH CAROLINA MUNICIPAL
BOND FUND; 0.80 of 1% of SPECIAL VALUES FUND; and 1.00% of EMERGING
MARKETS FUND. These fees are accrued daily and paid monthly. The fees
paid by THE WACHOVIA MUNICIPAL FUNDS, SPECIAL VALUES FUND and EMERGING
MARKETS FUND, while higher than the advisory fees paid by other mutual
funds in general, are comparable to fees paid by other mutual funds
with similar policies and objectives. The Adviser may voluntarily
choose to waive a portion of its fees or reimburse a Fund for certain
expenses but reserves the right to terminate such waiver or
reimbursement at any time at its sole discretion.
Investment decisions for the Funds will be made independently from
those of any fiduciary or other accounts that may be managed by the
Adviser or its affiliates. If, however, such accounts, the Funds, or
the Adviser for its own accounts, are simultaneously engaged in
transactions involving the same securities, the transactions may be
combined and allocated to each account. This system may adversely
affect the price the Funds pay or receive, or the size of the position
they obtain.
Adviser's Background. Wachovia Asset Management and its affiliates
have served as investment adviser to THE WACHOVIA FUNDS since March 9,
1992, to the SOUTH CAROLINA MUNICIPAL BOND FUND since August 5, 1990,
and to the NORTH CAROLINA MUNICIPAL BOND FUND and GEORGIA MUNICIPAL
BOND FUND since their inception in December 1994. Wachovia Asset
Management is a business unit of Wachovia Bank, N.A. which is a
wholly-owned subsidiary of Wachovia Corporation.
Through offices in eight states, Wachovia Corporation and its
subsidiaries provide a broad range of financial services to
individuals and businesses. Wachovia Bank offers financial services
that include, but are not limited to, commercial and consumer loans,
corporate, institutional, and personal trust services, demand and time
deposit accounts, letters of credit and international financial
services.
The Adviser employs an experienced staff of professional investment
analysts, portfolio managers and traders. The Adviser uses fundamental
analysis and other investment management disciplines to identify
investment opportunities. Wachovia Bank has been managing trust assets
for over 100 years, with over $23 billion in managed assets as of
December 31, 1996. As part of its regular banking operations, Wachovia
Bank may make loans to public companies and municipalities. Thus, it
may be possible, from time to time, for a Fund to hold or acquire the
securities of issuers which are also lending clients of Wachovia Bank.
The lending relationship will not be a factor in the selection of
securities.
Jerry D. Burton is a Vice President of Wachovia Asset Management. He is a
portfolio manager of the QUANTITATIVE EQUITY FUND. Mr. Burton received a
bachelors degree from Clemson University and an MBA from the College of William
and Mary. He is a Chartered Financial Analyst.
Daniel S. Earthman is a Chartered Financial Analyst and is a Senior
Vice President and portfolio manager of the BALANCED FUND. Mr.
Earthman joined Wachovia Bank, N.A. in 1988 as an institutional
portfolio manager. Prior to joining Wachovia Bank, N.A., he was a vice
president and investment manager with Richland Asset Management in
Nashville, and an assistant vice president and portfolio manager with
North Carolina National Bank in Charlotte. Mr. Earthman received a
bachelor's degree in business from Southern Methodist University and
an MBA from the University of North Carolina at Chapel Hill.
Samuel M. Gibbs, II is the portfolio manager of the SHORT-TERM FIXED INCOME FUND
and is Senior Vice President and Manager of Fixed Income Investments for
Wachovia Asset Management. Mr. Gibbs joined Wachovia Bank, N.A. in 1969 as a
portfolio manager. He became a bond trader and fixed-income portfolio manager in
1975 and assumed his current position in 1977. Mr. Gibbs is a graduate of
Davidson College and has an MBA from the University of South Carolina.
Alfred R. Guenthner is Senior Vice President and Manager of Research for
Wachovia Asset Management and is a portfolio manager of the BALANCED FUND. Mr.
Guenthner joined Wachovia Bank, N.A. in 1972 as an economist and became senior
economist in 1978. From 1978 to 1982, he was the fixed income strategist for
Wachovia Asset Management. Mr. Guenthner is a graduate of Concord College and is
completing a dissertation for a doctorate degree in economics from the
University of Georgia. He is a member of the North Carolina Society of Financial
Analysts and the United Shareholders Association. Mr. Guenthner is a former
president of the North Carolina Association of Business Economists.
John F. Hageman is a Chartered Financial Analyst and is a Senior Vice President
and Institutional Portfolio Manager. He is a portfolio manager of the EQUITY
FUND. Mr. Hageman is responsible for managing employee benefit, foundation and
endowment portfolios. Prior to joining Wachovia Bank, N.A. in 1986, Mr. Hageman
was Vice President and head of Institutional Investment Management at Michigan
National Investment Corporation from 1977 to 1986, and an account executive with
Merrill Lynch from 1975 to 1977. Mr. Hageman is a graduate of Wabash College
with a bachelor's degree in political science.
Paige C. Henderson is a Vice President of Wachovia Asset Management. Ms.
Henderson is an equity analyst
in the Investment Asset Group and a portfolio manager of the EMERGING MARKETS
FUND. Ms. Henderson joined Wachovia Bank, N.A. in 1991 as an equity analyst. Ms.
Henderson received a Bachelor of Science in Business Administration in 1986 and
an MBA from the University of North Carolina at Chapel Hill in 1991. Ms.
Henderson is a Chartered Financial Analyst and a Certified Public Accountant.
Michael W. Holt is the Portfolio Manager of THE WACHOVIA MUNICIPAL FUNDS. Mr.
Holt joined South Carolina National Bank in February 1991 and assumed his
present position as fixed income portfolio manager for Wachovia Asset Management
in January 1992. He is a graduate of the University of Tennessee where he
majored in economics and received an MBA in Finance. Mr. Holt is a Chartered
Financial Analyst.
Russell L. Kimbro, Jr. is a Senior Vice President and Portfolio
Manager for Personal Financial Services and is a portfolio manager of
the EQUITY FUND. Having been with Wachovia since 1985, Mr. Kimbro
worked previously as an account executive and operations manager at
Prudential Bache Securities and as an instructor of corporate finance
at the University of North Carolina at Greensboro. He received a
bachelor's degree in economics from Virginia Polytechnical Institute
and State University and an MBA from UNCG. Mr. Kimbro is a member of
the North Carolina Society of Financial Analysts.
F. Stanley King is a Chartered Financial Analyst and a Senior Vice President of
Wachovia Bank, N.A. Mr. King is a portfolio manager of the EQUITY FUND. He
serves as manager of institutional portfolio management for Wachovia Asset
Management. Mr. King joined Wachovia Bank, N.A. in 1985 as a securities analyst
and assumed his current position in 1991. He has both bachelor and master of
science degrees from North Carolina State University.
George E. McCall is a Certified Financial Planner and Vice President
of Wachovia Asset Management. He is a portfolio manager of the
QUANTITATIVE EQUITY FUND. He is a graduate of Presbyterian College and
received his MBA from the University of South Carolina.
Michael O. Mercer is Senior Vice President, Wachovia Bank, N.A., and, in
addition to being a portfolio manager of the EQUITY FUND, manages the Wachovia
Equity Investment Fund and other large institutional accounts. Mr. Mercer is a
graduate of Catawba College and received an MBA from Florida State University.
Mr. Mercer is a Chartered Financial Analyst and has been with Wachovia Bank,
N.A. since 1983.
Harold (Rick) Nelson III is a Senior Vice President and fixed-income portfolio
manager of Wachovia Asset Management in Atlanta. Mr. Nelson joined Wachovia in
June, 1985 as a fixed income portfolio manager. He became a portfolio manager of
the BALANCED FUND in May, 1996. Mr. Nelson is a native of Mountainside, New
Jersey. He received a bachelor of science degree in Management from St. Francis
College and an MBA in Finance at Mercer University in 1990.
R. Emery Pike is a Chartered Financial Analyst and Vice President of Wachovia
Asset Management. He is the portfolio manager of the FIXED INCOME FUND. He holds
both a bachelors degree and an MBA from Wake Forest University.
B. Scott Sadler is a portfolio manager of the EMERGING MARKETS FUND. He is a
Vice President of Wachovia Asset Management. He joined Wachovia Bank, N.A. in
1987. Mr. Sadler is a graduate of the University of Virginia's McIntire School
of Commerce with a bachelor's degree in economics. Mr. Sadler is a Chartered
Financial Analyst.
Timothy L. Swanson is a Vice President of Wachovia Asset Management. He joined
Wachovia Bank, N.A. in 1991. Mr. Swanson is a portfolio manager of the EMERGING
MARKETS FUND. Mr. Swanson is a graduate of Wake Forest University with a
bachelor's degree in mathematical economics, and of the University of Rochester
with a master's degree in economics. Mr. Swanson is a Chartered Financial
Analyst.
Michael J. Tierney is an Executive Vice President of Wachovia Bank, N.A. and
Chief Investment Officer with Wachovia Asset Management. He joined Wachovia
Bank, N.A. in 1981. Mr. Tierney is a portfolio manager of the EMERGING MARKETS
FUND and the SPECIAL VALUES FUND. Mr. Tierney is a graduate of the University of
Connecticut, and has more than 25 years of experience managing equity and fixed
income investments.
Joseph H. Waterfill is a Senior Vice President of Wachovia Asset Management. Mr.
Waterfill is the portfolio manager of the BALANCED FUND, EQUITY FUND, and the
QUANTITATIVE EQUITY FUND. He joined Wachovia in 1976 as an employee benefit
portfolio manager. He was elected Senior Vice President in 1990. Mr. Waterfill
received a bachelor of science degree from the U.S. Naval Academy in 1963 and an
MBA from Vanderbilt University in 1973.
DISTRIBUTION OF SHARES
Federated Securities Corp., Federated Investors Tower, Pittsburgh, Pennsylvania
15222-3779 is the distributor for shares of the Funds. It is a Pennsylvania
corporation organized on November 14, 1969, and is the distributor for a number
of investment companies. Federated Securities Corp. is a subsidiary of Federated
Investors.
ADMINISTRATIVE ARRANGEMENTS
The distributor may pay financial institutions and other financial
service providers such as banks, fiduciaries custodians for public
funds, investment advisers, and broker/dealers a fee based upon the
average net asset value of shares of their customers for providing
administrative services to the Funds. This fee, if paid, will be
reimbursed by the Adviser or their affiliates, not the Funds.
ADMINISTRATION OF THE FUNDS
Federated Administrative Services, Pittsburgh, Pennsylvania, also
provides the Funds with the administrative personnel and services
necessary to operate the Funds. Such services include legal,
accounting and other administrative services. Federated Administrative
Services provides these at an annual rate, computed and payable daily,
as specified below:
<TABLE>
<CAPTION>
MAXIMUM AVERAGE AGGREGATE DAILY NET
ADMINISTRATIVE ASSETS OF THE WACHOVIA FUNDS
FEE AND THE WACHOVIA MUNICIPAL FUNDS.
<S> <C>
.15 of 1% on the first $250 million
.125 of 1% on the next $250 million
.10 of 1% on the next $250 million
.075 of 1% on assets in excess of $750 million
</TABLE>
The administrative fee received during any fiscal year shall aggregate
at least $75,000 for each portfolio of THE WACHOVIA FUNDS and at least
$50,000 for each portfolio of THE WACHOVIA MUNICIPAL FUNDS. Federated
Administrative Services may choose voluntarily to waive or reimburse a
portion of its fee at any time.
EXPENSES OF THE FUNDS AND CLASS Y SHARES
Holders of Shares pay their allocable portion of Trust and respective
Fund expenses. The Trust expenses for which holders of Shares pay
their allocable portion include, but are not limited to: the cost of
organizing the Trust and continuing its existence; the cost of
registering the Trust; Trustees' fees; auditors' fees; the cost of
meetings of Trustees; legal fees of the Trust; association membership
dues and such non-recurring and extraordinary items as may arise.
Fund expenses for which holders of Shares pay their allocable portion
based on average daily net assets include, but are not limited to:
registering a Fund and Shares of that Fund; investment advisory
services; taxes and commissions; custodian fees; insurance premiums;
auditors' fees; and such non-recurring and extraordinary items as may
arise.
The Funds' expenses under the Rule 12b-1 Plans are incurred solely by
the Class B Shares. In addition, the Funds' expenses under a
shareholder services plan are incurred by the Class A Shares and Class
B Shares. The Trustees reserve the right to allocate certain other
expenses to Classes of Shares as they deem appropriate ("Class
Expenses"). These Class Expenses would be limited to: transfer agent
fees as identified by the transfer agent as attributable to holders of
shares; printing and postage expenses related to preparing and
distributing materials such as shareholder reports, prospectuses and
proxies to current shareholders of a Class; registration fees paid to
the Securities and Exchange Commission and to state securities
commissions for Shares of a Class; expenses related to administrative
personnel and services as required to support holders of Shares of a
Class; legal fees relating solely to a Class; and Trustees fees
incurred as a result of issues relating solely to a Class.
BROKERAGE TRANSACTIONS
The Funds may engage in brokerage transactions. When selecting brokers
and dealers to handle the purchase and sale of portfolio instruments,
the Adviser looks for prompt execution of the order at a favorable
price. In working with dealers, the Adviser will generally utilize
those who are recognized dealers in specific portfolio instruments,
except when a better price and execution of the order can be obtained
elsewhere. In selecting among firms believed to meet these criteria,
the Adviser may give consideration to those firms which have sold or
are selling shares of the Funds. The Adviser makes decisions on
portfolio transactions and selects brokers and dealers subject to
review by the Trustees.
- ---------------------------------------------------------
- ---------------------------------------------------------
NET ASSET VALUE
The net asset value of Class Y Shares of a Fund may differ slightly
from that of Class A Shares and Class B Shares of the same Fund due to
the variability in daily net income resulting from different
distribution charges and shareholder services fees. The net asset
value for each Fund will fluctuate for all three classes.
The net asset value is determined as of the close of trading (normally
4:00 p.m., Eastern time) on the New York Stock Exchange, Monday
through Friday, except on: (i) days on which there are not sufficient
changes in the value of a Fund's portfolio securities that its net
asset value might be materially affected; (ii) days during which no
shares are tendered for redemption and no orders to purchase shares
are received; or (iii) the following holidays: New Year's Day, Martin
Luther King Day, Presidents' Day, Good Friday, Memorial Day,
Independence Day, Labor Day, Columbus Day, Veterans' Day, Thanksgiving
Day and Christmas Day.
- ---------------------------------------------------------
- ---------------------------------------------------------
INVESTING IN THE FUNDS
SHARE PURCHASES
Fund Shares are sold on days on which Wachovia Bank, the New York
Stock Exchange and the Federal Reserve Wire System are open for
business. Shares may be purchased through the Trust Division of
Wachovia Bank. All purchase orders must be transmitted to a Fund by
5:00 p.m. (Eastern time) and will be purchased at the public offering
price next determined after a Fund receives the purchase request.
Texas residents must purchase Shares through Federated Securities
Corp. at 1-800-618-8573. In connection with the sale of Shares, the
distributor may from time to time offer certain items of nominal value
to any shareholder or investor. Each Fund and the distributor reserve
the right to reject any purchase request.
Trust customers of Wachovia Bank may purchase Shares of a Fund by
telephoning, sending written instructions, or placing the order in
person with their account officer in accordance with the procedures
established by Wachovia Bank and as set forth in the relevant account agreement.
Payment may be made by check, by wire of federal funds, or by debiting
a customer's account with Wachovia Bank. Purchase orders must normally
be received by Wachovia Bank by 3:00 p.m. (Eastern time), in order for
Shares to be purchased at that day's price. It is the responsibility
of Wachovia Bank to transmit orders promptly to the Fund.
MINIMUM INVESTMENT REQUIRED
There are no sales charges imposed on Class Y Shares of the Funds.
Minimum initial investments on Class Y Shares may be waived from time
to time for purchases by the Trust Division of Wachovia Bank for its
fiduciary or custodial accounts. An institutional investor's minimum
investment will be calculated by combining all accounts it maintains
with the Funds. The minimum initial investment in THE WACHOVIA FUNDS
is $250, and $500 for THE WACHOVIA MUNICIPAL FUNDS. Subsequent
investments in THE WACHOVIA FUNDS must be in amounts of at least $50,
and for THE WACHOVIA MUNICIPAL FUNDS, subsequent investments must be
in amounts of at least $100.
SYSTEMATIC INVESTMENT PROGRAM
Shareholders in any of the Funds may participate in a Systematic
Investment Program. Once a Fund account has been opened, shareholders
in THE WACHOVIA FUNDS and THE WACHOVIA MUNCIPAL FUNDS may add to their
investment on a regular basis in a minimum amount of $25. Under this
program, funds may be automatically withdrawn periodically from the
shareholder's checking account and invested in Fund shares at the net
asset value next determined after an order is received by a Fund. A
shareholder may apply for participation in this program through
Wachovia Bank or through the distributor.
CERTIFICATES AND CONFIRMATIONS
As the transfer agent, Federated Shareholder Services Company
maintains a share account for each shareholder of record. Share
certificates are not issued unless requested in writing to a Fund.
Detailed confirmations of each purchase or redemption are sent to each
shareholder of record. Annual statements are sent to report dividends
paid during the year for THE WACHOVIA FUNDS, and monthly confirmations
are sent to report dividends paid during that month for THE WACHOVIA
MUNICIPAL FUNDS.
SUBACCOUNTING SERVICES
Institutions are encouraged to open single master accounts; however,
certain institutions may wish to use the Transfer Agent's
subaccounting system to minimize their internal recordkeeping
requirements. The Transfer Agent may charge a fee based on the level
of subaccounting services rendered. Institutions holding Shares of a
Fund in a fiduciary, agency, custodial, or similar capacity may charge
or pass through subaccounting fees as part of or in addition to normal
trust or agency account fees. They may also charge fees for other
services provided which may be related to the ownership of Fund
Shares. This prospectus should, therefore, be read together with any
agreement between the customer and the institution with regard to the
services provided, the fees charged for those services, and any
restrictions and limitations imposed.
DIVIDENDS AND CAPITAL GAINS
Dividends are declared and paid quarterly to shareholders invested in
the EQUITY FUND, the QUANTITATIVE EQUITY FUND, the EQUITY INDEX FUND
and the BALANCED FUND on the record date. Dividends are declared and
paid monthly to all shareholders invested in the FIXED INCOME FUND and
the SHORT-TERM FIXED INCOME FUND on the record date. Dividends are
declared daily and paid monthly to all shareholders invested in THE
WACHOVIA MUNICIPAL FUNDS on the record date. Dividends are declared
and paid annually to all shareholders of the EMERGING MARKETS FUND and
SPECIAL VALUES FUND on the record date. Unless shareholders request
cash payments by writing to a Fund, dividends are automatically
reinvested in additional Shares of a Fund on the payment dates at the
ex-dividend date net asset value without a sales charge.
Dividends are declared just prior to determining net asset value. If
an order for Shares is placed on the preceding business day, Shares
purchased by wire begin earning dividends on the business day wire
payment is received by the Custodian. If the order for Shares and
payment by wire are received on the same day, Shares begin earning
dividends on the next business day. Shares purchased by check begin
earning dividends on the business day after the check is converted
into federal funds.
Capital gains, when realized by a Fund, will be distributed at least
once every 12 months.
- ---------------------------------------------------------
- ---------------------------------------------------------
EXCHANGE PRIVILEGE
Shareholders of the Funds have easy access to the other Funds
comprising the Trusts through a telephone exchange program. Class Y
Shares of a Fund may be exchanged for Class Y Shares of another Fund
at net asset value. The exchange privilege is available to
shareholders residing in any state in which the Shares being acquired
may be legally sold. Prior to any exchange, a shareholder should
review a copy of the current prospectus of the Fund into which an
exchange is to be effected. Shareholders contemplating exchanges into
THE WACHOVIA MUNICIPAL FUNDS should consult their tax advisers, since
the tax advantages of each Fund may vary.
Shareholders using this privilege must exchange Shares having a net
asset value at least equal to the minimum investment of the Fund into
which they are exchanging. An exchange order must comply with the
requirements for a redemption and purchase order and must specify the
dollar value or number of Shares to
be exchanged. Shareholders who desire to automatically exchange Shares
of a predetermined amount on a monthly, quarterly, or annual basis may
take advantage of a systematic exchange privilege. A shareholder may
obtain further information or give instructions for exchange between
Funds by calling the Fund, Wachovia Investments, Inc., or in the case
of customers of Wachovia Bank, the shareholder's account officer.
Shares may be exchanged by telephone only between Fund accounts having
identical shareholder registrations.
Upon receipt of proper instructions and all necessary supporting
documents, Shares submitted for exchange will be redeemed at the
next-determined net asset value. Written exchange instructions may
require a signature guarantee. Exercise of this privilege is treated
as a sale for federal income tax purposes and, depending on the
circumstances, a short or long-term capital gain or loss may be
realized. The exchange privilege may be modified or terminated at any
time. Shareholders will be notified of the modification or termination
of the exchange privilege.
Exchange By Telephone. Telephone exchange instructions must be
received before 3:30 p.m. (Eastern time) for Shares to be exchanged
the same day. Exchange instructions given by telephone may be
electronically recorded. If reasonable procedures are not followed by
the Fund, it may be liable for losses due to unauthorized or
fraudulent telephone instructions. The telephone exchange privilege
may be modified or terminated at any time. Shareholders will be
notified of such modification or termination. Shareholders may have
difficulty in making exchanges by telephone through banks, brokers,
and other financial institutions during times of drastic economic or
market changes. If a shareholder cannot contact his bank, broker, or
financial institution by telephone, it is recommended that an exchange
request be made in writing and sent by overnight mail.
- ---------------------------------------------------------
- ---------------------------------------------------------
REDEEMING SHARES
Each Fund redeems Shares at its net asset value next determined after
the Fund receives the redemption request. Redemptions will be made on
days on which the Fund computes its net asset value. Telephone or
written requests for redemptions must be received in proper form and
can be made through Wachovia Bank or directly to a Fund.
By Telephone. A shareholder may redeem Shares of a Fund by contacting
their trust officer or calling the Funds (call toll-free
1-800-994-4414) to request the redemption. Redemption requests made
through Wachovia Bank must be received before 3:30 p.m. (Eastern time)
in order for Shares to be redeemed at that day's net asset value.
Wachovia Bank is responsible for promptly submitting redemption
requests and providing proper written redemption instructions to the
Funds. Telephone redemption instructions may be recorded. If
reasonable procedures are not followed by a Fund, it may be liable for
losses due to unauthorized or fraudulent telephone instructions.
Normally, a check for the proceeds is mailed within three business
days, but in no event will proceeds be credited more than seven days
after a proper request for redemption has been received. In the event
of drastic economic or market changes, a shareholder may experience
difficulty in redeeming by telephone. If such a case should occur,
another method of redemption should be considered.
By Mail. A shareholder may redeem Fund Shares by sending a written
request to Wachovia Bank. The written request should include the
shareholder's name, the Fund name, the account number or brokerage
account numbers, and the share or dollar amount requested. If share
certificates have been issued, they must be properly endorsed and
should be sent by registered or certified mail with the written
request to a Fund. Shareholders should call Wachovia Bank or the Funds
for assistance in redeeming by mail.
Signatures. Shareholders requesting a redemption to be sent to an
address other than that on record with a Fund or a redemption payable
other than to the shareholder of record must have signatures on
written redemption requests guaranteed by:
a trust company or commercial bank whose deposits are insured by the
BIF; a member of the New York, American, Boston, Midwest, or Pacific
Stock Exchange; a savings bank or savings association whose deposits
are insured by the SAIF; or any other "eligible guarantor
institution," as defined in the Securities
Exchange Act of 1934.
The Funds do not accept signatures guaranteed by a notary public.
The Funds and the Transfer Agent have adopted standards for accepting
signature guarantees from the above institutions. A Fund may elect in
the future to limit eligible signature guarantors to institutions that
are members of a signature guarantee program. The Funds and the
Transfer Agent reserve the right to amend these standards at any time
without notice.
SYSTEMATIC WITHDRAWAL PROGRAM
Shareholders having an account value of at least $10,000 and who
desire to receive payments of a predetermined amount may take
advantage of the Systematic Withdrawal Program. Under this program,
shares are redeemed to provide for monthly or quarterly withdrawal
payments in a minimum of $100 as directed by the shareholder.
Depending upon the amount of the withdrawal payments, the amount of
dividends paid and capital gains distributions, and the fluctuation of
net asset value of shares redeemed under this program, redemptions may
reduce, and eventually deplete, the shareholder's investment in a
Fund. For this reason, payments under this program should not be
considered as yield or income on the shareholder's
investment in a Fund. A shareholder may apply for participation in this program
through his financial institution.
ACCOUNTS WITH LOW BALANCES
Due to the high cost of maintaining accounts with low balances, each
Fund may redeem Shares in any account and pay the proceeds to the
shareholder if, due to shareholder redemptions, the account balance
falls below the required minimum value of $250 for THE WACHOVIA FUNDS
and $500 for THE WACHOVIA MUNICIPAL FUNDS. This requirement does not
apply, however, if the balance falls below the required minimum
because of changes in a Fund's net asset value. Before Shares are
redeemed to close an account, the shareholder is notified in writing
and allowed 30 days to purchase additional Shares to meet the minimum
requirement.
- ---------------------------------------------------------
- ---------------------------------------------------------
SHAREHOLDER INFORMATION
VOTING RIGHTS
Each Share of a Fund gives the shareholder one vote in Trustee
elections and other matters submitted to shareholders for vote. All
shares of all classes of each Fund in a Trust have equal voting
rights, except that in matters affecting only a particular Fund or
class, only shares of that Fund or class are entitled to vote.
As Massachusetts business trusts, neither Trust is required to hold
annual shareholder meetings. Shareholder approval will be sought only
for certain changes in a Trust or a Fund's operation and for the
election of Trustees under certain circumstances.
As of January 3, 1997, Wachovia Bank and its various affiliates and
subsidiaries, acting in various capacities for numerous accounts,
together were the owners of record of in excess of 25% of the
outstanding shares of the Quantitative Equity Fund, Equity Index Fund,
Special Values Fund, Fixed Income Fund, and Short-Term Fixed Income
Fund, and therefore may, for certain purposes, be deemed to control
these Funds and be able to affect the outcome of certain matters
presented for a vote of shareholders.
Trustees may be removed by the Trustees or by shareholders at a
special meeting. A special meeting of a Trust's shareholders shall be
called by the Trustees upon the written request of shareholders owning
at least 10% of a Trust's outstanding shares.
- ---------------------------------------------------------
- ---------------------------------------------------------
EFFECT OF BANKING LAWS
The Glass-Steagall Act and other banking laws and regulations
presently prohibit a bank holding company registered under the Bank
Holding Company Act of 1956 or any bank or non-bank affiliate thereof
from sponsoring, organizing, controlling or distributing the shares of
a registered open-end investment company continuously engaged in the
issuance of its shares, and prohibit banks generally from issuing,
underwriting or distributing most securities. However, such banking
laws and regulations do not prohibit such a holding company or its
bank and non-bank affiliates generally from acting as investment
adviser, transfer agent or custodian to such an investment company or
from purchasing shares of such a company as agent for and upon the
order of their customers.
Some entities providing services to the Funds are subject to such
banking laws and regulations. Wachovia Bank believes, based on the
advice of its counsel, that it may perform the services for a Fund
contemplated by its investment advisory contracts and custodian
agreements with the Trusts without violating those laws or
regulations. Changes in either federal or state statutes and
regulations relating to the permissible activities of banks and their
subsidiaries or affiliates, as well as further judicial or
administrative decisions or interpretations of present or future
statutes and regulations, could prevent Wachovia Bank from continuing
to perform all or a part of the above services for its customers
and/or a Fund. If this happens, the Trustees would consider
alternative means of continuing available investment services. In such
event, changes in the operation of a Fund may occur, including the
possible termination of any automatic or other Fund share investment
and redemption services then being provided by Wachovia Bank. It is
not expected that existing Fund shareholders would suffer any adverse
financial consequences (if another service provider with equivalent
abilities to Wachovia Bank is found) as a result of any of these
occurrences.
The Glass-Steagall Act prohibits a depository institution (such as a
commercial bank or a savings association) from being an underwriter or
distributor of most securities. In the event the Glass-Steagall Act is
deemed to prohibit depository institutions from acting in the
administrative capacities described above, or should Congress relax
current restrictions on depository institutions, the Trustees will
consider appropriate changes in the services.
State securities laws governing the ability of depository institutions
to act as underwriters or distributors of securities may differ from
interpretations given to the Glass-Steagall Act and, therefore, banks
and financial institutions may be required to register as dealers
pursuant to state law.
- ---------------------------------------------------------
- ---------------------------------------------------------
TAX INFORMATION
The Funds expect to pay no federal income tax because each intends to
continue to meet requirements of the Internal Revenue Code applicable
to regulated investment companies and to receive the special tax
treatment afforded to such companies.
Each Fund will be treated as a single, separate entity for federal
income tax purposes so that income
(including capital gains) and losses earned and realized by any Fund
will not be combined for tax purposes with those of any other Fund.
Unless otherwise exempt, shareholders of THE WACHOVIA FUNDS are
subject to federal income tax on any dividends and other
distributions, including capital gain distributions, received. This
applies whether dividends and other distributions are received in cash
or as additional shares. The Funds will provide shareholders with tax
information for reporting purposes. Distributions representing
long-term capital gains, if any, will be taxable to a Funds net
shareholders as long-term capital gains no matter how long the
shareholders have held the shares.
Shareholders are urged to consult their own tax advisers regarding the
status of their accounts under state and local tax laws.
- ---------------------------------------------------------
- ---------------------------------------------------------
THE WACHOVIA_ MUNICIPAL FUNDS TAX INFORMATION
FEDERAL INCOME TAX
Shareholders of THE WACHOVIA MUNICIPAL FUNDS are not required to pay
federal regular income tax on any dividends received from the Fund
that represent net interest on tax-exempt municipal bonds
("exempt-interest dividends"). However, dividends representing net
interest income earned on some municipal bonds may be included in
calculating the federal alternative minimum tax.
The alternative minimum tax, equal to up to 28% of alternative minimum
taxable income for individuals and 20% for corporations, applies when
it exceeds the regular tax for the taxable year. Alternative minimum
taxable income is equal to the regular taxable income of the taxpayer
increased by certain "tax preference" items not included in regular
taxable income and increased or reduced by certain alternative minimum
tax adjustments.
Interest on certain "private activity" bonds issued after August 7,
1986, is a tax preference item for both individuals and corporations.
Unlike traditional governmental purpose municipal bonds, which finance
roads, schools, libraries, prisons, and other public facilities,
private activity bonds provide benefits to private parties. A Fund may
purchase all types of municipal bonds, including private activity
bonds. If a Fund purchases any such bonds, a portion of its dividends
may be treated as a tax preference item.
In addition, in the case of a corporate shareholder, exempt-interest
dividends may become subject to the 20% corporate alternative minimum
tax because the dividends are included in a corporations's "adjusted
current earnings." The corporate alternative minimum tax treats 75% of
the excess of the taxpayer's "adjusted current earnings" over the
taxpayer's preadjustment alternative minimum taxable income as an
alternative minimum tax adjustment. "Adjusted current earnings" is
based upon the concept of a corporation's "earnings and profits".
Since "earnings and profits" generally includes the full amount of any
Fund dividend (including exempt-interest dividends), and preadjustment
alternative minimum taxable income does not include exempt-interest
dividend to municipal bonds which are not private activity bonds, 75%
of the difference will be included in the calculation of the
corporation's alternative minimum tax.
Shareholders should consult with their tax advisers to determine
whether they are subject to the alternative minimum tax and, if so,
the tax treatment of dividends paid by a Fund.
Dividends of a Fund representing net interest income earned on some
taxable temporary investments and any realized net short-term gains
are taxed as ordinary income. Distributions representing net long-term
capital gains realized by a Fund, if any, will be taxable to its
shareholders as long-term capital gains regardless of the length of
time the shareholders have held their shares.
These tax consequences apply whether dividends are received in cash or
as additional shares. Information on the tax status of dividends and
other distributions is provided annually.
GEORGIA AND NORTH CAROLINA TAXES
Under existing Georgia and North Carolina laws, shareholders of the
GEORGIA MUNICIPAL BOND FUND and NORTH CAROLINA MUNICIPAL BOND FUND
will not be subject to Georgia or North Carolina income taxes,
respectively, on Fund dividends to the extent that such dividends
represent exempt-interest dividends as defined in the Internal Revenue
Code of 1986, as amended, which are directly attributable to (i)
interest on obligations issued by or on behalf of the States of
Georgia or North Carolina, respectively, or their respective political
subdivisions; or (ii) interest on obligations of the United States or
any other issuer whose obligations are exempt from state income taxes
under federal law.
To the extent that Fund dividends are attributable to other sources,
such dividends will be subject to the relevant state's income taxes.
SOUTH CAROLINA TAXES
Under current South Carolina law, shareholders of the SOUTH CAROLINA
MUNICIPAL BOND FUND who are subject to South Carolina individual or
corporate income taxes will not be subject to such taxes on Fund
dividends to the extent that such dividends qualify as either (1)
exempt-interest dividends under the Internal Revenue Code, which are
derived from interest on obligations of the state of South Carolina or
any of its political subdivisions; (2) dividends derived from interest
on certain obligations of the United States; and (3) dividends derived
from interest on obligations of any agency or instrumentality of the
United States that is prohibited by federal law from being taxed by a
state or any political subdivision of a state. To the extent
that Fund dividends are attributable to other sources, such dividends
will be subject to South Carolina taxes.
OTHER STATE AND LOCAL TAXES
Income from THE WACHOVIA MUNICIPAL FUNDS is not necessarily free from
state income taxes in states other than Georgia, North Carolina, or
South Carolina, respectively, or from personal property taxes. State
laws differ on this issue, and shareholders are urged to consult their
own tax advisers regarding the status of their accounts under state
and local tax laws.
- ---------------------------------------------------------
- ---------------------------------------------------------
OTHER CLASSES OF SHARES
THE WACHOVIA FUNDS and THE WACHOVIA MUNICIPAL FUNDS offer three
classes of shares: Class Y Shares for institutional investors, and
Class A Shares and Class B Shares of the Equity Fund, the Quantitative
Equity Fund, the Balanced Fund, and the Fixed Income Fund for
institutional investors, individuals and other customers of Wachovia
Bank.
Class A Shares and Class B Shares are sold at net asset value plus a
sales charge which, at the election of the purchaser, may be imposed
either (i) at the time of purchase (the Class A Shares), or (ii) on a
contingent deferred basis (the Class B Shares). Class B Shares are
distributed pursuant to Rule 12b-1 Plans adopted by the Trusts,
whereby the distributor is paid a fee of 0.75 of 1% of Class B Shares'
average daily net asset value. In addition, Class A Shares and Class B
Shares pay a shareholder services fee of 0.25% of the respective
class' average daily net assets.
Class A Shares of a Fund may be purchased at net asset value, without
a sales charge, by certain investors described in the Class A Shares'
prospectus.
The stated advisory fee is the same for all classes of the Funds.
Financial institutions and brokers providing sales and/or
administrative services may receive different compensation with
respect to one class of shares than with respect to another class of
shares of the same Fund.
The amount of dividends payable to Class A Shares and Class B Shares
will be less than those payable to Class Y Shares by the difference
between Class Expenses and distribution and shareholder services
expenses borne by the shares of each respective class.
- ---------------------------------------------------------
- ---------------------------------------------------------
PERFORMANCE INFORMATION
From time to time, the Funds advertise their total return, yield, and
if applicable, tax-equivalent yield.
Total return represents the change, over a specified period of time,
in the value of an investment in a Fund after reinvesting all income
and capital gain distributions. It is calculated by dividing that
change by the initial investment and is expressed as a percentage.
The yield of each Fund is calculated by dividing the net investment
income per share (as defined by the Securities and Exchange
Commission) earned by the Fund over a thirty-day period by the maximum
offering price per share of the Fund on the last day of the period.
This number is then annualized using semi-annual compounding.
The tax-equivalent yield of THE WACHOVIA MUNICIPAL FUNDS is calculated
similarly to the yield, but is adjusted to reflect the taxable yield
that the Fund would have had to earn to equal its actual yield,
assuming a specific tax rate.
The yield and the tax-equivalent yield do not necessarily reflect
income actually earned by a Fund and, therefore, may not correlate to
the dividends or other distributions paid to shareholders.
Total return and yield will be calculated separately for Class Y
Shares, Class A Shares, and Class B Shares of a Fund. Because Class B
Shares are subject to a Rule 12b-1 fee, and Class A Shares and Class B
Shares are subject to a shareholder services fee, the yield will be
lower than that of Class Y Shares. The sales load applicable to Class
A Shares also contributes to a lower total return for Class A Shares.
The performance information reflects the effect of the maximum sales
load which, if excluded, would increase the total return, yield, and,
as applicable, tax-equivalent yield. In addition, Class B Shares are
subject to similar non-recurring charges, such as the contingent
deferred sales charge, which, if excluded, would increase the total
return for Class B Shares.
From time to time, advertisements for a Fund may refer to ratings,
rankings, and other information in certain financial publications
and/or compare a Fund's performance to certain indices.
THE WACHOVIA FUNDS &
THE WACHOVIA MUNICIPAL FUNDS
CLASS Y SHARES
ADDRESSES
WACHOVIA EQUITY FUND 101 GREYSTONE BOULEVARD
WACHOVIA QUANTITATIVE EQUITY FUND SC-9215
WACHOVIA EQUITY INDEX FUND COLUMBIA, SC 29226
WACHOVIA SPECIAL VALUES FUND WACHOVIA EMERGING MARKETS FUND WACHOVIA
BALANCED FUND WACHOVIA FIXED INCOME FUND WACHOVIA SHORT-TERM FIXED
INCOME FUND WACHOVIA GA MUNICIPAL BOND FUND WACHOVIA NC MUNICIPAL BOND
FUND WACHOVIA SC MUNICIPAL BOND FUND
INVESTMENT ADVISER
(THE WACHOVIA FUNDS) WACHOVIA ASSET MANAGEMENT
(THE WACHOVIA MUNICIPAL FUNDS) 100 NORTH MAIN STREET
WINSTON-SALEM, NC 27101
COUNSEL TO THE WACHOVIA FUNDS AND KIRKPATRICK & LOCKHART LLP
THE WACHOVIA MUNICIPAL FUNDS 1800 MASSACHUSETTS AVENUE, NW
WASHINGTON, DC 20036-1800
COUNSEL TO THE INDEPENDENT TRUSTEES PIPER & MARBURY LLP
1200 NINETEENTH STREET, NW
WASHINGTON, DC 20036-2430
JULY 31,1997
822-28 (7/97) G01689-01-IS (7/97)
THE WACHOVIA FUNDS
THE WACHOVIA MUNICIPAL FUNDS
CLASS A SHARES
ALL PORTFOLIOS
CLASS Y SHARES
ALL PORTFOLIOS
CLASS B SHARES
WACHOVIA EQUITY FUND
WACHOVIA QUANTITATIVE EQUITY FUND
WACHOVIA BALANCED FUND
WACHOVIA FIXED INCOME FUND
STATEMENT OF ADDITIONAL INFORMATION
THIS STATEMENT OF ADDITIONAL INFORMATION SHOULD BE READ WITH
THE PROSPECTUSES OF THE WACHOVIA FUNDS AND THE WACHOVIA
MUNICIPAL FUNDS (INDIVIDUALLY REFERRED TO AS THE "TRUST" OR
COLLECTIVELY AS THE "TRUSTS"), DATED JANUARY 31, 1997, REVISED
ON JULY 31, 1997. THIS STATEMENT IS NOT A PROSPECTUS ITSELF. TO
RECEIVE A COPY OF THE PROSPECTUSES, CALL THE FUNDS TOLL-FREE AT
1-800-994-4414.
Federated Investors Tower
Pittsburgh, Pennsylvania 15222-3779
Statement dated January 31, 1997
(Revised March 10, 1997)
(Revised July 31, 1997)
[GRAPHIC OMITTED]
Federated Securities Corp. is the distributor of the Funds
and is a subsidiary of Federated Investors.
3012917B (7/97)
<PAGE>
- ----------------------------------------------------------------------
TABLE OF CONTENTS
GENERAL INFORMATION 1
INVESTMENT OBJECTIVES, POLICIES, AND LIMITATIONS
OF THE FUNDS 1
Portfolio Turnover 15
Investment Limitations 16
THE WACHOVIA FUNDS AND THE WACHOVIA MUNICIPAL
FUNDS MANAGEMENT 21
Officers and Trustees 21
Fund Ownership 22
Trustees Compensation 24
Trustee Liability 24
INVESTMENT ADVISORY SERVICES 24
Adviser to the Funds 24
Advisory and Sub-Advisory Fees 25
BROKERAGE TRANSACTIONS 25
OTHER SERVICES 27
Administration 27
Custodian 27
Transfer Agent 27
Legal Services 28
Independent Auditors 28
DISTRIBUTION PLAN (CLASS B SHARES ONLY) AND
SHAREHOLDER SERVICES PLAN (CLASS A SHARES AND
CLASS B SHARES ONLY) 28
PURCHASING FUND SHARES 29
Conversion to Federal Funds 29
Exchanging Securities for Fund Shares 29
DETERMINING NET ASSET VALUE 29
DETERMINING MARKET VALUE OF SECURITIES 29
REDEEMING FUND SHARES 30
Redemption in Kind 30
MASSACHUSETTS BUSINESS TRUSTS 30
TAX STATUS 30
The Funds' Tax Status 30
Shareholders' Tax Status 31
Capital Gains 31
TOTAL RETURN 32
YIELD 33
TAX-EQUIVALENT YIELD 34
PERFORMANCE COMPARISONS 37
FINANCIAL STATEMENTS 40
STANDARD & POOR'S CORPORATION 40
APPENDIX 41
<PAGE>
GENERAL INFORMATION
The Wachovia Funds (formerly, The Biltmore Funds) was
established as a Massachusetts business trust under a Declaration of
Trust dated November 19, 1991. The Wachovia Municipal Funds (formerly,
The Biltmore Municipal Funds) was established as a Massachusetts
business trust under a Declaration of Trust dated August 15, 1990.
Prior to June 3, 1993, The Wachovia Municipal Funds was known as "The
Passageway Funds." Unless otherwise indicated, the investment policies
described below may be changed by the Board of Trustees ("Trustees" or
the "Board") without shareholder approval. Shareholders will be
notified before any material change in these policies becomes
effective. Capitalized terms not otherwise defined in this Statement
shall have the same meaning assigned in the prospectus. The following
Funds (individually referred to as the "Fund" or collectively as the
"Funds") are portfolios of the Trusts:
Shares of Wachovia Equity Fund ("Equity Fund") (formerly,
Biltmore Equity Fund) are currently offered in three classes: Class A
Shares, Class B Shares, and Class Y Shares.
Shares of Wachovia Quantitative Equity Fund ("Quantitative
Equity Fund") (formerly, Biltmore Quantitative Equity Fund) are
currently offered in three classes: Class A Shares, Class B Shares,
and Class Y Shares.
Shares of Wachovia Equity Index Fund ("Equity Index Fund")
(formerly, Biltmore Equity Index Fund) are currently offered in two
classes: Class A Shares and Class Y Shares.
Shares of Wachovia Special Values Fund ("Special Values
Fund") (formerly, Biltmore Special Values Fund) are currently offered
in two classes: Class A Shares and Class Y Shares.
Shares of Wachovia Emerging Markets Fund ("Emerging Markets
Fund") (formerly, Biltmore Emerging Markets Fund) are currently
offered in two classes: Class A Shares and Class Y Shares.
Shares of Wachovia Balanced Fund ("Balanced Fund")
(formerly, Biltmore Balanced Fund) are currently offered in three
classes: Class A Shares, Class B Shares, and Class Y Shares.
Shares of Wachovia Fixed Income Fund ("Fixed Income Fund")
(formerly, Biltmore Fixed Income Fund) are currently offered in three
classes: Class A Shares, Class B Shares, and Class Y Shares.
Shares of Wachovia Short-Term Fixed Income Fund ("Short-Term
Fixed Income Fund") (formerly, Biltmore Short-Term Fixed Income Fund)
are currently offered in two classes: Class A Shares and Class Y
Shares.
Shares of Wachovia Georgia Municipal Bond Fund ("Georgia
Municipal Bond Fund") (formerly, Biltmore Georgia Municipal Bond Fund)
are currently offered in two classes: Class A Shares and Class Y
Shares
Shares of Wachovia North Carolina Municipal Bond Fund ("North
Carolina Municipal Bond Fund") (formerly, Biltmore North Carolina
Municipal Bond Fund) are currently offered in two classes: Class A
Shares and Class Y Shares
Shares of Wachovia South Carolina Municipal Bond Fund ("South
Carolina Municipal Bond Fund") (formerly, Biltmore South Carolina
Municipal Bond Fund) are currently offered in two classes: Class A
Shares and Class Y Shares.
Prior to July 22, 1996, each Fund offered a single class of
shares, which is currently designated as Class A Shares.
INVESTMENT OBJECTIVES, POLICIES, AND LIMITATIONS OF THE FUNDS
The prospectuses discuss the objective of each Fund and the
policies that each Fund employs to achieve its objective. The
following discussion supplements the description of each Fund's
investment policies.
Each Fund's respective investment objective cannot be
changed without the approval of shareholders.
WHEN-ISSUED AND DELAYED DELIVERY TRANSACTIONS
These transactions are made to secure what is considered to
be an advantageous price or yield for the Funds. No fees or other
expenses, other than normal transaction costs, are incurred. However,
liquid assets of the Funds sufficient to make payment for the
securities to be purchased are segregated on the Funds' records at the
trade date. These assets are marked to market daily and are maintained
until the transaction has been settled. The Funds do not intend to
engage in when-issued and delayed delivery transactions to an extent
that would cause the segregation of more than 20% of the total value
of a Fund's assets.
LENDING OF PORTFOLIO SECURITIES
The collateral received when a Fund lends portfolio
securities must be valued daily and, should the market value of the
loaned securities increase, the borrower must furnish additional
collateral to the Fund. During the time portfolio securities are on
loan, the borrower pays the Fund any dividends or interest paid on
such securities. Loans are subject to termination at the option of the
Fund or the borrower. A Fund may pay reasonable administrative and
custodial fees in connection with a loan and may pay a negotiated
portion of the interest earned on the cash or equivalent collateral to
the borrower or placing broker. The Funds do not have the right to
vote securities on loan. In circumstances where the Fund does not, the
Fund would terminate the loan and regain the right to vote if that
were considered important with respect to the investment.
REPURCHASE AGREEMENTS
The Funds require the custodian to take possession of the
securities subject to repurchase agreements and these securities are
marked to market daily. To the extent that the original seller does
not repurchase the securities from a Fund, the Fund could receive less
than the repurchase price on any sale of such securities. In the event
that such a defaulting seller filed for bankruptcy or became
insolvent, disposition of such securities by the Fund might be delayed
pending court action. The Funds believe that, under the regular
procedures normally in effect for custody of a Fund's portfolio
securities subject to repurchase agreements, a court of competent
jurisdiction would rule in favor of the Fund and allow retention or
disposition of such securities. A Fund will only enter into repurchase
agreements with banks and other recognized financial institutions,
such as broker/dealers, which are deemed by the Funds' adviser to be
creditworthy pursuant to guidelines established by the Trustees.
REVERSE REPURCHASE AGREEMENTS
The Funds may enter into reverse repurchase agreements under
certain circumstances. This transaction is similar to borrowing cash.
In a reverse repurchase agreement, a Fund transfers possession of a
portfolio instrument to another person, such as a financial
institution, broker, or dealer, in return for a percentage of the
instrument's market value in cash, and agrees that on a stipulated
date in the future the Fund will repurchase the portfolio instrument
by remitting the original consideration plus interest at an agreed
upon rate. The use of reverse repurchase agreements may enable a Fund
to avoid selling portfolio instruments at a time when a sale may be
deemed to be disadvantageous, but the ability to enter into reverse
repurchase agreements does not ensure that a Fund will be able to
avoid selling portfolio instruments at a disadvantageous time.
When effecting reverse repurchase agreements, liquid assets
of a Fund, in a dollar amount sufficient to make payment for the
obligations to be purchased, are segregated at the trade date. These
securities are marked to market daily and maintained until the
transaction is settled.
MONEY MARKET INSTRUMENTS
The Funds may invest in money market instruments such as:
instruments of domestic and foreign banks and savings and loans
if they have capital, surplus, and undivided profits of over
$100,000,000, or if the principal amount of the instrument is
federally insured;
commercial paper rated, at the time of purchase, A-1 or better
by Standard & Poor's Ratings Group ("S&P") or Prime-1 or better
by Moody's Investors Service ("Moody's") or, if unrated, are of
comparable quality as determined by the Fund's investment
adviser.
time and savings deposits whose accounts are insured by the Bank
Insurance Fund ("BIF"), which is administered by the Federal
Deposit Insurance Corporation ("FDIC"), or in institutions whose
accounts are insured by the Savings Association Insurance Fund
("SAIF"), which is also administered by the FDIC, including
certificates of deposit issued by and other time deposits in
foreign branches of BIF-insured banks; or
bankers' acceptances.
The Equity Fund, Quantitative Equity Fund, Special Values
Fund and the Wachovia Municipal Funds may invest in money market
instruments as temporary investments, from time to time, for defensive
purposes.
FUTURES AND OPTIONS TRANSACTIONS
The Funds (except the Wachovia Municipal Funds) may
engage in futures and options transactions. As a means of reducing
fluctuations in the net asset value of shares of a Fund, a Fund may
attempt to hedge its portfolio by buying and selling financial futures
contracts, buying put options on portfolio securities and put options
on financial futures contracts for portfolio securities, or writing
call options on futures contracts. A Fund also may write covered call
options on portfolio securities to attempt to increase its current
income.
A Fund will maintain its position in securities, options and
segregated cash subject to puts and calls until the options are
exercised, closed, or have expired. An option position may be closed
out over-the-counter or on a nationally-recognized exchange which
provides a secondary market for options of the same series.
FUTURES CONTRACTS
The Funds (except the Wachovia Municipal Funds) may
purchase and sell financial futures contracts to hedge
against the effects of changes in the value of portfolio
securities due to anticipated changes in interest rates and
market conditions without necessarily buying or selling the
securities. The Funds will not engage in futures transactions
for speculative purposes.
A futures contract is a firm commitment by two parties: the
seller, who agrees to make delivery of the specific type of
security called for in the contract ("going short"), and the
buyer, who agrees to take delivery of the security ("going
long") at a certain time in the future.
For example, in the fixed income securities market, prices
generally move inversely to interest rates. A rise in rates
means a drop in price. Conversely, a drop in rates typically
means a rise in price. In order to hedge its holdings of
fixed income securities against a rise in market interest
rates, the Fund could enter into contracts to deliver
securities at a predetermined price (i.e., "go short") to
protect itself against the possibility that the prices of its
fixed income securities may decline during a Fund's
anticipated holding period. A Fund would "go long" (agree to
purchase securities in the future at a predetermined price)
to hedge against a decline in market interest rates.
"MARGIN" IN FUTURES TRANSACTIONS
The Funds (except the Wachovia Municipal Funds)may engage
in "margin" in futures transactions. Unlike the purchase or
sale of a security, a Fund does not pay or receive money upon
the purchase or sale of a futures contract. Rather, the Fund
is required to deposit an amount of "initial margin" in cash
or U.S. Treasury bills with its custodian or the broker. The
nature of initial margin in futures transactions is different
from that of margin in securities transactions in that
initial margin in futures transactions does not involve the
borrowing of funds by a Fund to finance the transactions.
Initial margin is in the nature of a performance bond or good
faith deposit on the contract which is returned to the Fund
upon termination of the futures contract, assuming all
contractual obligations have been satisfied.
A futures contract held by a Fund is valued daily at the
official settlement price of the exchange on which it is
traded. Each day the Fund pays or receives cash, called
"variation margin," equal to the daily change in value of the
futures contract. This process is known as "marking to
market." Variation margin does not represent a borrowing or
loan by a Fund, but is instead settlement between the Fund
and the broker of the amount one would owe the other if the
futures contract expired. In computing its daily net asset
value, the Fund will mark to market its open futures
positions.
A Fund is also required to deposit and maintain margin when
it writes call options on futures contracts.
The Funds will comply with the following restrictions when
purchasing and selling futures contracts. First, a Fund will
not participate in futures transactions if the sum of its
initial margin deposits on open contracts will exceed 5% of
the market value of each Fund's total assets, after taking
into account the unrealized profits and losses on those
contracts it has entered into. Second, a Fund will not enter
into these contracts for speculative purposes. Third, since a
Fund does not constitute a commodity pool, it will not market
itself as such, nor serve as a vehicle for trading in the
commodities futures or commodity options markets. Connected
with this, each Fund will disclose to all prospective
investors the limitations on its futures and options
transactions, and make clear that these transactions are
entered into only for bona fide hedging purposes, or other
permissible purposes pursuant to regulations promulgated by
the Commodity Futures Trading Commission ("CFTC"). Finally,
because the Funds will submit to the CFTC special calls for
information, the Funds will not register as a commodities
pool operators.
PURCHASING PUT OPTIONS ON PORTFOLIO SECURITIES
The Funds (except the Wachovia Municipal Funds) may
purchase put options on portfolio securities to protect
against price movements in particular securities in its
portfolio. A put option gives a Fund, in return for a
premium, the right to sell the underlying security to the
writer (seller) at a specified price during the term of the
option. A fund may purchase these put options as long as they
are listed on a recognized options exchange and the
underlying stocks are held in its portfolio.
WRITING COVERED CALL OPTIONS ON PORTFOLIO SECURITIES
The Funds (except the Wachovia Municipal Funds) may also
write call options on securities either held in its portfolio
or which it has the right to obtain without payment of
further consideration or for with it has segregated cash in
the amount of any additional consideration. As the writer of
a call option, a Fund has the obligation, upon exercise of
the option during the option period, to deliver the
underlying security upon payment of the exercise price. The
call options which a Fund writes and sells must be listed on
a recognized options exchange. Writing of call options by a
Fund is intended to generate income for the Fund and thereby
protect against price movements in particular securities in
the Fund's portfolio.
PUT OPTIONS ON FINANCIAL FUTURES CONTRACTS
The Equity Fund, Quantitative Equity Fund, Special Values
Fund, Emerging Markets Fund, Balanced Fund, Fixed Income
Fund, and Short-Term Fixed Income Fund may engage in put
options on financial futures contracts. A Fund may purchase
listed put options on financial futures contracts. The Fund
would use these options solely to protect portfolio
securities against decreases in value resulting from market
factors such as an anticipated increase in rates.
Unlike entering directly into a futures contract, which
requires the purchaser to buy a financial instrument on a set
date at a specified price, the purchase of a put option on a
futures contract entitles (but does not obligate) its
purchaser to decide on or before a future date whether to
assume a short position at the specified price.
Generally, if the hedged portfolio securities decrease in
value during the term of an option, the related futures
contracts will also decrease in value and the option will
increase in value. In such an event, a Fund will normally
close out its option by selling an identical option. If the
hedge is successful, the proceeds received by a Fund upon the
sale of the second option will be large enough to offset both
the premium paid by the Fund for the original option plus the
decrease in value of the hedged securities.
Alternatively, a Fund may exercise its put option to close
out the position. To do so, it would simultaneously enter
into a futures contract of the type underlying the option
(for a price less than the strike price of the option) and
exercise the option. The Fund would then deliver the futures
contract in return for payment of the strike price. If a Fund
neither closes out nor exercises an option, the option will
expire on the date provided in the option contract, and only
the premium paid for the contract will be lost.
CALL OPTIONS ON FINANCIAL FUTURES CONTRACTS
The Equity Fund, Quantitative Equity Fund, Special Values
Fund, Emerging Markets Fund, Balanced Fund, Fixed Income
Fund, and Short-Term Fixed Income Fund may engage in call
options on financial futures contracts. In addition to
purchasing put options on futures, a Fund may write listed
call options on financial futures contracts or
over-the-counter call options on future contracts to hedge
its portfolio against an increase in market interest rates.
When a Fund writes a call option on a futures contract, it is
undertaking the obligation of assuming a short futures
position (selling a futures contract) at the fixed strike
price at any time during the life of the option if the option
is exercised. As market interest rates rise, causing the
prices of futures to decrease, the Fund's obligation under a
call option on a future (to sell a futures contract) costs
less to fulfill, causing the value of the Fund's call option
position to increase.
In other words, as the underlying futures price goes down
below the strike price, the buyer of the option has no reason
to exercise the call, so that the Fund keeps the premium
received for the option. This premium can substantially
offset the drop in value of the Fund's portfolio securities.
Prior to the expiration of a call written by a Fund, or
exercise of it by the buyer, the Fund may close out the
option by buying an identical option. If the hedge is
successful, the cost of the second option will be less than
the premium received by the Fund for the initial option. The
net premium income of the Fund will then substantially offset
the realized decrease in value of the hedged securities.
A Fund will not maintain open positions in futures contracts
it has sold or call options it has written on futures
contracts if, in the aggregate, the value of the open
positions (marked to market) exceeds the current market value
of its portfolio, plus or minus the unrealized gain or loss
on those open positions, adjusted for the correlation of
volatility between the hedged securities and the futures
contracts. If this limitation is exceeded at any time, the
Fund will take prompt action to close out a sufficient number
of open contracts to bring its open futures and options
positions within this limitation.
OVER-THE-COUNTER OPTIONS
The Equity Fund, Quantitative Equity Fund, Special Values
Fund, Emerging Markets Fund, Balanced Fund, Fixed Income
Fund, and Short-Term Fixed Income Fund may purchase and write
over-the-counter options on portfolio securities in
negotiated transactions with the buyers or writers of the
options for those options on portfolio securities held by a
Fund and not traded on an exchange. The Fund purchases and
writes options only with investment dealers and other
financial institutions (such as commercial banks or savings
and loan associations) deemed creditworthy by the Funds'
investment adviser.
Over-the-counter options are two party contracts with price
and terms negotiated between buyer and seller. In contrast,
exchange-traded options are third party contracts with
standardized strike prices and expiration dates and are
purchased from a clearing corporation. Exchange-traded
options have a continuous liquid market while
over-the-counter options may not.
STOCK INDEX FUTURES AND OPTIONS
The Equity Fund, Quantitative Equity Fund, Equity Index Fund,
Special Values Fund, Emerging Markets Fund, and Balanced Fund
may utilize stock index futures contracts, options, and
options on futures contracts as discussed in the
prospectuses.
A stock index futures contract is a bilateral agreement which
obligates the seller to deliver (and the purchaser to take
delivery of) an amount of cash equal to a specific dollar
amount times the difference between the value of a specific
stock index at the close of trading of the contract and the
price at which the agreement is originally made. There is no
physical delivery of the stocks constituting the index, and
no price is paid upon entering into a futures contract. In
general, contracts are closed out prior to their expiration.
A Fund may only: (1) buy listed put options on stock indices;
(2) buy listed put options on securities held in its
portfolio; and (3) sell listed call options either on
securities held in its portfolio or on securities which it
has the right to obtain without payment of further
consideration (or has segregated cash in the amount of any
such additional consideration). The Fund will maintain its
positions in securities, option rights, and segregated cash
subject to puts and calls until the options are exercised,
closed, or expired.
There are several risks accompanying the utilization of
futures contracts to effectively anticipate market movements.
Because, by definition, futures contracts look to projected
price levels in the future, and not to current levels of
valuation, market circumstances may result in there being a
discrepancy between the price of the stock index future and
the movement in the corresponding stock index. The absence of
a perfect price correlation between the futures contract and
its underlying stock index could stem from investors choosing
to close futures contracts by offsetting transactions rather
than satisfying additional margin requirements. This could
result in a distortion of the relationship between the index
and the futures market. In addition, because the futures
market imposes less burdensome margin requirements than the
securities market, an increased amount of participation by
speculators in the futures market could result in price
fluctuations.
The effectiveness of purchasing stock index options will
depend upon the extent to which price movements in a Fund's
portfolio correlate with price movements of the stock index
selected. Because the value of an index option depends upon
movements in the level of the index rather than the price of
a particular stock, whether a Fund will realize a gain or
loss from the purchase of options on an index depends upon
movements in the level of stock prices in the stock market
generally or, in the case of certain indices, in an industry
or market segment, rather than movements in the price of a
particular stock. Accordingly, successful use by a Fund of
options on stock indices will be subject to the ability of a
Fund's investment adviser to predict correctly movements in
the direction of the stock market generally or of a
particular industry. This requires different skills and
techniques than predicting changes in the price of individual
stocks.
RISKS
When a Fund uses futures and options on futures as hedging
devices, there is a risk that the prices of the securities
subject to the futures contracts may not correlate perfectly
with the prices of the securities in the Fund's portfolio.
This may cause the futures contract and any related options
to react differently than the portfolio securities to market
changes. In addition, the Funds' adviser could be incorrect
in its expectations about the direction or extent of market
factors such as stock price movements. In these events, a
Fund may lose money on the futures contract or option.
It is not certain that a secondary market for positions in
futures contracts or for options will exist at all times.
Although the Funds' adviser will consider liquidity before
entering into these transactions, there is no assurance that
a liquid secondary market on an exchange or otherwise will
exist for any particular futures contract or option at any
particular time. A Fund's ability to establish and close out
futures and options positions depends on this secondary
market. The inability to close out these positions could have
an adverse effect on a Fund's ability to effectively hedge
its portfolio.
RESTRICTED AND ILLIQUID SECURITIES
The Funds may invest in restricted and illiquid securities.
The ability of the Trustees to determine the liquidity of certain
restricted securities is permitted under a Securities and Exchange
Commission staff position set forth in the adopting release for Rule
144A (the "Rule") under the Securities Act of 1933. The Rule is a
non-exclusive safe-harbor for certain secondary market transactions
involving securities subject to restrictions on resale under federal
securities laws. The Rule provides an exemption from registration for
resales of otherwise restricted securities to qualified institutional
buyers. The Rule was expected to further enhance the liquidity of the
secondary market for securities eligible for resale under the Rule.
The Fund believes that the staff of the Securities and Exchange
Commission has left the question of determining the liquidity of all
restricted securities (eligible for resale under the Rule) to the
Trusts' Board. The Board considers the following criteria in
determining the liquidity of certain restricted securities:
the frequency of trades and quotes for the security;
the number of dealers willing to purchase or sell the security and the
number of other potential buyers;
dealer undertakings to make a market in the security; and
the nature of the security and the nature of the marketplace trades.
CONVERTIBLE SECURITIES
The Funds (except the Wachovia Municipal Funds) may
invest in convertible securities. Convertible bonds and convertible
preferred stocks are fixed income securities that generally retain the
investment characteristics of fixed income securities until they have
been converted but also react to movements in the underlying equity
securities. The holder is entitled to receive the fixed income of a
bond or the dividend preference of a preferred stock until the holder
elects to exercise the conversion privilege. Usable bonds are
corporate bonds that can be used in whole or in part, customarily at
full face value, in lieu of cash to purchase the issuer's common
stock. When owned as part of a unit along with warrants, which are
options to buy the common stock, they function as convertible bonds,
except that the warrants generally will expire before the bond's
maturity. Convertible securities are senior to equity securities and,
therefore, have a claim to assets of the corporation prior to the
holders of common stock in the case of liquidation. However,
convertible securities are generally subordinated to similar
nonconvertible securities of the same company. The interest income and
dividends from convertible bonds and preferred stocks provide a stable
stream of income with generally higher yields than common stocks, but
lower than nonconvertible securities of similar quality.
A Fund will exchange or convert the convertible securities
held in its portfolio into shares of the underlying common stock in
instances in which, in the Fund's investment adviser's opinion, the
investment characteristics of the underlying common shares will assist
the Fund in achieving its investment objective. Otherwise, the Fund
will hold or trade the convertible securities. In selecting
convertible securities for a Fund, the Fund's investment adviser
evaluates the investment characteristics of the convertible security
as a fixed income instrument, and the investment potential of the
underlying equity security for capital appreciation. In evaluating
these matters with respect to a particular convertible security, a
Fund's investment adviser considers numerous factors, including the
economic and political outlook, the value of the security relative to
other investment alternatives, trends in the determination of the
issuer's profits, and the issuer's management capability and
practices.
ZERO COUPON CONVERTIBLE SECURITIES
The Funds (except the Wachovia Municipal Funds) may
invest in zero coupon convertible securities. Zero coupon convertible
securities are debt securities which are issued at a discount to their
face amount and do not entitle the holder to any periodic payments of
interest prior to maturity. Rather, interest earned on zero coupon
convertible securities accretes at a stated yield until the security
reaches its face amount at maturity. Zero coupon convertible
securities are convertible into a specific number of shares of the
issuer's common stock. In addition, zero coupon convertible securities
usually have features that provide the holder with the opportunity to
put the bonds back to the issuer at a stated price before maturity.
Generally, the prices of zero coupon convertible securities may be
more sensitive to market interest rate fluctuations than conventional
convertible securities.
OBLIGATIONS OF FOREIGN ISSUERS
The Equity Fund, Quantitative Equity Fund, Special Values
Fund, Emerging Markets Fund, and Balanced Fund may invest in
obligations of foreign issuers. Obligations of foreign issuers may
include debt obligations of supranational entities, which include
international organizations designed or supported by governmental
entities to promote economic reconstruction or development, and
international banking institutions and related government agencies.
Examples of these include, but are not limited to, the International
Bank for Reconstruction and Development (World Bank), European
Investment Bank and InterAmerican Development Bank.
Obligations of a foreign issuer may present greater risks
than investments in U.S. securities, including higher transaction
costs. In addition, investments in foreign issuers may include
additional risks associated with less market liquidity and political
instability. The possible imposition of withholding taxes on interest
income might adversely affect the payment of principal and interest on
obligations of foreign issuers. Foreign securities may be denominated
in foreign currencies. Therefore, the value in U.S. dollars of a
Fund's assets and income may be affected by changes in exchange rates
and regulations.
WARRANTS
The Funds (except the Wachovia Municipal Funds) may
invest in warrants. Warrants are basically options to purchase common
stock at a specific price (usually at a premium above the market value
of the optioned common stock at issuance) valid for a specific period
of time. Warrants may have a life ranging from less than a year to
twenty years or may be perpetual. However, most warrants have
expiration dates after which they are worthless. In addition, if the
market price of the common stock does not exceed the warrant's
exercise price during the life of the warrant, the warrant will expire
as worthless. Warrants have no voting rights, pay no dividends, and
have no rights with respect to the assets of the corporation issuing
them. The percentage increase or decrease in the market price of the
warrant may tend to be greater than the percentage increase or
decrease in the market price of the optioned common stock.
CORPORATE DEBT SECURITIES
The Equity Fund, Quantitative Equity Fund, Special Values
Fund, Emerging Markets Fund, Balanced Fund, Fixed Income Fund, and
Short-Term Fixed Income Fund may invest in corporate debt securities.
Corporate debt securities may bear fixed, fixed and contingent, or
variable rates of interest. They may involve equity features such as
conversion or exchange rights, warrants for the acquisition of common
stock of the same or a different issuer, participations based on
revenues, sales, or profits, or the purchase of common stock in a unit
transaction (where corporate debt securities and common stock are
offered as a unit).
Increasing rate securities, which currently do not make up a
significant share of the market in corporate debt securities, are
generally offered at an initial interest rate which is at or above
prevailing market rates. Interest rates are reset periodically (most
commonly every 90 days) at different levels on a predetermined scale.
These levels of interest are ordinarily set at progressively higher
increments over time. Some increasing rate securities may, by
agreement, revert to fixed rate status. These securities may also
contain features which allow the issuer the option to convert the
increasing rate of interest to a fixed rate under such terms,
conditions, limitations as are described in each issuer's prospectus.
MORTGAGE-BACKED SECURITIES
The Emerging Markets Fund, Balanced Fund, Fixed Income Fund,
and Short-Term Fixed Income Fund may invest in mortgage-backed
securities. The mortgages underlying mortgage-backed securities often
may be prepaid without penalty or premium. Therefore, mortgage-backed
securities are generally subject to higher prepayment risks than most
other types of debt instruments. Prepayment risks on mortgage-backed
securities tend to increase during periods of declining mortgage
interest rates, because many borrowers refinance their mortgages to
take advantage of the more favorable rates. Depending upon market
conditions, the yield that the Fund receives from the reinvestment of
such prepayments, or any scheduled principal payments, may be lower
than the yield on the original mortgage security. As a consequence,
mortgage-backed securities may be a less effective means of "locking
in" interest rates than other types of debt securities having the same
stated maturity and may also have less potential for capital
appreciation. For certain types of asset pools, such as collateralized
mortgage obligations, prepayments may be allocated to one tranche of
securities ahead of other tranches in order to reduce the risk of
prepayments for the other tranches.
Prepayments may result in a capital loss to the Fund to the
extent that the prepaid mortgage securities were purchased at a market
premium over their stated principal amount. Conversely, the prepayment
of mortgage-backed securities purchased at a market discount from
their stated principal amount will accelerate the recognition of
interest income by the Fund, which would be taxed as ordinary income
when distributed to the shareholders.
PRIVATELY ISSUED MORTGAGE-RELATED SECURITIES
The Emerging Markets Fund, Balanced Fund, Fixed Income Fund,
and Short-Term Fixed Income Fund may invest in privately issued
mortgage-related securities. Privately issued mortgage-related
securities generally represent an ownership interest in federal agency
mortgage pass-through securities such as those issued by Government
National Mortgage Association. The terms and characteristics of the
mortgage instruments may vary among pass-through mortgage loan pools.
The market for such mortgage-related securities has expanded
considerably since its inception. The size of the primary issuance
market and the active participation in the secondary market by
securities dealers and other investors makes government-related pools
highly liquid.
RESETS OF INTEREST RATES
The interest rates paid on adjustable rate mortgages
("ARMs"), collateralized mortgage obligations ("CMOs"), and real
estate mortgage investment conduits ("REMICs") in which the Emerging
Markets Fund, Balanced Fund, Fixed Income Fund, and Short-Term Fixed
Income Fund invest generally are readjusted at intervals of one year
or less to an increment over some predetermined interest rate index.
There are two main categories of indices: those based on U.S. Treasury
securities and those derived from a calculated measure, such as a cost
of funds index or a moving average of mortgage rates. Commonly
utilized indices include the one-year and five-year constant maturity
Treasury note rates, the three-month Treasury bill rate, the 180-day
Treasury bill rate, rates on longer-term Treasury securities, the
National Median Cost of Funds, the one-month or three-month LIBOR, the
prime rate of a specific bank, or commercial paper rates. Some
indices, such as the one-year constant maturity Treasury note rate,
closely mirror changes in market interest rate levels. Others tend to
lag changes in market rate levels and tend to be somewhat less
volatile.
To the extent that the adjusted interest rate on the
mortgage security reflects current market rates, the market value of
an adjustable rate mortgage security will tend to be less sensitive to
interest rate changes than a fixed rate debt security of the same
stated maturity. Hence, adjustable rate mortgage securities which use
indices that lag changes in market rates should experience greater
price volatility than adjustable rate mortgage securities that closely
mirror the market. Certain residual interest tranches of CMOs may have
adjustable interest rates that deviate significantly from prevailing
market rates, even after the interest rate is reset, and are subject
to correspondingly increased price volatility. In the event a Fund
purchases such residual interest mortgage securities, it will factor
in the increased interest and price volatility of such securities when
determining its dollar-weighted average duration.
CAPS AND FLOORS
The underlying mortgages which collateralize the ARMs, CMOs,
and REMICs in which the Emerging Markets Fund, Balanced Fund, Fixed
Income Fund, and Short-Term Fixed Income Fund invest will frequently
have caps and floors which limit the maximum amount by which the loan
rate to the residential borrower may change up or down: (1) per reset
or adjustment interval, and (2) over the life of the loan. Some
residential mortgage loans restrict periodic adjustments by limiting
changes in the borrower's monthly principal and interest payments
rather than limiting interest rate changes. These payment caps may
result in negative amortization.
The value of mortgage securities in which a Fund invests may
be affected if market interest rates rise or fall faster and farther
than the allowable caps or floors on the underlying residential
mortgage loans. Additionally, even though the interest rates on the
underlying residential mortgages are adjustable, amortization and
prepayments may occur, thereby causing the effective maturities of the
mortgage securities in which a Fund invests to be shorter than the
maturities stated in the underlying mortgages.
DEMAND MASTER NOTES
The Funds (except the Wachovia Municipal Funds) may
invest in variable amount demand master notes. Demand notes are
short-term borrowing arrangements between a corporation or government
agency and an institutional lender (such as a Fund) payable upon
demand by either party. The notice period for demand typically ranges
from one to seven days, and the party may demand full or partial
payment. Many master notes give a Fund the option of increasing or
decreasing the principal amount of the master note on a daily or
weekly basis within certain limits. Demand master notes usually
provide for floating or variable rates of interest.
VARIABLE RATE DEMAND NOTES
The Funds (except the Wachovia Municipal Funds) may
invest in variable rate demand notes. Variable rate demand notes are
long-term corporate debt instruments that have variable or floating
interest rates and provide a Fund with the right to tender the
security for repurchase at its stated principal amount plus accrued
interest. Such securities typically bear interest at a rate that is
intended to cause the securities to trade at par. The interest rate
may float or be adjusted at regular intervals (ranging from daily to
annually), and is normally based on an interest rate index or a
published interest rate. Many variable rate demand notes allow a Fund
to demand the repurchase of the security on not more than seven days
prior notice. Other notes only permit a Fund to tender the security at
the time of each interest rate adjustment or at other fixed
intervals.
DEMAND FEATURES
The Funds (except the Wachovia Municipal Funds) may acquire
securities that are subject to puts and standby commitments ("demand
features") which require the issuer of the demand feature to purchase
the securities at their principal amount (usually with accrued
interest) within a fixed period (usually seven days) following a
demand by the Fund. The demand feature may be issued by the issuer of
the underlying securities, a dealer in the securities or by another
third party, and may not be transferred separately from the underlying
security. The Fund uses these arrangements to provide the Fund with
liquidity and not to protect against changes in the market value of
the underlying securities. The bankruptcy, receivership or default by
the issuer of the demand feature, or a default on the underlying
security or other event that terminates the demand feature before its
exercise, will adversely affect the liquidity of the underlying
security. Demand features that are exercisable even after a payment
default on the underlying security may be treated as a form of credit
enhancement.
U.S. GOVERNMENT OBLIGATIONS
The Funds may invest in U.S. government obligations. The types of
U.S. government obligations in which the Funds may invest generally
include direct obligations of the U.S. Treasury (such as U.S. Treasury
bills, notes, and bonds) and obligations issued or guaranteed by U.S.
government agencies or instrumentalities. These securities are backed
by:
the full faith and credit of the U.S. Treasury;
the issuer's right to borrow from the U.S. Treasury;
the discretionary authority of the U.S. government to purchase
certain obligations of agencies or instrumentalities; or
the credit of the agency or instrumentality issuing the
obligations.
Examples of agencies and instrumentalities which may not always
receive financial support from the U.S. government are:
Farm Credit System, including the National Bank for Cooperatives
and Banks for Cooperatives;
Federal Home Loan Banks;
Federal Home Loan Mortgage Corporation;
Federal National Mortgage Association;
Government National Mortgage Association; and
Student Loan Marketing Association.
The Equity Fund, Quantitative Equity Fund, and Special Values
Fund and The Wachovia Municipal Funds may invest in U.S. government
obligations as temporary investments, from time to time, for defensive
purposes.
VARIABLE RATE U.S. GOVERNMENT SECURITIES
The Funds may invest in variable rate U.S. government securities. In
the case of certain U.S. government securities purchased by the Fund
that carry variable interest rates, these rates will reduce the
changes in the market value of such securities from their original
purchase prices.
Accordingly, the potential for capital appreciation or capital
depreciation should not be greater than the potential for capital
appreciation or capital depreciation of fixed interest rate U.S.
government securities having maturities equal to the interest rate
adjustment dates of the variable rate U.S. government securities.
The Fund may purchase variable rate U.S. government securities upon
the determination by the Trustees that the interest rate as adjusted
will cause the instrument to have a current market value that
approximates its par value on the adjustment date.
HIGH YIELD SECURITIES
The Special Values Fund and Emerging Markets Fund may
invest in high yield securities. Generally, the lowest-rated
securities in which the Fund may invest are rated B by S&P or Moody's
or are not rated but are determined by the Fund's investment adviser
to be of comparable quality. Securities rated B are judged to have
speculative elements and are high yield, high risk bonds (i.e., junk
bonds), typically subject to greater market fluctuations and greater
risk of loss of income and principal due to an issuer's default. To a
greater extent than investment-grade bonds, lower-rated bonds and
speculative grade securities tend to reflect short-term corporate,
economic and market developments, as well as investor perceptions of
the issuer's credit quality. In addition, lower-rated bonds and
speculative grade securities may be more difficult to dispose of or to
value than high-rated, lower-yielding bonds. In circumstances where,
in the judgment of the Fund's investment adviser, the investment
opportunities may benefit the Fund, the Fund may invest in securities
which are rated D by S&P. Debt that is rated D is in default, and
payment of interest and/or repayment of principal on such debt is in
arrears. The Fund's investment adviser attempts to reduce the risks
described above through diversification of the portfolio and by credit
analysis of each issuer, as well as by monitoring broad economic
trends and corporate and legislative developments.
DURATION
Duration is a commonly used measure of the potential
volatility in the price of a bond, or other fixed income security, or
in a portfolio of fixed income securities, prior to maturity.
Volatility is the magnitude of the change in the price of a bond
relative to a given change in the market date; and the level of market
yield of similar fixed income securities. Generally, bonds with lower
coupons or longer maturities will be more volatile than bonds with
higher coupon or shorter maturities. Duration combines these variables
into a single measure.
Duration is calculated by dividing the sum of the
time-weighted values of the cash flows of a bond or bonds, including
interest and principal payments, by the sum of the present values of
the cash flows. When the Fund invests in mortgage pass-through
securities, its duration will be calculated in a manner which requires
assumptions to be made regarding future principal prepayments. A more
complete description of this calculation is available upon request
from the Funds.
INVESTMENT PHILOSOPHY OF THE EMERGING MARKETS FUND
As described in the Fund's prospectus under "Investment
Policies" and "Investment Process," the Fund's investment adviser
manages the Fund's portfolio to attempt to capture the return
opportunities presented by securities of issuers and companies located
in emerging markets. In light of recent political events (for example,
the fall of Communism in Europe, the opening of China to Western
investment, the move toward free-market capitalism in many developing
countries, etc.), conditions for investing in many emerging market
economies have become attractive. A number of emerging market
capitalist economies present striking market growth opportunities
(stemming from the increasing number of working-class and middle-class
citizens in those nations who are now demanding improved housing,
infrastructure such as roads and utilities and a greater array of
consumer goods). In view of the fact that approximately 75% of the
world's population resides in emerging market countries, and many of
these countries are still in the early or initial stages of growth and
development, it is conceivable that many of these emerging market
countries will exhibit economic and earnings growth that exceeds
similar measurements in what have been traditionally characterized as
the developed nations of Europe, Japan, and the United States. While
past performance is not a guarantee of future results, this trend has
been seen in recent years, as the stock markets of a number of
emerging market economies have outperformed the stock markets of more
developed countries. Investors should recognize that investments in
emerging market countries present a number of risks, which are
discussed in the Fund's prospectus. Currently, the Fund may invest in
the securities of issuers located in the following countries:
Argentina, Brazil, Chile, China, the Czech Republic, Egypt, Greece,
Hong Kong, Hungary, India, Indonesia, Luxembourg, Malaysia, Mexico,
Morocco, Peru, the Philippines, Poland, Portugal, Slovak Republic,
South Korea, Taiwan, Thailand, Turkey, and Venezuela. The Fund may
also purchase depositary receipts of issuers located in other emerging
market countries.
SOVEREIGN DEBT OBLIGATIONS
Sovereign debt instruments are issued or guaranteed by
foreign governments or their agencies, including debt of Latin
American nations or other developing countries. Sovereign debt may be
in the form of conventional securities or other types of debt
instruments, such as loans or loan participations. Sovereign debt of
developing countries may involve a high degree of risk. Governmental
entities responsible for repayment of the debt may be unable or
unwilling to repay principal and interest when due, and may require
renegotiation or rescheduling of debt payments. In addition, prospects
for repayment of principal and interest may depend on political as
well as economic factors. Debt obligations of supranational entities
include international organizations designed or supported by
governmental entities to promote economic reconstruction or
development, and international banking institutions and related
government agencies. Examples of these include, but are not limited
to, the International Bank for Reconstruction and Development (World
Bank), European Investment Bank and Inter-American Development Bank.
FOREIGN CURRENCY TRANSACTIONS
CURRENCY RISKS
The exchange rates between the U.S. dollar and foreign
currencies are a function of such factors as supply and demand in the
currency exchange markets, international balances of payments,
governmental intervention, speculation and other economic and
political conditions. Although the Funds value their assets daily in
U.S. dollars, a Fund may not convert its holdings to U.S. dollars
daily. A Fund may incur conversion costs when it converts its holdings
to another currency. Foreign exchange dealers may realize a profit on
the difference between the price at which a Fund buys and sells
currencies.
Foreign currency exchange transactions are conducted either
on a spot (i.e., cash) basis at the spot rate prevailing in the
foreign currency exchange market or through forward contracts to
purchase or sell foreign currencies.
FORWARD FOREIGN CURRENCY EXCHANGE CONTRACTS
The Emerging Markets Fund may enter into forward foreign
currency exchange contracts in order to protect against possible loss
resulting from an adverse change in the relationship between the U.S.
dollar and a foreign currency involved in an underlying transaction.
However, forward foreign currency exchange contracts may limit
potential gains which could result from a positive change in such
currency relationships. The Fund's investment adviser believes that it
is important to have the flexibility to enter into forward currency
exchange contracts whenever it determines that it is in the Fund's
best interest to do so. The Fund will not speculate in foreign
currency exchange.
The Fund will not enter into forward foreign currency
exchange contracts or maintain a net exposure in such contracts when
it would be obligated to deliver an amount of foreign currency in
excess of the value of its portfolio securities or other assets
denominated in that currency or, in the case of a "cross-hedge"
denominated in a currency or currencies that the investment adviser
believes will tend to be closely correlated with that currency with
regard to price movements. Generally, the Fund will not enter into a
forward foreign currency exchange contract with a term longer that one
year.
FOREIGN CURRENCY OPTIONS
A foreign currency option provides the option buyer with the
right to buy or sell a stated amount of foreign currency at the
exercise price on a specified date or during the option period. The
owner of a call option has the right, but not the obligation, to buy
the currency. Conversely, the owner of a put option has the right, but
not the obligation, to sell the currency.
When the option is exercised, the seller (i.e., writer) of
the option is obligated to fulfill the terms of the sold option.
However, either the seller or the buyer may, in the secondary market,
close its position during the option period at any time prior to
expiration.
A call option on a foreign security generally rises in value
if the underlying currency appreciates in value, and a put option on a
foreign currency generally falls in value if the underlying currency
depreciates in value. Although purchasing a foreign currency option
can protect the Fund against an adverse movement in the value of a
foreign currency, the option will not limit the movement in the value
of such currency. For example, if the Fund was holding securities
denominated in a foreign currency that was appreciating and had
purchased a foreign currency to put a hedge against a decline in the
value of the currency, the Emerging Markets Fund would not have to
exercise its put option. Likewise, if the Fund were to enter into a
contract to purchase a security denominated in foreign currency and,
in conjunction with that purchase, were to purchase a foreign currency
call option to hedge against a rise in value of the currency, and if
the value of the currency instead depreciated between the date of
purchase and the settlement date, the Fund would not have to exercise
its call. Instead, the Fund could acquire in the spot market the
amount of foreign currency needed for settlement.
SPECIAL RISKS ASSOCIATED WITH FOREIGN CURRENCY OPTIONS
Buyers and sellers of foreign currency options are subject
to the same risks that apply to options generally. In addition, there
are certain additional risks associated with foreign currency options.
The markets in foreign currency options are relatively new, and the
Emerging Markets Fund's ability to establish and close out positions
on such options is subject to the maintenance of a liquid secondary
market. Although the Fund will not purchase or write such options
unless and until, in the opinion of the investment adviser, the market
for them has developed sufficiently to ensure that the risks in
connection with such options are not greater than the risks in
connection with the underlying currency, there can be no assurance
that a liquid secondary market will exist for a particular option at
any specific time.
In addition, options on foreign currencies are affected by
all of those factors that influence foreign exchange rates and
investments generally.
The value of a foreign currency option depends upon the
value of the underlying currency relative to the U.S. dollar. As a
result, the price of the option position may vary with changes in the
value of either or both currencies and may have no relationship to the
investment merits of a foreign security. Because foreign currency
transactions occurring in the interbank market involve substantially
larger amounts than those that may be involved in the use of foreign
currency options, investors may be disadvantaged by having to deal in
an odd market lot (generally consisting of transactions of less than
$1 million) for the underlying foreign currencies at prices that are
less favorable than for round lots.
There is no systematic reporting of last sale information
for foreign currencies or any regulatory requirement that quotations
available through dealers or other market sources be firm or revised
on a timely basis. Available quotation information is generally
representative of very large transactions in the interbank market and
thus may not reflect relatively smaller transactions (i.e., less than
$1 million) where rates may be less favorable. The interbank market in
foreign currencies is a global, around-the-clock market. To the extent
that the U.S. option markets are closed while the markets for the
underlying currencies remain open, significant price and rate
movements may take place in the underlying markets that cannot be
reflected in the options markets until they reopen.
FOREIGN CURRENCY FUTURES TRANSACTIONS
By using foreign currency futures contracts and options on
such contracts, the Emerging Markets Fund may be able to achieve many
of the same objectives as it would through the use of forward foreign
currency exchange contracts. The Fund may be able to achieve these
objectives possibly more effectively and at a lower cost by using
futures transactions instead of forward foreign currency exchange
contracts.
SPECIAL RISKS ASSOCIATED WITH FOREIGN CURRENCY FUTURES CONTRACTS AND RELATED
OPTIONS
Buyers and sellers of foreign currency futures contracts are
subject to the same risks that apply to the use of futures generally.
In addition, there are risks associated with foreign currency futures
contracts and their use as a hedging device similar to those
associated with options on futures currencies, as described above.
Options on foreign currency futures contracts may involve
certain additional risks. Trading options on foreign currency futures
contracts is relatively new. The ability to establish and close out
positions on such options is subject to the maintenance of a liquid
secondary market. To reduce this risk, the Emerging Markets Fund will
not purchase or write options on foreign currency futures contracts
unless and until, in the opinion of the investment adviser, the market
for such options has developed sufficiently that the risks in
connection with such options are not greater than the risks in
connection with transactions in the underlying foreign currency
futures contracts. Compared to the purchase or sale of foreign
currency futures contracts, the purchase of call or put options on
futures contracts involves less potential risk to the Fund because the
maximum amount at risk is the premium paid for the option (plus
transaction costs). However, there may be circumstances when the
purchase of a call or put option on a futures contract would result in
a loss, such as when there is no movement in the price of the
underlying currency or futures contract.
MUNICIPAL SECURITIES
The Georgia Municipal Bond Fund, North Carolina Municipal
Bond Fund, and South Carolina Municipal Bond Fund invest in municipal
securities. If a security loses its rating or has its rating reduced
after a Fund has purchased it, the Fund is not required to drop the
security from its portfolio, but may consider doing so. If ratings
made by Moody's or S&P change because of changes in those
organizations or in their rating systems, the Funds will try to use
comparable ratings as standards in accordance with the investment
policies described in the prospectus.
PARTICIPATION INTERESTS
The financial institutions from which the Funds purchase
participation interests frequently provide or secure from
another financial institution irrevocable letters of credit
or guarantees and give the Funds the right to demand payment
of the principal amounts of the participation interests plus
accrued interest on short notice (usually within seven days).
VARIABLE RATE MUNICIPAL SECURITIES
Variable interest rates generally reduce changes in the
market value of municipal securities from their original
purchase prices. Accordingly, as interest rates decrease or
increase, the potential for capital appreciation or
depreciation is less for variable rate municipal securities
than for fixed income obligations.
Many municipal securities with variable interest rates
purchased by the Funds are subject to repayment of principal
(usually within seven days) on a Fund's demand. The terms of
these variable rate demand instruments require payment of
principal and accrued interest from the issuer of the
municipal obligations, the issuer of the participation
interests, or a guarantor of either issuer.
MUNICIPAL LEASES
The Funds may purchase municipal securities in the form of
participation interests which represent undivided
proportional interests in lease payments by a governmental or
non-profit entity. The lease payments and other rights under
the lease provide for and secure the payments on the
certificates. Lease obligations may be limited by municipal
charter or the nature of the appropriation for the lease. In
particular, lease obligations may be subject to periodic
appropriation. If the entity does not appropriate funds for
future lease payments, the entity cannot be compelled to make
such payments. Furthermore, a lease may provide that the
certificate trustee cannot accelerate lease obligations upon
default. The trustee would only be able to enforce lease
payments as they become due. In the event of a default or
failure of appropriation, it is unlikely that the trustee
would be able to obtain an acceptable substitute source of
payment or that the substitute source of payment will
generate tax-exempt income.
In determining the liquidity of municipal lease securities, a
Fund's adviser, under the authority delegated by the
Trustees, will base its determination on the following
factors:
o whether the lease can be terminated by the lessee;
o the potential recovery, if any, from a sale of the leased property
upon termination of the lease;
o the lessee's general credit strength (e.g., its debt,
administrative, economic and financial characteristics and
prospects);
o the likelihood that the lessee will discontinue
appropriating funding for the leased property because the
property is no longer deemed essential to its operations
(e.g., the potential for an "event of non-
appropriation"); and
o any credit enhancement or legal recourse provided upon an
event of non- appropriation or other termination of the
lease.
MUNICIPAL BOND INSURANCE
The Funds may purchase two types of Policies issued by
municipal bond insurers. One type of Policy covers certain municipal
securities only during the period in which they are in a Fund's
portfolio. In the event that a municipal security covered by such a
Policy is sold from a Fund, the insurer of the relevant Policy will be
liable only for those payments of interest and principal which are due
and owing at the time of sale.
The other type of Policy covers municipal securities not
only while they remain in the Fund's portfolio but also until their
final maturity even if they are sold out of the Fund's portfolio, so
that the coverage may benefit all subsequent holders of those
municipal securities. The Fund will obtain insurance which covers
municipal securities until final maturity even after they are sold out
of the Fund's portfolio only if, in the judgment of the investment
adviser, the Fund would receive net proceeds from the sale of those
securities, after deducting the cost of such permanent insurance and
related fees, significantly in excess of the proceeds it would receive
if such municipal securities were sold without insurance. Payments
received from municipal bond issuers may not be tax-exempt income to
shareholders of the Fund.
The premiums for the Policies are paid by the Fund and the
yield on the Fund's portfolio is reduced thereby. Premiums for the
Policies are paid by the Fund monthly, and are adjusted for purchases
and sales of municipal securities during the month. A Fund may
purchase Policies from MBIA Corp. ("MBIA"), AMBAC Indemnity
Corporation ("AMBAC"), Financial Guaranty Insurance Company ("FGIC"),
or any other municipal bond insurer which is rated AAA by S&P or Aaa
by Moody's. Each Policy guarantees the payment of principal and
interest on those municipal securities it insures. The Policies will
have the same general characteristics and features. A municipal
security will be eligible for coverage if it meets certain
requirements set forth in the Policy. In the event interest or
principal on an insured municipal security is not paid when due, the
insurer covering the security will be obligated under its Policy to
make such payment not later than 30 days after it has been notified by
the Fund that such non-payment has occurred. MBIA, AMBAC, and FGIC
will not have the right to withdraw coverage on securities insured by
their Policies so long as such securities remain in the Fund's
portfolio, nor may MBIA, AMBAC, or FGIC cancel their Policies for any
reason except failure to pay premiums when due.
MBIA, AMBAC, and FGIC will reserve the right at any time
upon 90 days' written notice to a Fund to refuse to insure any
additional municipal securities purchased by the Fund after the
effective date of such notice. The Funds reserve the right to
terminate any of the Policies if they determine that the benefits to a
Fund of having its portfolio insured under such Policy are not
justified by the expense involved.
Additionally, the Funds reserve the right to enter into
contracts with insurance carriers other than MBIA, AMBAC, or FGIC if
such carriers are rated AAA by S&P or Aaa by Moody's.
Under the Policies, municipal bond insurers unconditionally
guarantee to the Georgia Municipal Bond Fund, North Carolina Municipal
Bond Fund, and South Carolina Municipal Bond Fund the timely payment
of principal and interest on the insured municipal securities when and
as such payments shall become due but shall not be paid by the issuer,
except that in the event of any acceleration of the due date of the
principal by reason of mandatory or optional redemption (other than
acceleration by reason of mandatory sinking fund payments), default or
otherwise, the payments guaranteed will be made in such amounts and at
such times as payments of principal would have been due had there not
been such acceleration. The municipal bond insurers will be
responsible for such payments less any amounts received by a Fund from
any trustee for the municipal bond issuers or from any other source.
The Policies do not guarantee payment on an accelerated basis, the
payment of any redemption premium, the value for the shares of a Fund,
or payments of any tender purchase price upon the tender of the
municipal securities. The Policies also do not insure against
nonpayment of principal of or interest on the securities resulting
from the insolvency, negligence or any other act or omission of the
trustee or other paying agent for the securities. However, with
respect to small issue industrial development municipal bonds and
pollution control revenue municipal bonds covered by the Policies, the
municipal bond insurers guarantee the full and complete payments
required to be made by or on behalf of an issuer of such municipal
securities if there occurs any change in the tax- exempt status of
interest on such municipal securities, including principal, interest
or premium payments, if any, as and when required to be made by or on
behalf of the issuer pursuant to the terms of such municipal
securities. A when-issued municipal security will be covered under the
Policies upon the settlement date of the issuer of such when-issued
municipal securities. In determining to insure municipal securities
held by a Fund, each municipal bond insurer has applied its own
standard, which corresponds generally to the standards it has
established for determining the insurability of new issues of
municipal securities. This insurance is intended to reduce financial
risk, but the cost thereof and compliance with investment restrictions
imposed under the Policies will reduce the yield to shareholders of
each Fund.
If a Policy terminates as to municipal securities sold by a
Fund on the date of sale, in which event municipal bond insurers will
be liable only for those payments of principal and interest that are
then due and owing, the provision for insurance will not enhance the
marketability of securities held by the Fund, whether or not the
securities are in default or subject to significant risk of default,
unless the option to obtain permanent insurance is exercised. On the
other hand, since issuer-obtained insurance will remain in effect as
long as the insured municipal securities are outstanding, such
insurance may enhance the marketability of municipal securities
covered thereby, but the exact effect, if any, on marketability cannot
be estimated. The Funds generally intend to retain any securities that
are in default or subject to significant risk of default and to place
a value on the insurance, which ordinarily will be the difference
between the market value of the defaulted security and the market
value of similar securities of minimum investment grade (i.e., rated
"BBB" by S&P or "Baa" by Moody's) that are not in default. To the
extent that a Fund holds defaulted securities, it may be limited in
its ability to manage its investment and to purchase other municipal
securities. Except as described above with respect to securities that
are in default or subject to significant risk of default, the Funds
will not place any value on the insurance in valuing the municipal
securities that it holds.
Municipal bond insurance may be provided by one or more of
the following insurers or any other municipal bond insurer which is
rated "Aaa" by Moody's or "AAA" by S&P:
MUNICIPAL BOND INVESTORS ASSURANCE CORP.
Municipal Bond Investors Assurance Corp. ("MBIA") is a
wholly-owned subsidiary of MBIA, Inc. MBIA, domiciled in New
York, is regulated by the New York State Insurance Department
and licensed to do business in various states. The address of
MBIA is 113 King Street, Armonk, New York, 10504, and its
telephone number is (914) 273-4545. As of January 3, 1997,
S&P has rated the claims-paying ability of MBIA "AAA."
AMBAC INDEMNITY CORPORATION
AMBAC Indemnity Corporation ("AMBAC") is a
Wisconsin-domiciled stock insurance company, regulated by the
Insurance Department of Wisconsin, and licensed to do
business in various states. AMBAC is a wholly-owned
subsidiary of AMBAC, Inc., a financial holding company which
is owned by the public. Copies of certain statutorily
required filings of AMBAC can be obtained from AMBAC. The
address of AMBAC's administrative offices is One State Street
Plaza, 17th Floor, New York, New York 10004, and its
telephone number is (212) 668-0340. As of January 3, 1997,
S&P has rated the claims-paying ability of AMBAC "AAA."
FINANCIAL GUARANTY INSURANCE COMPANY
Financial Guaranty Insurance Company ("Financial Guaranty")
is a wholly- owned subsidiary of FGIC Corporation, a Delaware
holding company. FGIC Corporation is wholly-owned by General
Electric Capital Corporation. Financial Guaranty is subject
to regulation by the New York State Insurance Department and
is licensed to do business in various states. The address of
Financial Guaranty is 175 Water Street, New York, New York
10038, and its telephone number is 1-800-352-0001. As of
January 3, 1997, S&P has rated the claims-paying ability of
Financial Guaranty "AAA."
CONCENTRATION OF INVESTMENTS
The Georgia Municipal Bond Fund, North Carolina Municipal
Bond Fund, and South Carolina Municipal Bond Fund generally will not
invest more than 25% of its total assets in any one industry.
Governmental issuers of municipal securities are not considered part
of any "industry." However, municipal securities backed only by the
assets and revenues of nongovernmental users may, for this purpose, be
deemed to be related to the industry in which such nongovernmental
users engage, and the 25% limitation would apply to such obligations.
It is nonetheless possible that the Funds may invest more than 25% of
their assets in a broader segment of the municipal securities market,
such as revenue obligations of hospitals and other health care
facilities, housing agency revenue obligations, or airport revenue
obligations. This would be the case only if a Fund's investment
adviser determines that the yields available from obligations in a
particular segment of the market justified the additional risks
associated with a large investment in such segment. Although such
obligations could be supported by the credit of governmental users or
by the credit of nongovernmental users engaged in a number of
industries, economic, business, political and other developments
generally affecting the revenues of such users (for example, proposed
legislation or pending court decisions affecting the financing of such
projects and market factors affecting the demand for their services or
products) may have a general adverse effect on all municipal
securities in such a market segment.
PORTFOLIO TURNOVER
The Funds will not attempt to set or meet a portfolio
turnover rate since any turnover would be incidental to transactions
undertaken in an attempt to achieve a Fund's investment objective.
Securities in each portfolio will be sold whenever A Fund's investment
adviser believes it is appropriate to do so in light of a Fund's
investment objective, without regard to the length of time a
particular security may have been held. A higher rate of portfolio
turnover involves correspondingly greater transaction expenses which
must be borne directly by a Fund and, thus, indirectly by its
shareholders. In addition, a high rate of portfolio turnover may
result in the realization of larger amounts of capital gains which,
when distributed to a Fund's shareholders, are taxable to them.
Nevertheless, transactions for a Fund's portfolio will be based only
upon investment considerations and will not be limited by any other
considerations when an investment adviser deems it appropriate to make
changes in a Fund's portfolio.
During the fiscal years ended November 30, 1996 and 1995,
the Equity Fund's portfolio turnover rates were 64% and 65%,
respectively.
During the fiscal years ended November 30, 1996 and 1995,
the Quantitative Equity Fund's portfolio turnover rates were 44% and
63%, respectively.
During the fiscal years ended November 30, 1996 and 1995,
the Equity Index Fund's portfolio turnover rates were 14% and 60%,
respectively.
During the fiscal years ended November 30, 1996 and 1995,
the Special Values Fund's portfolio turnover rates were 38% and 57%,
respectively.
During the fiscal years ended November 30, 1996 and for the
period from December 26, 1994 (date of initial public investment) to
November 30, 1995, the Emerging Markets Fund's portfolio turnover
rates were 30% and 17%, respectively.
During the fiscal years ended November 30, 1996 and 1995,
the Balanced Fund's portfolio turnover rates were 99% and 102%,
respectively.
During the fiscal years ended November 30, 1996 and 1995,
the Fixed Income Fund's portfolio turnover rates were 181% and 155%,
respectively.
During the fiscal years ended November 30, 1996 and 1995,
the Short-Term Fixed Income Fund's portfolio turnover rates were 145%
and 147%, respectively.
During the fiscal years ended November 30, 1996 and for the
period from December 26, 1994 (date of initial public investment) to
November 30, 1995, the Georgia Municipal Bond Fund's portfolio
turnover rates were 14% and 14%, respectively.
During the fiscal years ended November 30, 1996 and for the
period from December 26, 1994 (date of initial public investment) to
November 30, 1995, the North Carolina Municipal Bond's portfolio
turnover rates were 7% and 19%, respectively.
During the fiscal years ended November 30, 1996 and 1995,
the South Carolina Municipal Bond Fund's portfolio turnover rates were
20% and 15%, respectively.
INVESTMENT LIMITATIONS
SELLING SHORT AND BUYING ON MARGIN
The Equity Fund, Quantitative Equity Fund, Equity Index Fund,
Special Values Fund, Emerging Markets Fund, and Balanced Fund
will not sell any securities short or purchase any securities
on margin, other than in connection with buying stock index
futures contracts, put options on stock index futures, put
options on financial futures and portfolio securities, and
writing covered call options, but may obtain such short-term
credits as are necessary for the clearance of purchases and
sales of portfolio securities.
The Short-Term Fixed Income Fund will not sell any securities
short or purchase any securities on margin, other than in
connection with put options on financial futures, put options
on portfolio securities, and writing covered call options,
but may obtain such short-term credits as may be necessary
for clearance of purchases and sales of securities.
The Fixed Income Fund, Georgia Municipal Bond Fund, North
Carolina Municipal Bond Fund, and South Carolina Municipal
Bond Fund will not sell any securities short or purchase any
securities on margin but may obtain such short-term credits
as may be necessary for clearance of purchases and sales of
securities.
The deposit or payment by a Fund of initial or variation
margin in connection with financial futures contracts or
related options transactions is not considered the purchase
of a security on margin.
ISSUING SENIOR SECURITIES AND BORROWING MONEY
The Equity Fund and Special Values Fund will not issue senior
securities, except that it may borrow money directly or
through reverse repurchase agreements in amounts up to
one-third of the value of its net assets, including the
amounts borrowed.
The Quantitative Equity Fund and Emerging Markets Fund will
not issue senior securities, except that a Fund may borrow
money directly or through reverse repurchase agreements in
amounts up to one-third of the value of its total assets,
including the amounts borrowed.
The Equity Index Fund, Balanced Fund, Fixed Income Fund and
Short-Term Fixed Income Fund will not issue senior
securities, except as permitted by its investment objective
and policies, and except that a Fund may borrow money and
engage in reverse repurchase agreements in amounts up to
one-third of the value of its total assets, including the
amounts borrowed.
The Georgia Municipal Bond Fund, North Carolina Municipal
Bond Fund, and South Carolina Municipal Bond Fund will not
issue senior securities, except that a Fund may borrow money
in amounts up to one-third of the value of its total assets,
including the amounts borrowed.
The Funds will not borrow money or engage in reverse
repurchase agreements for investment leverage, but rather as
a temporary, extraordinary, or emergency measure to
facilitate management of the portfolio by enabling a Fund to
meet redemption requests when the liquidation of portfolio
securities is deemed to be inconvenient or disadvantageous. A
Fund will not purchase any securities while borrowings in
excess of 5% of the value of its total assets are
outstanding.
PLEDGING ASSETS
The Equity Fund, Quantitative Equity Fund, and Special Values
Fund will not mortgage, pledge, or hypothecate any assets
except to secure permitted borrowings. In those cases, the
Fund may mortgage, pledge, or hypothecate assets to secure
such borrowings having a market value not exceeding the
lesser of the dollar amounts borrowed or 15% of the value of
total assets at the time of the borrowing. For purposes of
this limitation, the following are not deemed to be pledges:
margin deposits for the purchase and sale of futures
contracts and related options, and segregation or collateral
arrangements made in connection with options activities or
the purchase of securities on a when-issued basis.
The Equity Index Fund, Balanced Fund, Fixed Income Fund, and
Short-Term Fixed Income Fund will not mortgage, pledge, or
hypothecate any assets except to secure permitted borrowings.
In those cases, the Fund may mortgage, pledge or hypothecate
assets to secure such borrowings having a market value not
exceeding the lesser of the dollar amounts borrowed or 15% of
the value of total assets at the time of the borrowing. For
purposes of this limitation, the following are not deemed to
be pledges: margin deposits for the purchase and sale of
futures contracts and related options, and segregation or
collateral arrangements made in connection with options
activities or the purchase of securities on a when-issued
basis.
The Emerging Markets Fund will not mortgage, pledge, or
hypothecate any assets except to secure permitted borrowings.
For purposes of this limitation, the following will not be
deemed to be pledges of the Fund's assets: (a) the deposit of
assets in escrow in connection with the writing of covered
put or call options and the purchase of securities on a
when-issued basis; and (b) collateral arrangements with
respect to (i) the purchase and sale of stock options (and
options on stock indices) and (ii) initial or variation
margin for futures contracts.
The Georgia Municipal Bond Fund, North Carolina Municipal
Bond Fund, and South Carolina Municipal Bond Fund will not
mortgage, pledge, or hypothecate any assets except to secure
permitted borrowings. In those cases, South Carolina
Municipal Bond Fund may mortgage, pledge, or hypothecate
assets having a market value not exceeding 10% of the value
of its total assets at the time of the pledge.
INVESTING IN REAL ESTATE
The Funds (except Georgia Municipal Bond Fund, North Carolina
Municipal Bond Fund, and South Carolina Municipal Bond Fund)
will not buy or sell real estate, including limited
partnership interests, although a Fund may invest in the
securities of companies whose business involves the purchase
or sale of real estate or in securities which are secured by
real estate or interests in real estate.
The Georgia Municipal Bond Fund, North Carolina Municipal
Bond Fund, and South Carolina Municipal Bond Fund will not
buy or sell real estate, although a Fund may invest in
municipal bonds secured by real estate or interests in real
estate.
INVESTING IN COMMODITIES
The Equity Fund, Quantitative Equity Fund, Equity Index Fund,
Special Values Fund, and Emerging Markets Fund will not
purchase or sell commodities, commodity contracts, or
commodity futures contracts. However, a Fund may purchase put
options on stock index futures, put options on financial
futures, stock index futures contracts, and put options on
portfolio securities, and may write covered call options.
The Fixed Income Fund will not purchase or sell commodities,
commodity contracts, or commodity futures contracts except to
the extent that a Fund may engage in transactions involving
futures contracts and related options.
The Balanced Fund and Short-Term Fixed Income Fund will not
purchase or sell commodities, commodity contracts, or
commodity futures contracts except that a Fund may purchase
and sell futures contracts and related options.
The Georgia Municipal Bond Fund, North Carolina Municipal
Bond Fund, and South Carolina Municipal Bond Fund will not
buy or sell commodities, commodity contracts, or commodities
futures contracts.
UNDERWRITING
The Equity Fund, Special Values Fund, Balanced Fund, Fixed
Income Fund, and Short-Term Fixed Income Fund will not
underwrite any issue of securities, except as it may be
deemed to be an underwriter under the Securities Act of 1933
in connection with the sale of restricted securities which
the Fund may purchase pursuant to its investment objective,
policies, and limitations.
The Quantitative Equity Fund, Equity Index Fund, Emerging
Markets Fund, Georgia Municipal Bond Fund, North Carolina
Municipal Bond Fund, and South Carolina Municipal Bond Fund
will not underwrite any issue of securities, except as it may
be deemed to be an underwriter under the Securities Act of
1933 in connection with the sale of securities which the Fund
may purchase pursuant to its investment objective, policies,
and limitations.
DIVERSIFICATION OF INVESTMENTS
With respect to securities comprising 75% of the value of its
total assets, the Funds (except Georgia Municipal Bond Fund,
North Carolina Municipal Bond Fund, and South Carolina
Municipal Bond Fund) will not purchase securities issued by
any one issuer (other than cash, cash items or securities
issued or guaranteed by the government of the United States
or its agencies or instrumentalities and repurchase
agreements collateralized by such securities) if, as a
result, more than 5% of the value of its total assets would
be invested in the securities of that issuer. Also, a Fund
will not acquire more than 10% of the outstanding voting
securities of any one issuer.
CONCENTRATION OF INVESTMENTS
The Funds (except Emerging Markets Fund, Georgia Municipal
Bond Fund, North Carolina Municipal Bond Fund, and South
Carolina Municipal Bond Fund) will not invest 25% or more of
the value of their total assets in any one industry, except
that a Fund may invest 25% or more of the value of its total
assets in securities issued or guaranteed by the U.S.
government, its agencies or instrumentalities, and repurchase
agreements collateralized by such securities.
The Emerging Markets Fund will not invest 25% or more of the
value of its total assets in any one industry. However, the
Fund may invest 25% or more of the value of its assets in
cash or cash items, securities issued or guaranteed by the
U.S. government, its agencies or instrumentalities, or
instruments secured by these money market instruments, such
as repurchase agreements.
The Georgia Municipal Bond Fund, and North Carolina Municipal
Bond Fund will not purchase securities if, as a result of
such purchase, 25% or more of the value of its total assets
would be invested in industrial development bonds or other
securities, the interest upon which is paid from revenues of
similar type projects. A Fund may invest 25% or more of the
value of its total assets in cash, cash items, or securities
issued or guaranteed by the government of the United States
or its agencies, or instrumentalities and repurchase
agreement collateralized by such U.S. government securities.
Concentrating investments in one industry may subject a Fund
to more risk than if it did not concentrate.
South Carolina Municipal Bond Fund will not purchase
securities if, as a result of such purchase, 25% or more of
the value of its total assets would be invested in any one
industry, or in industrial development bonds or other
securities, the interest upon which is paid from revenues of
similar types of projects . The Fund may invest as temporary
investments more than 25% of the value of its assets in cash
or cash items, securities issued or guaranteed by the U.S.
government, its agencies, or instrumentalities, or
instruments secured by these money market instruments, such
as repurchase agreements.
LENDING CASH OR SECURITIES
The Equity Fund and Special Values Fund will not lend any of
their assets except portfolio securities, the market value of
which do not exceed one-third of the value of a Fund's total
assets.
The Quantitative Equity Fund and Emerging Markets Fund will
not lend any of their assets except portfolio securities.
This shall not prevent the above Funds from purchasing or
holding U.S. government obligations, money market
instruments, demand master notes, bonds, debentures, notes,
certificates of indebtedness, or other debt securities,
entering into repurchase agreements, or engaging in other
transactions where permitted by the Fund's investment
objective, policies, and limitations.
The Equity Index Fund will not lend any of its assets except
portfolio securities, the market value of which does not
exceed one-third of the value of the Fund's total assets.
This shall not prevent the purchase or holding of corporate
or government bonds, debentures, notes, certificates of
indebtedness or other debt securities of an issuer,
repurchase agreements, or engaging in other transactions
where permitted by a Fund's investment objective, policies
and limitations.
The Balanced Fund, Fixed Income Fund, and Short-Term Fixed
Income Fund will not lend any of its assets, except portfolio
securities up to one-third of the value of its total assets.
This shall not prevent a Fund from purchasing or holding U.S.
government obligations, money market instruments, variable
rate demand notes, bonds, debentures, notes, certificates of
indebtedness, or other debt securities, entering into
repurchase agreements, or engaging in other transactions
where permitted by the Fund's investment objective, policies,
and limitations.
The Georgia Municipal Bond Fund and North Carolina Municipal
Bond Fund will not lend any assets except portfolio
securities. The Funds may, however, acquire publicly or
non-publicly issued municipal bonds or temporary investments
or enter into repurchase agreements in accordance with a
Fund's investment objective, policies, limitations and
Declaration of Trust.
South Carolina Municipal Bond Fund will not lend any of its
assets except portfolio securities up to one-third of the
value of its total assets. The Fund may, however, acquire
publicly or non-publicly issued municipal bonds or temporary
investments or enter into repurchase agreements in accordance
with its investment objective, policies, and limitations or
the Trust's Declaration of Trust.
INVESTING IN RESTRICTED SECURITIES
South Carolina Municipal Bond Fund will not invest more than
10% of the value of its net assets in securities subject to
restrictions on resale, under the Securities Act of 1933.
DEALING IN PUTS AND CALLS
South Carolina Municipal Bond Fund will not buy or sell puts,
calls, straddles, spreads, or any combination of these.
The above investment limitations cannot be changed without
shareholder approval. The following limitations, however, may be
changed by the Trustees without shareholder approval. Shareholders
will be notified before any material change in these limitations
becomes effective.
INVESTING IN SECURITIES OF OTHER INVESTMENT COMPANIES
The Funds will limit their investment in other investment
companies to not more than 3% of the total outstanding voting
stock of any investment company, will invest no more than 5%
of their total assets in any one investment company, and will
invest no more than 10% of their total assets in investment
companies in general, unless, they are permitted to exceed
these limitations by action of the SEC. The Funds will
purchase securities of closed-end investment companies only
in open market transactions involving only customary brokers'
commissions. However, these limitations are not applicable if
the securities are acquired in a merger, consolidation,
reorganization, or acquisition of assets. It should be noted
that investment companies incur certain expenses such as
custodian and transfer agency fees, and therefore, any
investment by a Fund in shares of another investment company
would be subject to such duplicate expenses. The Funds will
invest in other investment companies primarily for the
purpose of investing its short-term cash on a temporary
basis.
However, the Equity Index Fund may invest in Standard &
Poor's Depository Receipts (SPDRs), which represent interests
in the portfolio of securities held by a unit investment
trust, a type of investment company. SPDRs trade like shares
of common stock on the American Stock Exchange and are
intended to provide investment results that generally
correspond to the price and yield performance of the S&P 500
Index. The Fund's purchase of SPDRs are subject to the 3%, 5%
and 10% limitations described above and secondary market
purchases and sales are subject to ordinary brokerage
commissions. The Funds have a present intention of investing
no more than 5% of their total assets in investment companies
during the current fiscal year.
INVESTING IN RESTRICTED SECURITIES.
The Funds will not invest more than 10% of their total assets
in securities subject to restrictions on resale under the
Securities Act of 1933, except for certain restricted
securities which meet the criteria for liquidity as
established by the Trustees.
INVESTING IN ILLIQUID SECURITIES
The Funds will not invest more than 15% of their net assets
in securities which are illiquid, including repurchase
agreements providing for settlement in more than seven days
after notice, over-the-counter options, non-negotiable time
deposits with maturities over seven days, and certain
securities not determined under guidelines established by the
Trustees to be liquid.
INVESTING IN PUT OPTIONS
The Funds (except Georgia Municipal Bond Fund, North Carolina
Municipal Bond Fund, and South Carolina Municipal Bond Fund )
will not purchase put options on securities, other than put
options on stock indices, unless the securities are held in a
Fund's portfolio and not more than 5% of the value of a
Fund's total assets would be invested in premiums on open put
option positions.
The Georgia Municipal Bond Fund, North Carolina Municipal
Bond Fund, and South Carolina Municipal Bond Fund will not
buy or sell puts, calls, straddles, spreads, or any
combination of these.
WRITING COVERED CALL OPTIONS
The Funds will not write call options on securities unless
the securities are held in a Fund's portfolio or unless a
Fund is entitled to them in deliverable form without further
payment or after segregating cash in the amount of any
further payment.
INVESTING IN WARRANTS
The Funds will not invest more than 5% of net assets in
warrants. No more than 2% of a Fund's net assets, to be
included within the overall 5% limit on investments in
warrants, may be warrants which are not listed on the New
York Stock Exchange or the American Stock Exchange.
PURCHASING SECURITIES TO EXERCISE CONTROL
The Funds will not purchase securities of a company for
purposes of exercising control or management.
ARBITRAGE TRANSACTIONS
The Funds will not enter into transactions for the purpose of
engaging in arbitrage.
Except with respect to borrowing money, if a percentage
limitation is adhered to at the time of investment, a later increase
or decrease in percentage resulting from any change in value or net
assets will not result in a violation of such restriction.
For purposes of its policies and limitations, the Funds
consider certificates of deposit and demand and time deposits issued
by a U.S. branch of a domestic bank or savings association, having
capital, surplus, and undivided profits in excess of $100,000,000 at
the time of deposit, to be "cash items."
The Funds do not intend to borrow money in excess of 5% of the value
of their total assets during the current fiscal year.
<PAGE>
THE WACHOVIA FUNDS AND THE WACHOVIA MUNICIPAL FUNDS MANAGEMENT
OFFICERS AND TRUSTEES
Officers and Trustees of the Trusts are listed with their
principal occupations, birthdates, and present positions.. Except as
listed below, none of the Trustees or Officers are affiliated with
Wachovia Bank, N.A., Federated Investors, Federated Securities Corp.,
Federated Services Company, or Federated Administrative Services.
James A. Hanley
4272 Sanctuary Way
Bonita Springs, FL
August 13, 1931
Trustee
Retired; Vice President and Treasurer, Abbott Laboratories (health
care products) (until 1992).
Samuel E. Hudgins
3100 Cumberland Circle
Suite 1525
Atlanta, GA
March 4, 1929
Trustee
President, Percival Hudgins & Company, LLC (investment
bankers/financial consultants); Director, Atlantic American
Corporation (insurance holding company); Director, Bankers Fidelity
Life Insurance Company; Director and Vice Chairman, Leath Furniture,
Inc. (retail furniture); President, Atlantic American Corporation
(until 1988); Director, Vice Chairman and Chief Executive Officer,
Rhodes, Inc. (retail furniture) (until 1988); Chairman and Director,
Atlantic American Life Insurance Co., Georgia Casualty & Surety
Company, and Bankers Fidelity Life Insurance (until 1988).
J. Berkley Ingram, Jr.
114-L Reynolda Village
Winston-Salem, NC
April 17, 1924
Trustee
Real estate investor and partner; formerly, Vice Chairman,
Massachusetts Mutual Life Insurance Company.
D. Dean Kaylor
2835 Greenbriar
Harbor Springs, MI
June 29, 1930
Trustee
Retired; Executive Vice President and Chief Financial Officer, NBD Bank, N.A.
and NBD Bancorp, Inc. (bank and bank holding company) (until 1990).
<PAGE>
Charles S. Way, Jr.*
200 Meeting Street
Suite 401
Charleston, S.C.
December 18, 1937
Trustee
President and CEO, The Beach Company and its various affiliated
companies and partnerships; Chairman of the Executive Committee,
Kiawah Resort Associates, L.P.
John W. McGonigle
Federated Investors Tower
Pittsburgh, PA
October 26, 1938
President and Treasurer
President and Chief Executive Officer, Federated Investors Management
Company; Executive Vice President, Secretary, General Counsel, and
Trustee, Federated Investors; Trustee, Federated Advisers, Federated
Management, Federated Research, and Federated Services Company; and
Director, Federated Securities Corp.
Charles L. Davis, Jr.
Federated Investors Tower
Pittsburgh, PA
March 23, 1960
Vice President and Assistant Treasurer
Vice President, Federated Services Company.
Peter J. Germain
Federated Investors Tower
Pittsburgh, PA
September 3, 1959
Secretary
Senior Corporate Counsel, Federated Investors.
* This Trustee is deemed to be an "interested person" as defined in the
Investment Company Act of 1940.
FUND OWNERSHIP
Officers and Trustees own less than 1% of the Fund's
outstanding shares.
The following list indicates the beneficial ownership of
shareholders who are the beneficial owners of more than 5% of the
outstanding shares of the following Funds as of January 3, 1997:
Acting in various capacities for numerous accounts, Wachovia
Securities Inc., Winston-Salem, North Carolina, was owner of record of
234,665 Class A Shares (14.11%) of Equity Fund; Wachovia Bank of North
Carolina, N.A., Winston-Salem, North Carolina, was owner of record of
1,635,425 Class Y Shares (16.50%) of Equity Fund; Wachovia Bank of
Georgia, N.A., Atlanta, Georgia, was owner of record of 602,665 Class
Y Shares (6.08%) of Equity Fund; Wachovia Bank of North Carolina,
N.A., Winston-Salem, North Carolina, was owner of record of 5,477,345
Class Y Shares (55.41%) of Quantitative Equity Fund; Wachovia Bank of
South Carolina, N.A., Columbia, South Carolina was owner of record of
642,512 Class Y Shares (6.50%) of Quantitative Equity Fund; Wachovia
Bank of North Carolina, N.A., Winston-Salem, North Carolina, was owner
of record of 8,113,547 Class Y Shares (57.88%) of Equity Index Fund;
Wachovia Bank of North Carolina, N.A., Winston-Salem, North Carolina,
was owner of record of 2,675,168 Class Y Shares (64.24%) of Special
Values Fund; Wachovia Securities Inc., Winston-Salem, North Carolina,
was owner of record of 27,834 Class A Shares (5.89%) of Emerging
Markets Fund; Wachovia Bank of North Carolina, N.A., Winston-Salem,
North Carolina, was owner of record of 1,054,612 Class Y Shares
(9.41%) of Emerging Markets Fund; Wachovia Securities Inc.,
Winston-Salem, North Carolina, was owner of record of 17,197 Class B
Shares (8.87%) of Balanced Fund; Wachovia Bank of North Carolina,
N.A., Winston-Salem, North Carolina, was owner of record of 5,021,097
Class Y Shares (24.61%) of Balanced Fund; Wachovia Securities inc.,
Winston-Salem, North Carolina, was owner of record of 74,613 Class A
Shares (17.92%) and 9,700 Class B Shares (84.18%) of Fixed Income
Fund; Wachovia Bank of North Carolina, N.A., Winston-Salem, North
Carolina, was owner of record of 4,053,024 Class Y Shares (22.44%) of
Fixed Income Fund; Wachovia Securities Inc., Winston-Salem, North
Carolina, was owner of record of 120,160 Class A Shares (64.03%) of
Short-Term Fixed Income Fund; Wachovia Bank of North Carolina, N.A.,
Winston-Salem, North Carolina, was owner of record of 7,834,447 Class
Y Shares (64.96%) of Short-Term Fixed Income Fund; Wachovia Bank of
North Carolina, N.A., Winston-Salem, North Carolina, was owner of
record of 79,566 Class Y Shares (12.97%) of Georgia Municipal Bond
Fund; Wachovia Bank of Georgia, N.A., Atlanta, Georgia, was owner of
record of 454,712 Class Y Shares (39.63%) of Georgia Municipal Bond
Fund; Wachovia Securities Inc., Winston-Salem, North Carolina, was
owner of record of 105,763 Class A Shares (8.57%) of North Carolina
Municipal Bond Fund; Wachovia Bank of North Carolina, N.A.,
Winston-Salem, North Carolina, was owner of record of 234,962 Class Y
Shares (8.87%) of North Carolina Municipal Bond Fund; Wachovia Bank of
South Carolina, N.A., Columbia, South Carolina, was owner of record of
361,327 Class Y Shares (10.62%) of South Carolina Municipal Bond Fund.
<PAGE>
TRUSTEES COMPENSATION
NAME AND TOTAL COMPENSATION PAID
POSITION WITH THE TO THE TRUSTEES FROM THE TRUSTS
TRUST AND FUND COMPLEX*+ #
James A. Hanley, $24,600
Trustee
Samuel E. Hudgins, $24,600
Trustee
J. Berkley Ingram, Jr., $22,500
Trustee
D. Dean Kaylor, $22,500
Trustee
Charles S. Way, Jr., $22,500
Trustee
*Information is furnished for the fiscal year ended November 30, 1996.
+The total compensation is paid by The Wachovia Funds,
which is comprised of twelve portfolios and The Wachovia Municipal
Funds, which is comprised of three portfolios.
# The Fund Complex is comprised of 15 portfolios.
TRUSTEE LIABILITY
The Trust's Declaration of Trust provides that the Trustees
are not liable for errors of judgment or mistakes of fact or law.
However, they are not protected against any liability to which they
would otherwise be subject by reason of willful misfeasance, bad
faith, gross negligence, or reckless disregard of the duties involved
in the conduct of their office.
INVESTMENT ADVISORY SERVICES
ADVISER TO THE FUNDS
Investment decisions for The Wachovia Funds and The Wachovia
Municipal Funds are made by Wachovia Asset Management, a business unit of
Wachovia Bank, N.A. (the "Adviser").
Twin Capital Management, Inc. ("Twin Capital") serves as the
sub-adviser to the Quantitative Equity Fund under the terms of an
investment sub-advisory agreement between Wachovia Asset Management
and Twin Capital. Twin Capital, incorporated as a Pennsylvania
corporation in 1989, is a registered investment adviser under the
Investment Advisers Act of 1940.
The Adviser shall not be liable to the Trust, a Fund or
any shareholder of the Funds for any losses that may be sustained in
the purchase, holding, or sale of any security, or for anything done
or omitted by it, except acts or omissions involving willful
misfeasance, bad faith, gross negligence, or reckless disregard of the
duties imposed upon it by its contracts with the Trusts.
Because of the internal controls maintained by Wachovia Bank
to restrict the flow of non-public information, Fund investments are
typically made without any knowledge of Wachovia Bank's or its
affiliates' lending relationships with an issuer.
ADVISORY AND SUB-ADVISORY FEES
For its advisory services, the investment adviser
receives an annual investment advisory fee as described in the
prospectus. The following shows all investment advisory fees incurred
by the Funds and the amounts of those fees that were voluntarily
waived. Twin Capital receives an annual sub-advisory fee, payable
solely by Wachovia Asset Management, as described in the
prospectuses.
<TABLE>
<CAPTION>
Year Ended Amount Year Ended Amount Year Ended
<S> <C> <C> <C> <C> <C> <C> <C>
Amount
Fund Name Nov. 30, 1996 Waived-1996 Nov. 30, 1995 Waived-1995 Nov. 30, 1994
Waived-1994
Equity Fund $1,003,098 $107,888 $754,597
$76,995$511,439 $73,062
Quantitative Equity
Fund $984,868 $100,131 $728,298 $89,503 $439,878*
$62,841
Equity Index Fund $616,302 $88,233 $545,415 $97,171 $503,953
$83,992
Special Values Fund $324,764 $76,655 $160,840 $59,075 $117,003
$58,501
Emerging Markets Fund $1,006,829 $1,057 $371,458** $60,903
Balanced Fund $1,588,214 $352,189 $1,394,516 $316,346
$1,291,534 $274,994
Fixed Income Fund $1,047,666 $177,507 $957,389 $159,425 $862,327
$143,721
Short-Term Fixed
Income Fund $649,181 $211,508 $768,294 $220,989
$816,857 $222,781
Georgia Municipal
Bond Fund $84,212 $78,762 $49,436** $40,609
North Carolina Municipal
Bond Fund $210,288 $176,041 $77,710** $63,053
South Carolina Municipal
Bond Fund $743,153 $500,413 $639,686 $469,407
$624,986 $488,215
</TABLE>
* Represents the period from March 28, 1994
(date of initial public investment) to November 30, 1994.
**Represents the period from December 26, 1994
(date of initial public investment) to November 30, 1995.
BROKERAGE TRANSACTIONS
When selecting brokers and dealers to handle the purchase
and sale of portfolio instruments, the investment adviser
looks for prompt execution of the order at a favorable price.
In working with dealers, the investment adviser will
generally use those who are recognized dealers in specific
portfolio instruments, except when a better price and
execution of the order can be obtained elsewhere. The
investment adviser makes decisions on portfolio transactions
and selects brokers and dealers subject to guidelines
established by the Trustees. The investment adviser may
select brokers and dealers who offer brokerage and research
services. These services may be furnished directly to a Fund
or to the investment adviser and may include: advice as to
the advisability of investing in securities; security
analysis and economic reports; economic studies; industry
studies; receipt of quotations for portfolio evaluations; and
similar services. Research services provided by brokers and
dealers may be used by the investment adviser or its
affiliates in advising a Fund and other accounts. To the
extent that receipt of these services may supplant services
for which the investment adviser or its affiliates might
otherwise have paid, it would tend to reduce its expenses.
The investment adviser and its affiliates exercise reasonable
business judgment in selecting brokers who offer brokerage
and research transactions. They determine in good faith that
commissions charged by such persons are reasonable in
relationship to the value of the brokerage and research
services provided. For the fiscal years ended November 30,
1996, 1995, and 1994, the Equity Fund paid $252,493,
$176,610, and $142,056, respectively, in commissions on
brokerage transactions. For the fiscal years ended November
30, 1996, 1995, and for the period from March 28, 1994 (date
of initial public investment) to November 30, 1994, the
Quantitative Equity Fund paid $165,434, $98,771, and
$163,527, respectively, in commissions on brokerage
transactions. For the fiscal years ended November 30, 1996,
1995, and 1994, the Equity Index Fund paid $15,333, $28,337,
and $32,790, respectively, in commissions on brokerage
transactions. For the fiscal years ended November 30, 1996,
1995, and 1994, the Special Values Fund paid $155,248,
$57,052, and $56,762, respectively, in commissions on
brokerage transactions. For the fiscal year ended November
30, 1996 and for the period from December 26, 1994 (date of
initial public investment) to November 30, 1995, the Emerging
Markets Fund paid $538,172, and $437,055, respectively, in
commissions on brokerage transactions. For the fiscal years
ended November 30, 1996, 1995, and 1994, the Balanced Fund
paid $269,729, $140,316, and $262,992, respectively, in
commissions on brokerage transactions. For the fiscal years
ended November 30, 1996, 1995, and 1994, the Fixed Income
Fund, Short-Term Fixed Income Fund, Georgia Municipal Bond
Fund, North Carolina Municipal Bond Fund, and South Carolina
Municipal Bond Fund paid no commissions on brokerage
transactions.
As of November 30, 1996, the Equity Index Fund owned
$6,082,960, $891,855, $403,002, $485,914, and $169,588 of
securities issued by General Electric Co., American Express,
Dean Witter Discover & Co., Merrill Lynch & Co., Inc., and
Salomon, Inc., respectively, several of its regular
broker/dealers, which derive more than 15% of its gross
revenues from securities-related activities.
As of November 30, 1996, the Balanced Fund owned $2,910,544
of securities issued by General Electric Co., one of its
regular broker/dealers, which derives more than 15% , of its
gross revenues from securities-related activities.
As of November 30, 1996, the Fixed Income Fund owned
$5,084,348 of securities issued by Merrill Lynch, Pierce,
Fenner & Smith, one of its regular broker/dealers, which
derive more than 15% of its gross revenues from
securities-related activities.
As of November 30, 1996, the Short-Term Fixed Income Fund
owned $2,480,050 of securities issued by Merrill Lynch & Co.,
one of its regular broker/dealers, which derives more than
15% of its gross revenues from securities-related activities.
Although investment decisions for the Funds are made
independently from those of the other accounts managed by the
investment adviser, investments of the type the Funds may make may
also be made by those other accounts. When a Fund and one or more
other accounts managed by the investment adviser are prepared to
invest in, or desire to dispose of, the same security, available to
investments or opportunities for sales will be allocated in a manner
believed by the investment adviser to be equitable to each. In some
cases, this procedure may adversely affect the price paid or received
by a Fund or the size of the position obtained or disposed of by a
Fund. In other cases, however, it is believed that coordination and
the ability to participate in volume transactions will be to the
benefit of a Fund.
<PAGE>
OTHER SERVICES
ADMINISTRATION
Federated Administrative Services ("FAS"), a subsidiary of
Federated Investors, provides administrative personnel and services to
the Funds for a fee as described in the prospectuses. The following
shows all fees earned by FAS and the amounts of those fees that were
voluntarily waived:
<TABLE>
<CAPTION>
Year Ended Amount Year Ended Amount Year Ended
Amount
<S> <C> <C> <C> <C> <C> <C>
Fund Name Nov. 30, 1996 Waived-1996 Nov. 30, 1995 Waived-1995 Nov. 30, 1994
Waived-1994
Equity Fund $124,288 $0 $96,714 $0
$75,000 $2,936
Quantitative Equity
Fund $121,949 $0 $93,391 $0 $59,254 *
$0
Equity Index Fund $178,161 $0 $163,299 $0 $166,703
$0
Special Values Fund $35,122 $0 $75,000 $56,955
$75,000$60,820
Emerging Markets Fund $87,231 $0 $ 75,000** $41,860
Balanced Fund $196,750 $0 $178,968
$46,191$183,610 $44,122
Fixed Income Fund $151,450 $0 $143,274 $0 $142,981
$0
Short-Term Fixed
Income Fund $102,429 $0 $125,580 $0
$148,458 $0
Georgia Municipal
Bond Fund $9,732 $0 $50,000 ** $44,142
North Carolina Municipal
Bond Fund $24,266 $0 $50,000 ** $40,270
South Carolina Municipal
Bond Fund $86,019 $0 $76,587 $0
$101,152 $3,488
</TABLE>
* Represents the period from March 28, 1994 (date of initial
public investment) to November 30, 1994.
**Represents the period from December 26, 1994 (date of
initial public investment) to November 30, 1995.
In addition, for the fiscal years ended November 30, 1996,
1995, and 1994, FAS reimbursed the Equity Fund $0, $0, and $40,467,
respectively, in other Fund operating expenses; for the fiscal years
ended November 30, 1996, 1995, and 1994, FAS reimbursed the Equity
Index Fund $0, $0, and $50,455, respectively, in other Fund operating
expenses; for the fiscal years ended November 30, 1996, 1995, and
1994, FAS reimbursed the Balanced Fund $0, $0, and $46,191,
respectively, in other Fund operating expenses; for the fiscal years
ended November 30, 1996, 1995, and 1994, FAS reimbursed the Fixed
Income Fund $0, $0, and $48,849, respectively, in other Fund operating
expenses; for the fiscal years ended November 30, 1996, 1995, and
1994, FAS reimbursed the Short-Term Fixed Income Fund $0, $0, and
$39,787, respectively, in other Fund operating expenses.
CUSTODIAN
Wachovia Bank, N.A., Winston-Salem, North Carolina, is
custodian (the "Custodian") for the securities and cash of the Funds.
Under the Custodian Agreement, the Custodian holds the Funds'
portfolio securities in safekeeping and keeps all necessary records
and documents relating to its duties. For the services to be provided
to the Trusts pursuant to the Custodian Agreement, the Trusts pay the
Custodian an annual fee based upon the average daily net assets of the
Funds and which is payable monthly. The Custodian will also charge
transaction fees and out-of-pocket expenses.
TRANSFER AGENT
Federated Services Company, Pittsburgh, Pennsylvania a
subsidiary of Federated Investors, is transfer agent (the "Transfer
Agent") for the shares of the Funds, and dividend disbursing agent for
the Funds. Federated Services Company also provides certain accounting
and recordkeeping services with respect to the Funds' portfolio
investments.
LEGAL SERVICES
Legal services for the Funds are provided by Kirkpatrick &
Lockhart LLP, Washington, D.C. Piper & Marbury L.L.P., Washington,
D.C., serves as counsel to the independent Trustees.
INDEPENDENT AUDITORS
The independent auditors are Ernst & Young LLP, Pittsburgh,
Pennsylvania.
DISTRIBUTION PLAN (CLASS B SHARES ONLY) AND SHAREHOLDER SERVICES PLAN
(CLASS A SHARES AND CLASS B SHARES ONLY)
These arrangements permit the payment of fees to financial
institutions, the distributor, and Federated Shareholder Services
Company, to stimulate distribution activities and to cause services to
be provided to shareholders by a representative who has knowledge of
the shareholder's particular circumstances and goals. These activities
and services may include, but are not limited to: marketing efforts;
providing office space, equipment, telephone facilities, and various
clerical, supervisory, computer, and other personnel as necessary or
beneficial to establish and maintain shareholder accounts and records;
processing purchase and redemption transactions and automatic
investments of client account cash balances; answering routine client
inquiries; and assisting clients in changing dividend options, account
designations, and addresses.
By adopting Distribution Plans, the Trustees expect that the
Funds will be able to achieve a more predictable flow of cash for
investment purposes and to meet redemptions. This will facilitate more
efficient portfolio management and assist a Fund in pursuing its
investment objective. By identifying potential investors whose needs
are served by a Fund's objectives, and properly servicing these
accounts, it may be possible to curb sharp fluctuations in rates of
redemptions and sales.
Other benefits, which may be realized under either
arrangement, may include: (1) providing personal services to
shareholders; (2) investing shareholder assets with a minimum of delay
and administrative detail; (3) enhancing shareholder recordkeeping
systems; and (4) responding promptly to shareholders' requests and
inquiries concerning their accounts.
For the fiscal year ended November 30, 1996, payments in the
amount of $979 were made pursuant to the Plan on behalf of Equity
Fund. In addition, for the fiscal year the Equity Fund Class A Shares
paid shareholder service fees in the amount of $112,041, all of which
was waived, and Class B Shares paid $326.
For the fiscal year ended November 30, 1996, payments in the
amount of $1,652 were made pursuant to the Plan on behalf of
Quantitative Equity Fund. In addition, for the fiscal year the
Quantitative Equity Fund Class A Shares paid shareholder service fees
in the amount of $101,106, all of which was waived, and Class B Shares
paid $551.
For the fiscal year ended November 30, 1996, the Equity
Index Fund Class A Shares paid shareholder service fees in the amount
of $146,700, all of which was waived.
For the fiscal year ended November 30, 1996, the Special
Values Fund Class A Shares paid shareholder service fees in the amount
of $36,749, all of which was waived.
For the fiscal year ended November 30, 1996, the Emerging
Markets Fund Class A Shares paid shareholder service fees in the
amount of $82,304, all of which was waived.
For the fiscal year ended November 30, 1996, payments in the
amount of $1,822 were made pursuant to the Plan on behalf of Balanced
Fund. In addition, for the fiscal year the Balanced Fund Class A
Shares paid shareholder service fees in the amount of $163,749, all of
which was waived, and Class B Shares paid $607.
For the fiscal year ended November 30, 1996, payments in the
amount of $195 were made pursuant to the Plan on behalf of Fixed
Income Fund. In addition, for the fiscal year the Fixed Income Fund
Class A Shares paid shareholder service fees in the amount of
$132,440, all of which was waived, and Class B Shares paid $65.
For the fiscal year ended November 30, 1996, the Short-Term
Fixed Income Fund Class A Shares paid shareholder service fees in the
amount of $85,662, all of which was waived.
For the fiscal year ended November 30, 1996, Georgia
Municipal Bond Fund Class A Shares paid shareholder service fees in
the amount of $9,722 all of which was waived.
For the fiscal year ended November 30, 1996, North Carolina
Municipal Bond Fund Class A Shares paid shareholder service fees in
the amount of $24,077, all of which was waived.
For the fiscal year ended November 30, 1996, South Carolina
Municipal Bond Fund Class A Shares paid shareholder service fees in
the amount of $86,827, all of which was waived.
PURCHASING FUND SHARES
Shares of a Fund are sold at net asset value plus an
applicable sales charge on days on which Wachovia Bank, the New York
Stock Exchange and the Federal Reserve Wire System are open for
business.
CONVERSION TO FEDERAL FUNDS
It is each Fund's policy to be as fully invested as
possible so that maximum interest may be earned. To this end, all
payments from shareholders must be in federal funds or be converted
into federal funds. Wachovia Bank acts as the shareholders' agent in
depositing checks and converting them to federal funds.
EXCHANGING SECURITIES FOR FUND SHARES
A Fund may accept securities in exchange for Fund shares. A
Fund will allow such exchanges only upon the prior approval of the
Fund and a determination by the Fund and the investment adviser that
the securities to be exchanged are acceptable.
Any securities exchanged must meet the investment objective
and policies of a Fund, must have a readily ascertainable market
value, must be liquid, and must not be subject to restrictions on
resale. The market value of any securities exchanged in any initial
investment, plus any cash, must be at least equal to the minimum
investment in the Fund.
Securities accepted by a Fund will be valued in the same
manner as the Fund values its assets. The basis of the exchange will
depend on the net asset value of Fund shares on the day the securities
are valued. One share of the Fund will be issued for each equivalent
amount of securities accepted.
Any interest earned on the securities prior to the exchange
will be considered in valuing the securities. All interest, dividends,
subscription or other rights attached to the securities become the
property of the Fund, along with the securities.
If an exchange is permitted, it will be treated as a sale
for federal income tax purposes. Depending upon the cost basis of the
securities exchanged for Fund shares, a gain or loss may be realized
by the investor.
DETERMINING NET ASSET VALUE
Net asset value generally changes each day. The days on
which net asset value is calculated by a Fund are described in the
prospectuses.
Dividend income is recorded on the ex-dividend date, except
certain dividends from foreign securities where the ex-dividend date
may have passed, are recorded as soon as a Fund is informed of the
ex-dividend date.
DETERMINING MARKET VALUE OF SECURITIES
The market values of a Fund's portfolio securities are
determined as follows:
o for equity securities, according to the last sale price on a
national securities exchange, if available;
o in the absence of recorded sales for listed equity
securities, according to the mean between the last closing
bid and asked prices;
o for unlisted equity securities, the latest bid prices;
o for bonds and other fixed income securities, as determined by an
independent pricing service;
o for short-term obligations, according to the mean between bid and
asked prices as furnished by an independent pricing service; or
o for all other securities, at fair value as determined in good faith
by the Trustees.
Prices provided by independent pricing services may be
determined without relying exclusively on quoted prices and may
reflect: institutional trading in similar groups of securities, yield,
quality, coupon rate, maturity, type of issue, trading
characteristics, and other market data.
The Fund will value futures contracts, options and put
options on financial futures at their market values established by the
exchanges at the close of option trading on such exchanges, unless the
Trustees determine in good faith that another method of valuing option
positions is necessary.
REDEEMING FUND SHARES
A Fund redeems shares at the next computed net asset value
after the Fund receives the redemption request. Redemption procedures
are explained in the prospectuses under "Redeeming Shares."
REDEMPTION IN KIND
Although each Fund intends to redeem shares in cash, it
reserves the right under certain circumstances to pay the redemption
price in whole or in part by a distribution of securities from the
Fund's portfolio. To the extent available, such securities will be
readily marketable.
Redemption in kind will be made in conformity with
applicable Securities and Exchange Commission rules, taking such
securities at the same value employed in determining net asset value
and selecting the securities in a manner the Trustees determine to be
fair and equitable.
Redemption in kind is not as liquid as a cash redemption. If
redemption is made in kind, shareholders receiving their securities
and selling them before their maturity could receive less than the
redemption value of their securities and could incur transaction
costs.
The Trusts have elected to be governed by Rule 18f-1 under
the Investment Company Act of 1940, which obligates a Fund to redeem
shares for any one shareholder in cash only up to the lesser of
$250,000 or 1% of the Fund's net asset value during any 90-day period.
MASSACHUSETTS BUSINESS TRUSTS
Under certain circumstances, shareholders may be held
personally liable under Massachusetts law for acts or obligations of
the Trusts. To protect shareholders, the Trusts have filed legal
documents with Massachusetts that expressly disclaim the liability of
shareholders for such acts or obligations of the Trusts. These
documents require notice of this disclaimer to be given in each
agreement, obligation, or instrument the Trusts or the Trustees enter
into or sign on behalf of a Fund.
In the unlikely event a shareholder is held personally
liable for a Trust's obligations on behalf of a Fund, the Trust is
required by its Declaration of Trust to use the property of the Fund
to protect or compensate the shareholder. On request, a Trust will
defend any claim made and pay any judgment against a shareholder of a
Fund for any act or obligation of the Trust on behalf of the Fund.
Therefore, financial loss resulting from liability as a shareholder of
a Fund will occur only if the Trust cannot meet its obligations to
indemnify shareholders and pay judgments against them from the assets
of the Fund.
TAX STATUS
THE FUNDS' TAX STATUS
Each Fund expects to pay no federal income tax because it
intends to meet the requirements of Subchapter M of the Internal
Revenue Code applicable to regulated investment companies and to
receive the special tax treatment afforded to such companies. To
qualify for this treatment, each Fund must, among other requirements:
o derive at least 90% of its gross income from dividends, interest,
and gains from the sale of securities;
o derive less than 30% of its gross income from the sale of
securities held less than three months;
o invest in securities within certain statutory limits; and
o distribute to its shareholders at least 90% of its net income
earned during the year.
Federal income tax law requires the holder of a zero coupon
convertible security to recognize income with respect to the security
prior to the receipt of cash payments. To maintain its qualification
as a regulated investment company and to avoid liability of federal
income taxes, a Fund will be required to distribute income accrued
with respect to zero coupon convertible securities which it owns, and
may have to sell portfolio securities (perhaps at disadvantageous
times) in order to generate cash to satisfy these distribution
requirements.
SHAREHOLDERS' TAX STATUS
Shareholders of the Equity Fund, Quantitative Equity Fund,
Equity Index Fund, Special Values Fund, Emerging Markets Fund,
Balanced Fund, Fixed Income Fund, and Short-Term Fixed Income Fund are
subject to federal income tax on dividends received as cash or
additional shares. The dividends received deduction for corporations
will apply to ordinary income distributions to the extent the
distribution represents amounts that would qualify for the dividends
received deduction to a Fund if the Fund were a regular corporation,
and to the extent designated by the Fund as so qualifying. These
dividends, and any short-term capital gains, are taxable as ordinary
income.
No portion of any income dividend income paid by the Georgia
Municipal Bond Fund, North Carolina Municipal Bond Fund, and South
Carolina Municipal Bond Fund is eligible for the dividends received
deductions available to corporations.
CAPITAL GAINS
Long-term capital gains distributed to shareholders will be
treated as long-term capital gains regardless of how long shareholders
have held shares.
Capital gains or losses may be realized by the Georgia
Municipal Bond Fund, North Carolina Municipal Bond Fund, and South
Carolina Municipal Bond Fund on the sale of portfolio securities and
as a result of discounts from par value on securities held to
maturity. Sales would generally be made because of:
o the availability of higher relative yields;
o differentials in market values;
o new investment opportunities;
o changes in creditworthiness of an issuer; or
o an attempt to preserve gains or limit losses.
Distribution of long-term capital gains are taxed as such,
whether they are taken in cash or reinvested, and regardless of the
length of time the shareholder has owned the shares.
<PAGE>
TOTAL RETURN
The average annual total return is the average compounded
rate of return for a given period that would equate a $1,000 initial
investment to the ending redeemable value of that investment. The
ending redeemable value is computed by multiplying the number of
shares owned at the end of the period by the net asset value per share
at the end of the period. The number of shares owned at the end of the
period is based on the number of shares purchased at the beginning of
the period with $1,000, less any applicable sales load, adjusted over
the period by any additional shares, assuming the reinvestment of all
dividends and distributions.
Cumulative total return reflects a Fund's total performance over
a specific period of time. This total return assumes and is reduced by
the payment of the maximum sales charge. The Funds' cumulative total
returns are representative of investment activity since a Fund's
effective date.
<TABLE>
<CAPTION>
FUND NAME CLASS A SHARES CLASS A SHARES CLASS A SHARES CLASS B SHARES CLASS Y SHARES
AVERAGE ANNUAL AVERAGE ANNUAL AVERAGE ANNUAL CUMULATIVE CUMULATIVE
TOTAL RETURN TOTAL RETURN TOTAL RETURN TOTAL RETURN TOTAL RETURN
1-YEAR PERIOD* 5-YEAR PERIOD* SINCE INCEPTION** SINCE INCEPTION SINCE INCEPTION
- -------------------------- ----------------- ------------------------------------------------------ ------------
<S> <C> <C> <C> <C> <C>
Equity Fund 19.90% 15.08%+ 14.25%++ 19.57%++
Quantitative Equity Fund 18.15% 19.04%# 14.92%++ 20.19%++
Equity Index Fund 21.48% 17.17%+ 20.14++
Special Values Fund 33.53% 15.90%+ 15.05%++
Emerging Markets Fund 7.39% 5.92## (2.10%)++
Balanced Fund 13.23% 11.93%+ 9.47%++ 14.69%++
Fixed Income Fund 0.72% 4.36%+ 0.77%++ 6.12%++
Short-Term Fixed Income 2.70% 4.00%+ 3.00%++
Fund
Georgia Municipal Bond 0.21% 7.09%## 4.31%++
Fund
North Carolina Municipal 0.42% 7.43%## 4.55%++
Bond Fund
South Carolina Municipal 0.80% 6.63% 6.85%### 4.86%++
Bond Fund
</TABLE>
* For the fiscal year ended November 30, 1996. ** Start of performance
+ May 7, 1993 through November 30, 1996 ++ July 23, 1996 through
November 30, 1996 # March 25, 1994 through November 30, 1996 ##
December 23, 1994 through November 30, 1996 ### January 11, 1991
through November 30, 1996 YIELD
The yield for a Fund is determined each day by dividing the
net investment income per share (as defined by the Securities and
Exchange Commission) earned by the Fund over a thirty-day period by
the maximum offering price per share of the Fund on the last day of
the period. This value is then annualized using semi-annual
compounding. This means that the amount of income generated during the
thirty-day period is assumed to be generated each month over a
12-month period and is reinvested every six months. The yield does not
necessarily reflect income actually earned by a Fund because of
certain adjustments required by the Securities and Exchange Commission
and, therefore, may not correlate to the dividends or other
distributions paid to shareholders.
To the extent that financial institutions and broker/dealers
charge fees in connection with services provided in conjunction with
an investment in a Fund, the performance will be reduced for those
shareholders paying those fees.
The Funds' yield for the thirty-day period ended November
30, 1996, is as follows:
FUND NAME CLASS A SHARES CLASS B SHARES CLASS Y SHARES
- ---------------------------------- ------------------------------------------
Equity Fund 0.77% (0.15%) 0.81%
Quantitative Equity Fund 1.11% 0.21% 1.17%
Equity Index Fund 1.50% 1.57% 1.57%
Special Values Fund 0.40% 0.40%
Emerging Markets Fund 0.00% 0.00%
Balanced Fund 2.52% 1.68% 2.65%
Fixed Income Fund 5.21% 4.46% 5.47%
Short-Term Fixed Income Fund 5.11% 5.24%
Georgia Municipal Bind Fund 3.96% 4.16%
North Carolina Municipal Bond 3.88% 4.09%
Fund
South Carolina Municipal Bond 4.40% 4.63%
Fund
<PAGE>
TAX-EQUIVALENT YIELD
The tax-equivalent yield of a Fund is calculated similarly
to the yield, but is adjusted to reflect the taxable yield that a Fund
would have had to earn to equal its actual yield, assuming that income
is 100% tax-exempt.
The Funds may also use a tax-equivalency table in
advertising and sales literature. The interest earned by the municipal
bonds in a Fund's portfolio generally remain free from federal regular
income tax*, and is often free from state and local taxes as well. As
the tables below indicate, a "tax-free" investment is an attractive
choice for investors, particularly in times of narrow spreads between
tax-free and taxable yields.
Georgia Municipal Bond Fund Class A Shares' tax-equivalent
yield for the thirty-day period ended November 30, 1996 was 5.74%,
assuming a 31% tax bracket.
Georgia Municipal Bond Fund Class Y Shares' tax-equivalent
yield for the thirty-day period ended November 30, 1996 was 6.03%,
assuming a 31% tax bracket.
<TABLE>
<CAPTION>
TAXABLE YIELD EQUIVALENT FOR 1996
STATE OF GEORGIA
<S> <C> <C> <C> <C> <C> <C>
TAX BRACKET:
FEDERAL 15.00% 28.00% 31.00% 36.00% 39.60%
COMBINED
FEDERAL
AND STATE: 21.00% 34.00% 37.00% 42.00% 45.60%
JOINT $1- $40,101- $96,901- $147,701- OVER
RETURN 40,100 96,900 147,700 263,750 $263,750
SINGLE $1- $24,001- $58,151- $121,301- OVER
RETURN 24,000 58,150 121,300 263,750 $263,750
Tax-Exempt
Yield Taxable Yield Equivalent
1.50% 1.90% 2.27% 2.38% 2.59% 2.76%
2.00% 2.53% 3.03% 3.17% 3.45% 3.68%
2.50% 3.16% 3.79% 3.97% 4.31% 4.60%
3.00% 3.80% 4.55% 4.76% 5.17% 5.51%
3.50% 4.43% 5.30% 5.56% 6.03% 6.43%
4.00% 5.06% 6.06% 6.35% 6.90% 7.35%
4.50% 5.70% 6.82% 7.14% 7.76% 8.27%
5.00% 6.33% 7.58% 7.94% 8.62% 9.19%
5.50% 6.96% 8.33% 8.73% 9.48% 10.11%
6.00% 7.59% 9.09% 9.52% 10.34% 11.03%
6.50% 8.23% 9.85% 10.32% 11.21% 11.95%
7.00% 8.86% 10.61% 11.11% 12.07% 12.87%
North Carolina Municipal Bond Fund Class A Shares'
tax-equivalent yield for the thirty-day period ended November 30, 1996
was 5.62%, assuming a 31% tax bracket.
North Carolina Municipal Bond Fund Class Y Shares'
tax-equivalent yield for the thirty-day period ended November 30, 1996
was 5.93%, assuming a 31% tax bracket.
TAXABLE YIELD EQUIVALENT FOR 1996
STATE OF NORTH CAROLINA
TAX BRACKET:
FEDERAL 15.00% 28.00% 31.00% 36.00% 39.60%
COMBINED
FEDERAL
AND STATE 22.00% 35.00% 38.75% 43.75% 47.35%
JOINT $1- $40,101- $96,901- $147,701- OVER
RETURN 40,100 96,900 147,700 263,750 $263,750
SINGLE $1- $24,001- $58,151- $121,301- OVER
RETURN 24,000 58,150 121,300 263,750 $263,750
Tax-Exempt
Yield Taxable Yield Equivalent
3.50% 4.49% 5.38% 5.71% 6.22% 6.65%
4.00% 5.13% 6.15% 6.53% 7.11% 7.60%
4.50% 5.77% 6.92% 7.35% 8.00% 8.55%
5.00% 6.41% 7.69% 8.16% 8.89% 9.50%
5.50% 7.05% 8.46% 9.98% 9.78% 10.45%
6.00% 7.69% 9.23% 9.80% 10.67% 11.40%
6.50% 8.33% 10.00% 10.61% 11.56% 12.35%
7.00% 8.97% 10.77% 11.43% 12.44% 13.30%
7.50% 9.62% 11.54% 12.24% 13.33% 14.25%
8.00% 10.26% 12.31% 13.06% 14.22% 15.19%
<PAGE>
South Carolina Municipal Bond Fund Class A Shares'
tax-equivalent yield for the thirty-day period ended November 30, 1996
was 6.38%, assuming a 31% tax bracket.
South Carolina Municipal Bond Fund Class Y Shares'
tax-equivalent yield for the thirty-day period ended November 30, 1996
was 6.71%, assuming a 31% tax bracket.
TAXABLE YIELD EQUIVALENT FOR 1996
STATE OF SOUTH CAROLINA
TAX BRACKET:
FEDERAL 15.00% 28.00% 31.00% 36.00% 39.60%
COMBINED
FEDERAL
AND STATE 22.00% 35.00% 38.00% 43.00% 46.60%
JOINT $1- $40,401- $96,901- $147,701- OVER
RETURN 40,100 96,900 147,700 263,750 $263,750
SINGLE $1- $24,001- $58,151- $121,301- OVER
RETURN 24,000 58,150 121,300 263,750 $263,750
Tax-Exempt
Yield Taxable Yield Equivalent
2.50% 3.21% 3.85% 4.03% 4.39% 4.68%
3.00% 3.85% 4.62% 4.84% 5.26% 5.62%
3.50% 4.49% 5.38% 5.65% 6.14% 6.55%
4.00% 5.13% 6.15% 6.45% 7.02% 7.49%
4.50% 5.77% 6.92% 7.26% 7.89% 8.43%
5.00% 6.41% 7.69% 8.06% 8.77% 9.36%
5.50% 7.05% 8.46% 8.87% 9.65% 10.30%
6.00% 7.69% 9.23% 9.68% 10.53% 11.24%
6.50% 8.33% 10.00% 10.48% 11.40% 12.17%
7.00% 8.97% 10.77% 11.29% 12.28% 13.11%
</TABLE>
Note: The maximum marginal tax rate for each bracket was
used in calculating the taxable yield equivalent. Furthermore,
additional state and local taxes paid on comparable taxable
investments were not used to increase federal deductions.
The charts above are for illustrative purposes only. They
are not indicators of past or future performance of the Funds.
* Some portion of a Fund's income may be subject to the
federal alternative minimum tax and state and local taxes.
<PAGE>
PERFORMANCE COMPARISONS
A Fund's performance depends upon such variables as:
o portfolio quality;
o average portfolio maturity;
o type of instruments in which the portfolio is invested;
o changes in interest rates and market value of portfolio securities;
o changes in the Fund's expenses;
o the relative amount of Fund cash flow; and
o various other factors.
A Fund's performance fluctuates on a daily basis largely
because net earnings and the maximum offering price (i.e., net asset
value plus any sales charge) per share fluctuate daily. Both net
earnings and offering price per share are factors in the computation
of yield and total return.
Investors may use financial publications and/or indices to
obtain a more complete view of the Fund's performance. When comparing
performance, investors should consider all relevant factors, such as
the composition of any index used, prevailing market conditions,
portfolio compositions of other funds, and methods used to value
portfolio securities and compute offering price. The financial
publications and/or indices which the Fund uses in advertising may
include:
o 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 maximum offering price over a
specific period of time. From time to time, a Fund will
quote its Lipper ranking in advertising and sales
literature.
o DOW JONES INDUSTRIAL AVERAGE ("DJIA") represents share
prices of selected blue-chip industrial corporations. The
DJIA indicates daily changes in the average price of stock
of these corporations. Because it represents the top
corporations of America, the DJIA index is a leading
economic indicator for the stock market as a whole.
o STANDARD & POOR'S DAILY STOCK PRICE INDEX OF 500 COMMON
STOCKS (THE "S&P INDEX"), is a composite index of common
stocks in industry, transportation, and financial and
public utility companies. In addition, the S&P Index
assumes reinvestment of all dividends paid by stocks
listed on the S&P Index. Taxes due on any of these
distributions are not included, nor are brokerage or other
fees calculated in the S&P Index figures.
o RUSSELL 2000 INDEX is a broadly diversified index
consisting of approximately 2,000 small capitalization
common stocks that can be used to compare the total
returns of funds whose portfolios are invested primarily
in small capitalization common stocks.
o EUROPE, AUSTRALIA, AND FAR EAST ("EAFE") is a market
capitalization weighted foreign securities index, which is
widely used to measure the performance of European,
Australian, New Zealand and Far Eastern stock markets. The
index covers approximately 1,020 companies drawn from 18
countries in the above regions. The index values its
securities daily in both U.S. dollars and local currency
and calculates total returns monthly. EAFE U.S. dollar
total return is a net dividend figure less Luxembourg
withholding tax. The EAFE is monitored by Capital
International, S.A., Geneva, Switzerland.
o INTERNATIONAL FINANCE CORPORATION ("IFC") EMERGING MARKET INDICES
are market capitalization-weighted foreign securities indices,
which are used to measure the performance of emerging markets (as
defined by the World Bank) in Europe, Asia, Latin America, and
the Middle East/Africa. The IFC calculates both a "Global" and an
"Investable" version of its index. The "Global" version includes
companies and countries with regard to their access to foreign
investors. The "Investable" Index adjusts company and market
weights to reflect their accessibility to foreign investors. The
IFC Global Index currently covers approximately 1,200 securities
in 25 markets; the IFC Investable Index currently covers
approximately 900 securities in 24 markets. Both indices are
presently calculated in local currency and in US dollars, without
dividends and with gross dividends reinvested (e.g., before
withholding taxes). The IFC is a subsidiary of the World Bank,
and has been collecting data on emerging markets since 1975.
o MORGAN STANLEY CAPITAL INTERNATIONAL ("MSCI") EMERGING MARKETS
INDICES are market capitalization-weighted foreign securities
indices, which are used to measure the performance of emerging
markets (as defined by the World Bank) in Europe, Asia, Latin
America, and the Middle East/Africa. MSCI calculates a "Global"
and a "Free" version of its index. The "Global" version includes
companies and countries without regards to their access to
foreign investors. The "Free" Index adjusts company and market
weights to reflect their accessibility to foreign investors. The
MSCI Global Index currently covers approximately 630 securities
in 20 markets; the MSCI Free Index currently covers approximately
560 securities in 19 markets. Both indices are presently
calculated in local currency and in US dollars, without dividends
and with gross dividends reinvested (e.g., before withholding
taxes).
o MERRILL LYNCH COMPOSITE 1-3 YEAR TREASURY INDEX is an
unmanaged index tracking short-term U.S. government
securities with maturities between 1 and 2.99 years. The
index is produced by Merrill Lynch, Pierce, Fenner &
Smith.
o MERRILL LYNCH COMPOSITE 1-5 YEAR TREASURY INDEX is
comprised of approximately 66 issues of U.S. Treasury
securities maturing between 1 and 4.99 years, with coupon
rates of 4.25% or more. These total return figures are
calculated for one, three, six, and twelve month periods
and year-to-date and include the value of the bond plus
income and any price appreciation or depreciation.
o SALOMON BROTHERS 3-5 YEAR GOVERNMENT INDEX quotes total
returns for U.S. Treasury issues (excluding flower bonds)
which have maturities of three to five years. These total
returns are year-to-date figures which are calculated each
month following January 1.
o MERRILL LYNCH 3-5 YEAR TREASURY INDEX is comprised of
approximately 24 issues of intermediate-term U.S.
government and U.S. Treasury securities with maturities
between 3 and 4.99 years and coupon rates above 4.25%.
Index returns are calculated as total returns for periods
of one, three, six and twelve months as well as
year-to-date.
o MERRILL LYNCH 3-YEAR TREASURY YIELD CURVE INDEX is an
unmanaged index comprised of the most recently issued
3-year U.S. Treasury notes. Index returns are calculated
as total returns for periods of one, three, six, and
twelve months as well as year-to-date.
o LEHMAN BROTHERS GOVERNMENT INDEX is an unmanaged index
comprised of all publicly issued, non-convertible domestic
debt of the U.S. government, or any agency thereof, or any
quasi-federal corporation and of corporate debt guaranteed
by the U.S. government. Only notes and bonds with a
minimum outstanding principal of $1 million and a minimum
maturity of one year are included.
o LEHMAN BROTHERS AGGREGATE BOND INDEX is a total return index
measuring both the capital price changes and income provided by
the underlying universe of securities, weighted by market value
outstanding. The Aggregate Bond Index is comprised of the Lehman
Brothers Government Bond Index, Corporate Bond Index,
Mortgage-Backed Securities Index and the Yankee Bond Index. These
indices include: U.S. Treasury obligations, including bonds and
notes; U.S. agency obligations, including those of the Farm
Credit System, including the National Bank for Cooperatives, Farm
Credit Banks, and Banks for Cooperatives; Farmers Home
Administration; Federal Home Loan Banks; Federal Home Loan
Mortgage Corporation; Fannie Mae; Government National Mortgage
Association; and Student Loan Marketing Association; foreign
obligations; and U.S. investment-grade corporate debt and
mortgage-backed obligations. All corporate debt included in the
Aggregate Bond Index has a minimum S&P rating of BBB or a minimum
Moody's rating of Baa.
o MERRILL LYNCH CORPORATE AND GOVERNMENT INDEX includes issues
which must be in the form of publicly placed, nonconvertible,
coupon-bearing domestic debt and must carry a term of maturity of
at least one year. Par amounts outstanding must be no less than
$10 million at the start and at the close of the performance
measurement period. Corporate instruments must be rated by S&P or
by Moody's as investment grade issues (i.e., BBB/Baa or better).
o MERRILL LYNCH DOMESTIC MASTER INDEX includes issues which must be
in the form of publicly placed, nonconvertible, coupon-bearing
domestic debt and must carry a term to maturity of at least one
year. Par amounts outstanding must be no less than $10 million at
the start and at the close of the performance measurement period.
The Domestic Master Index is a broader index than the Merrill
Lynch Corporate and Government Index and includes, for example,
mortgage-related securities. The mortgage market is divided by
agency, type of mortgage and coupon and the amount outstanding in
each agency/type/coupon subdivision must be no less than $200
million at the start and at the close of the performance
measurement period. Corporate instruments must be rated by S&P or
by Moody's as investment-grade issues (i.e. BBB/Baa or better).
o S&P 500/LEHMAN BROTHERS GOVERNMENT/CORPORATE (WEIGHTED
INDEX) and the S&P 500/Lehman Brothers Government
(Weighted Index) combine the components of a
stock-oriented index and a bond-oriented index to obtain
results which can be compared to the performance of a
managed fund. The indices' total returns will be assigned
various weights depending upon the Fund's current asset
allocation.
o SALOMON BROTHERS AAA-AA CORPORATE index calculates total
returns of approximately 775 issues which include
long-term, high grade domestic corporate taxable bonds,
rated AAA-AA with maturities of twelve years or more and
companies in industry, public utilities, and finance.
o LEHMAN BROTHERS INTERMEDIATE GOVERNMENT/CORPORATE BOND
INDEX is an unmanaged index comprised of all the bonds
issued by the Lehman Brothers Government/Corporate Bond
Index with maturities between 1 and 9.99 years. Total
return is based on price appreciation/depreciation and
income as a percentage of the original investment. Indices
are rebalanced monthly by market capitalization.
o SEI BALANCED UNIVERSE is composed of 916 portfolios
managed by 390 managers representing $86 billion in
assets. To be included in the universe, a portfolio must
contain a 5% minimum commitment in both equity and
fixed-income securities. Consulting universes may be
composed of pension, profit-sharing, commingled,
endowment/foundation and mutual funds.
o LEHMAN BROTHERS GOVERNMENT/CORPORATE (TOTAL) index is comprised
of approximately 5,000 issues which include: non-convertible
bonds publicly issued by the U.S. government or its agencies;
corporate bonds guaranteed by the U.S. government and
quasi-federal corporations; and publicly issued, fixed rate,
non-convertible domestic bonds of companies in industry, public
utilities, and finance. The average maturity of these bonds
approximates nine years. Tracked by Lehman Brothers, the index
calculates total returns for one-month, three-month,
twelve-month, and ten-year periods and year-to-date.
o MERRILL LYNCH CORPORATE MASTER is an unmanaged index comprised of
approximately 4,356 corporate debt obligations rated BBB or
better. These quality parameters are based in composites of
ratings assigned by S&P and Moody's.
Only bonds with a minimum maturity of one year are
included.
O LEHMAN BROTHERS STATE GENERAL OBLIGATIONS INDEX is an index
comprised of all state general obligation debt issues and is
compiled without regard to maturities. These bonds are rated A or
better and represent a variety of coupon ranges. Index figures
are total returns calculated for one, three, and twelve month
periods as well as year-to-date. Total returns are also
calculated as of the index inception, December 31, 1979.
o LEHMAN BROTHERS FIVE-YEAR STATE GENERAL OBLIGATIONS BONDS is an
index comprised of all state general obligation debt issues with
maturities between four and six years. These bonds are rated A or
better and represent a variety of coupon ranges. Index figures
are total returns calculated for one, three, and twelve month
periods as well as year-to-date. Total returns are also
calculated as of the index inception, December 31, 1979.
o LEHMAN BROTHERS THREE-YEAR STATE GENERAL OBLIGATIONS BONDS is an
index comprised of the same issues noted above except that the
maturities range between two and four years. Index figures are
total returns calculated for the same periods as listed above.
o 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.
Advertisements and other sales literature for the Fund may
quote total returns which are calculated on non-standardized base
periods. These total returns also 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.
Advertisements may quote performance information which does
not reflect the effect of the sales load.
<PAGE>
FINANCIAL STATEMENTS
The financial statements for the fiscal period ended
November 30, 1996, are incorporated herein by reference from the
Funds' Annual Reports dated November 30, 1996 (File Nos. 33-44590 and
811-6504). A copy of an Annual Report may be obtained without charge
by contacting the Funds at the address located on the back cover of
the prospectus or by calling the Funds at 1-800-994-4414.
STANDARD & POOR'S CORPORATION
Standard & Poor's Corporation ("S&P") makes no
representation or warranty, express or implied, to the owners of a
Fund or any member of the public regarding the advisability of
investing in securities generally or in a Fund particularly or the
ability of the S&P 500 Index (as defined in the prospectuses) to track
general stock market performance. S&P's only relationship to Federated
Securities Corp., the Funds' distributor (the "Licensee") is the
licensing of certain trademarks and trade names of S&P and of the S&P
500 Index which is determined, composed and calculated by S&P without
regard to the Licensee or a Fund. S&P has no obligation to take the
needs of the Licensee or the owners of a Fund into consideration in
determining, composing or calculating the S&P 500 Index. S&P is not
responsible for and has not participated in the determination of, the
timing of, prices at, or quantities of a Fund to be issued or in the
determination or calculation of the equation by which a Fund is to be
converted into cash. S&P has no obligation or liability in connection
with the administration, marketing or trading of a Fund.
S&P does not guarantee the accuracy and/or the completeness
of the S&P 500 Index or any data included therein. S&P makes no
warranty, express or implied, as to results to be obtained by the
Licensee, owners of a Fund, or any other person or entity from the use
of the S&P 500 Index or any data included therein in connection with
the rights licensed hereunder or for any other use. S&P makes no
express or implied warranties, and expressly disclaims all warranties
or merchantability or fitness for a particular purpose or use with
respect to the S&P 500 Index or any data included therein. Without
limiting any of the foregoing, in no event shall S&P have any
liability for any special, punitive, indirect or consequential damages
(including lost profits), even if notified of the possibility of such
damages.
<PAGE>
APPENDIX
STANDARD & POOR'S RATINGS GROUP CORPORATE BOND RATINGS
AAA--Debt rated "AAA" has the highest rating assigned by
S&P. Capacity to pay interest and repay principal is extremely strong.
AA--Debt rated "AA" has a very strong capacity to pay
interest and repay principal and differs from the higher rated issues
only in small degree.
A--Debt rated "A" has a strong capacity to pay interest and
repay principal although it is somewhat more susceptible to the
adverse effects of changes in 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.
BB, B, CCC, CC -- Debt rated "BB", "B", "CCC", and "CC" is
regarded, on balance, as predominantly speculative with respect to
capacity to pay interest and repay principal in accordance with the
terms of the obligation. "BB" indicates the lowest degree of
speculation and "CC" the highest degree of speculation. While such
debt will likely have some quality and protective characteristics,
these are outweighed by large uncertainties of major risk exposure to
adverse conditions.
C -- The rating "C" is reserved for income bonds on which no
interest is being paid.
D -- Debt rated "D" is in default, and payment of interest
and/or repayment of principal is in arrears.
NR--NR indicates that no public rating has been requested,
that there is insufficient information on which to base a rating, or
that S&P does not rate a particular type of obligation as a matter of
policy.
S&P may apply a plus (+) sign or minus (-) sign to the above
rating classifications to show relative standing within the
classifications.
MOODY'S INVESTORS SERVICE, INC. CORPORATE BOND RATING
AAA--Bonds which are rated "AAA" are judged to be of the
best quality. They carry the smallest degree of investment risk and
are generally referred to as "gilt edged." Interest payments are
protected by a large or by an exceptionally stable margin and
principal is secure. While the various protective elements are likely
to change, such changes as can be visualized are most unlikely to
impair the fundamentally strong position of such issues.
AA--Bonds which are rated "AA" are judged to be of high
quality by all standards. Together with the "AAA" group they comprise
what are generally known as high grade bonds. They are rated lower
than the best bonds because margins of protection may not be as large
as in "AAA "securities or fluctuation of protective elements may be of
greater amplitude or there may be other elements present which make
the long-term 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 some time in the future.
BAA--Bonds which are rated "BAA" are considered as
medium-grade obligations, (i.e., they are neither highly protected nor
poorly secured). Interest payments and principal security appear
adequate for the present but certain protective elements may be
lacking or may be characteristically unreliable over any great length
of time. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.
BA--Bonds which are "BA" are judged to have speculative
elements; their future cannot be considered as well assured. Often the
protection of interest and principal payments may be very moderate and
thereby not well safeguarded during both good and bad times over the
future. Uncertainty of position characterizes bonds in this class.
B--Bonds which are rated "B" generally lack characteristics
of a desirable investment. Assurance of interest and principal
payments or of maintenance of other terms of the contract over any
long period of time may be small.
CAA -- Bonds which are rated "CAA" are of poor standing.
Such issues may be in default or there may be present elements of
danger with respect to principal or interest.
CA--Bonds which are rated "CA" represent obligations which
are speculative in a high degree. Such issues are often in default or
have other marked shortcomings.
C--Bonds which are rated "C" are the lowest rated class of
bonds and issues so rated can be regarded as having extremely poor
prospects or ever attaining any real investment standing.
NR--Not rated by Moody's. 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 rating category.
STANDARD & POOR'S RATINGS GROUP COMMERCIAL PAPER RATINGS
A-1--This highest category indicates that the degree of
safety regarding timely payment is strong. Those issues determined to
possess extremely strong safety characteristics are denoted with a
plus sign (+) 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."
A-3--Issues carrying this designation have adequate capacity
for timely payment. They are, however, more vulnerable to the adverse
effects of changes in circumstances than obligations carrying the
higher designations.
B--Issues rated "B" are regarded as having only speculative
capacity for timely payment.
C--This rating is assigned to short-term debt obligations
with a doubtful capacity for payment.
D--Debt rated "D" is in payment default. The "D" rating
category is used when interest payments or principal payments are not
made on the date due, even if the applicable grace period has not
expired, unless S&P believes that such payments will be made during
such grace period.
MOODY'S INVESTORS SERVICE, INC. COMMERCIAL PAPER RATING DEFINITIONS
PRIME-1--Issuers rated "PRIME-1" (or related supporting
institutions) have a superior capacity for repayment of short-term
promissory obligations. "PRIME-1" repayment capacity will normally be
evidenced by many of the following characteristics:
o Leading market positions in well-established industries;
o High rates of return on funds employed;
o Conservative capitalization structure with moderate reliance on
debt and ample asset protection;
o Broad margins in earnings coverage of fixed financial charges and
high internal cash generation; or
o Well-established access to a range of financial markets and
assured sources of alternate liquidity.
PRIME-2- Issuers rated "PRIME-2" (or related supporting
institutions) have a strong capacity for repayment of short-term
promissory 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, will 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 MUNICIPAL BOND RATINGS
AAA--Debt rated "AAA" has the highest rating assigned by
S&P. Capacity to pay interest and repay principal is extremely strong.
AA--Debt rated "AA" has a very strong capacity to pay
interest and repay principal and differs from the higher rated issues
only in small degree.
A--Debt rated "A" has a strong capacity to pay interest and
repay principal although it is somewhat more susceptible to the
adverse effect 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.
BB, B, CCC, CC--Debt rated "BB," "B," "CCC" and "CC" is
regarded, on balance, as predominantly speculative with respect to
capacity to pay interest and repay principal in accordance with the
terms of the obligation. "BB" indicates the lowest degree of
speculation and "CC" the highest degree of speculation. While such
debt will likely have some quality and protective characteristics,
these outweighed by large uncertainties of major risk exposure to
adverse conditions.
C--The rating "C" is reversed for income bonds on which no
interest is being paid.
D--Debt rated "D" is in default, and payment of interest
and/or repayment of principal is in arrears.
STANDARD & POOR'S RATINGS GROUP MUNICIPAL NOTE RATINGS
SP-1--Very strong or strong capacity to pay principal and
interest. Those issues determined to possess overwhelming safety
characteristics will be given a plus sign (+) designation.
SP-2--Satisfactory capacity to pay principal and interest.
SP-3--Speculative capacity to pay principal and interest.
MOODY'S INVESTORS SERVICE, INC. MUNICIPAL BOND RATINGS
AAA--Bonds which are rated "Aaa" are judged to be of the
best quality. They carry the smallest degree of investment risk and
are generally referred to as "gilt edged." Interest payments are
protected by a large or by an exceptionally stable margin and
principal is secure. While the various protective elements are likely
to change, such changes as can be visualized are most unlikely to
impair the fundamentally strong position of such issues.
AA--Bonds which are rated "Aa" are judged to be of high
quality by all standards. Together with the "Aaa" group they comprise
what are generally known as high grade bonds. They are rated lower
than the best bonds because margins of protection may not be as large
as in "Aaa" securities or fluctuation of protective elements may be of
greater amplitude or there may be other elements present which make
the long term 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 some time in the future.
BAA--Bonds which are rated "Baa" are considered as medium
grade obligations, i.e., they are neither highly protected nor poorly
secured. Interest payments and principal security appear adequate for
the present but certain protective elements may be lacking or may be
characteristically unreliable over any great length of time. Such
bonds lack outstanding investment characteristics and in fact have
speculative characteristics as well.
BA--Bonds which are "Ba" are judged to have speculative
elements; their future cannot be considered as well assured. Often the
protection of interest and principal payments may be very moderate and
thereby not well safeguarded during both good and bad times over the
future. Uncertainty of position characterizes bonds in this class.
B--Bonds which are rated "B" generally lack characteristics
of the desirable investment. Assurance of interest and principal
payments or of maintenance of other terms of the contract over any
long period of time may be small.
CAA--Bonds which are rated "Caa" are of poor standing. Such
issues may be in default or there may be present elements of danger
with respect to principal or interest.
CA--Bonds which are rated "Ca" represent obligations which
are speculative in a high degree. Such issues are often in default or
have other marked shortcomings.
C--Bonds which are rated "C" are the lowest rated class of
bonds and issues so rated can be regarded as having extremely poor
prospects of ever attaining any real investment standing.
MOODY'S INVESTORS SERVICE, INC. SHORT-TERM DEBT RATINGS
PRIME-1--Issuers rated PRIME-1 (or related supporting
institutions) have a superior capacity for repayment of short-term
promissory obligations. PRIME-1 repayment capacity will normally be
evidenced by the following characteristics:
o Leading market positions in well established industries;
o High rates of return on funds employed;
o Conservative capitalization structure with moderate reliance on
debt and ample asset protection;
o Broad margins in earning coverage of fixed financial charges and
high internal cash generation; and
o Well-established access to a range of financial markets and
assured sources of alternate liquidity.
PRIME-2--Issuers rated PRIME-2 (or related supporting
institutions) have a strong capacity for repayment of short-term
promissory 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, will be more subject to variation.
Capitalization characteristics, while still appropriate, may be more
affected by external conditions. Ample alternate liquidity is
maintained.
PRIME-3--Issuers rated PRIME-3 (or related supporting
institutions) have an acceptable ability for repayment of senior
short-term obligations. The effect of industry characteristics and
market compositions may be more pronounced. Variability in earnings
and profitability may result in changes in the level of debt
protection measurements and may require relatively high financial
leverage. Adequate alternate liquidity is maintained.
NOT PRIME--Issuers rated NOT PRIME do not fall within any of
the Prime rating categories.
MOODY'S INVESTORS SERVICE, INC. SHORT TERM LOAN RATINGS
MIG 1/VMIG 1--This designation denotes best quality. There
is present strong protection by established cash flows, superior
liquidity support or demonstrated broad based access to the market for
refinancing.
MIG 2/VMIG 2--This designation denotes high quality. Margins
of protection are ample although not so large as in the preceding
group.
MIG 3/VMIG 3--This designation denotes favorable quality.
All security elements are accounted for but there is lacking the
undeniable strength of the preceding grades. Liquidity and cash flow
protection may be narrow and market access for refinancing is likely
to be less well established.
