Information contained herein is subject to completion or amendment. A
registration statement relating to these securities has been filed with the
Securities and Exchange Commission. These securities may not be sold nor may any
offers to buy be accepted prior to the time the registration statement becomes
effective. This Prospectus shall not constitute an offer to sell or the
solicitation of an offer to buy nor shall there be any sale of these securities
in any State in which such offer, solicitation, or sale would be unlawful prior
to registration or qualification under the securities laws of any such State.
SUBJECT TO COMPLETION
PRELIMINARY PROSPECTUS
DATED FEBRUARY 4, 1998
------------------------------------------------------------------------
------------------------------------------------------------------------
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
Wachovia Growth & Income Fund Municipal Bond Fund
Wachovia Equity Index Fund Wachovia South Carolina
Wachovia Special Values Fund Municipal Bond Fund
Wachovia Emerging Markets Fund Wachovia Virginia Municipal Bond Fund
Wachovia Balanced Fund
Wachovia Fixed Income Fund
Wachovia Intermediate 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 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
March , 1998, 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 prospectus, 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 Growth & Income Fund 10
Wachovia Equity Index Fund 11
Wachovia Special Values Fund 11
Wachovia Emerging Markets Fund 11
Wachovia Balanced Fund 12
Wachovia Fixed Income Fund 12
Wachovia Intermediate Fixed Income Fund 13
Wachovia Short-Term Fixed Income Fund 13
Additional Acceptable Investments 13
- ----------------------------------------------------------
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
Wachovia Virginia Municipal Bond Fund 14
Acceptable Investments 14
State Municipal Securities 14
- ----------------------------------------------------------
PORTFOLIO INVESTMENTS AND STRATEGIES 14
Investment Considerations 14
Equity Investments 14
Securities of Foreign Issuers 15
Securities in Emerging Markets 15
Investments in Debt Obligations 16
Investments in Lower-Rated Debt Obligations 16
Municipal Security Investments 16
Investment Processes 17
Quantitative Equity Fund 17
Equity Index Fund 17
S&P 500 Index 18
Emerging Markets Fund 18
Fixed Income Fund and Short-Term
Fixed Income Fund 18
Portfolio Investments 19
Corporate Debt Obligations 19
Fixed Rate Corporate Debt Obligations 19
Floating Rate Corporate Debt Obligations 19
Convertible Securities 19
Put and Call Options 20
Stock Index Futures and Options 20
Forward Foreign Currency Exchange
Contracts 21
Index Participation Contracts 21
Mortgage-Backed Securities 21
Adjustable Rate Mortgage Securities 21
Collateralized Mortgage Obligations 22
Real Estate Mortgage Investment Conduits 22
Stripped Mortgage-Backed Securities 22
Asset-Backed Securities 22
U.S. Government Obligations 23
Demand Master Notes 23
Temporary Investments 23
Restricted and Illiquid Securities 24
Repurchase Agreements 24
Demand Features 24
When-Issued and Delayed Delivery
Transactions 24
Lending of Portfolio Securities 24
Investing in Securities of Other Investment
Companies 25
Ratings 25
Municipal Leases 25
Participation Interests 25
Variable Rate Municipal Securities 25
Municipal Bond Insurance 25
Non-Diversification 26
- ----------------------------------------------------------
INVESTMENT LIMITATIONS 26
Borrowing Money 26
Diversification 26
- ----------------------------------------------------------
TRUST INFORMATION 26
Management of the Trusts 26
Board of Trustees 26
Investment Adviser 26
Sub-Adviser 27
Advisory Fees 27
Adviser's Background 27
Distribution of Shares 29
Distribution Plan 29
Administrative Arrangements 30
Shareholder Servicing Arrangements 30
Administration of the Funds 30
Expenses of the Funds and Class A Shares
and Class B Shares 30
Brokerage Transactions 31
- ----------------------------------------------------------
NET ASSET VALUE 31
- ----------------------------------------------------------
INVESTING IN THE FUNDS 31
Share Purchases 31
Through the Trust Division of Wachovia Bank 31
Through Wachovia Investments, Inc. 31
By Mail 31
Minimum Investment Required 31
What Shares Cost 32
Class A Shares 32
Purchases of Net Asset Value 32
Reducing the Initial Sales Charge 32
Quantity Discounts and Accumulated
Purchases 32
Letter of Intent 32
Reinvestment Privilege 33
Concurrent Purchases 33
Plan Right of Accumulation 33
Class B Shares 33
Conversion Feature 33
Sales Charge Reallowance 34
Systematic Investment Program 34
Certificates and Confirmations 34
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
TABLE OF CONTENTS (CONT'D)
Subaccounting Services 34
Dividends and Capital Gains 34
- ----------------------------------------------------------
EXCHANGE PRIVILEGE 34
Exchange by Telephone 35
- ----------------------------------------------------------
REDEEMING SHARES 35
By Telephone 35
By Mail 36
Signatures 36
Systematic Withdrawal Program 36
Accounts With Low Balances 36
- ----------------------------------------------------------
SHAREHOLDER INFORMATION 36
Voting Rights 36
- ----------------------------------------------------------
EFFECT OF BANKING LAWS 37
- ----------------------------------------------------------
TAX INFORMATION 37
- ----------------------------------------------------------
THE WACHOVIA MUNICIPAL FUNDS TAX INFORMATION 38
Federal Income Tax 38
Georgia and North Carolina Taxes 38
South Carolina Taxes 38
Virginia Taxes 38
Other State and Local Taxes 38
- ----------------------------------------------------------
OTHER CLASSES OF SHARES 39
- ----------------------------------------------------------
PERFORMANCE INFORMATION 39
- ----------------------------------------------------------
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 ten professionally managed diversified portfolios
and four 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 GROWTH & INCOME FUND ("GROWTH & INCOME FUND")--seeks to provide total
return through growth of capital and current 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 INTERMEDIATE FIXED INCOME FUND ("INTERMEDIATE FIXED INCOME
FUND")--seeks current income consistent with preservation of capital;
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;
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; and
WACHOVIA VIRGINIA MUNICIPAL BOND FUND ("VIRGINIA MUNICIPAL BOND FUND")--seeks to
provide a high level of current income that is exempt from federal regular
income tax and the income tax imposed by the Commonwealth of Virginia as is
consistent with the preservation of capital.
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 BALANCED
FUND FUND FUND FUND FUND FUND
--------- --------- --------- --------- --------- ---------
<S> <C> <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% 4.50%
Maximum Sales Charge Imposed on Reinvested
Dividends (as a percentage of offering price) None None None None None None
Contingent Deferred Sales Charge (as a
percentage of original purchase price of
redemption proceeds, as applicable) None None None None None None
Redemption Fees (as a percentage of amount
redeemed, if applicable) None None None None None None
Exchange Fee None None None None None None
<CAPTION>
GROWTH &
INCOME
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 of
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 average net assets)
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
Management Fee (after waiver, if applicable) (1) 0.63% 0.63% 0.28% 0.79% 1.00% 0.54%
12b-1 Fees None None None None None None
Other Expenses (after reimbursement,
if applicable) (2) 0.26% 0.23% 0.19% 0.31% 0.54% 0.23%
Shareholder Servicing Fee--0.25%
Total Class A Shares Operating Expenses
(after waiver and reimbursement,
if applicable) (3) 1.14% 1.11% 0.72% 1.35% 1.79% 1.02%
<CAPTION>
GROWTH &
INCOME
FUND
---------
<S> <C>
Management Fee (after waiver, if applicable) (1) 0.70%
12b-1 Fees None
Other Expenses (after reimbursement,
if applicable) (2) 0.19%
Shareholder Servicing Fee--0.25%
Total Class A Shares Operating Expenses
(after waiver and reimbursement,
if applicable) (3) 1.14%
</TABLE>
SHAREHOLDER TRANSACTION EXPENSES
<TABLE>
<CAPTION>
SHORT-TERM NORTH SOUTH
FIXED FIXED GEORGIA CAROLINA CAROLINA VIRGINIA
INCOME INCOME MUNI BOND MUNI BOND MUNI BOND MUNI BOND
FUND FUND FUND FUND FUND FUND
--------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Maximum Sales Charge Imposed on
Purchases (as a percentage of
offering price) 4.50% 2.50% 4.50% 4.50% 4.50% 4.50%
Maximum Sales Charge Imposed on
Reinvested Dividends (as
percentage of offering price) None 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 None
Redemption Fees (as a percentage
of amount redeemed, if applicable) None None None None None None
Exchange Fee None None None None None None
<CAPTION>
INTERMEDIATE
FIXED INCOME
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
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 average net assets)
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
Management Fee (after waiver,
if applicable) (1) 0.49% 0.36% 0.00% 0.31% 0.27% 0.45%
12b-1 Fees None None None None None None
Other Expenses (after
reimbursement, if applicable)(2) 0.24% 0.26% 0.89% 0.51% 0.29% 0.25%
Shareholder Servicing
Fee--0.25%
Total Class A Shares Operating
Expenses (after waiver and
reimbursement, if applicable) (3) 0.98% 0.87% 1.14% 1.07% 0.81% 0.95%
<CAPTION>
INTERMEDIATE
FIXED INCOME
FUND
---------
<S> <C>
Management Fee (after waiver,
if applicable) (1) 0.48%
12b-1 Fees None
Other Expenses (after
reimbursement, if applicable)(2) 0.26%
Shareholder Servicing Fee--0.25%
Total Class A Shares Operating
Expenses (after waiver and
reimbursement, if applicable) (3) 0.99%
</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 and INTERMEDIATE FIXED INCOME FUND, 0.70% for the
EQUITY FUND, QUANTITATIVE EQUITY FUND, BALANCED FUND, and GROWTH & INCOME
FUND, 0.75% for the GEORGIA MUNICIPAL BOND FUND, NORTH CAROLINA MUNICIPAL
BOND FUND, SOUTH CAROLINA MUNICIPAL BOND FUND, and VIRGINIA 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 would have
been 1.50% for the GEORGIA MUNICIPAL BOND FUND, absent the reimbursement by
the adviser.
(3) The Annual Class A Shares Operating Expenses would have been 1.21% for the
EQUITY FUND, 1.18% for the QUANTITATIVE EQUITY FUND, 0.74% for the EQUITY
INDEX FUND, 1.36% for the SPECIAL VALUES FUND, 1.18% for the BALANCED FUND,
1.09% for the FIXED INCOME FUND, 1.06% for the SHORT-TERM FIXED INCOME
FUND, 2.25% for the GEORGIA MUNICIPAL BOND FUND, 1.51% for the NORTH
CAROLINA MUNICIPAL BOND FUND, and 1.29% for the SOUTH CAROLINA MUNICIPAL
BOND FUND, absent the voluntary waivers/reimbursement described above in
Notes 1 and 2. The Annual Class A Operating Expenses are expected to be
1.25% for the VIRGINIA MUNICIPAL BOND FUND and 1.11% for the INTERMEDIATE
FIXED INCOME FUND absent the voluntary waiver described above in Note 1.
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 "THE WACHOVIA FUNDS INFORMATION", "THE WACHOVIA MUNICIPAL FUNDS 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 load. As noted in the table above, the Fund charges no sales
loads or redemption fees.
<TABLE>
<CAPTION>
QUANTITATIVE EQUITY SPECIAL EMERGING GROWTH &
EQUITY EQUITY INDEX VALUES MARKETS BALANCED INCOME
FUND FUND FUND FUND FUND FUND FUND
<S> <C> <C> <C> <C> <C> <C> <C>
1 Year $ 56 $ 56 $ 52 $ 58 $ 62 $ 55 $ 56
3 Years $ 80 $ 79 $ 67 $ 86 $ 99 $ 76 $ 80
5 Years $ 105 $ 103 $ 83 $ 116 $ 138 $ 99 N/A
10 Years $ 177 $ 174 $ 130 $ 200 $ 246 $ 164 N/A
<CAPTION>
FIXED SHORT-TERM GEORGIA NORTH CAROLINA SOUTH CAROLINA VIRGINIA
INCOME FIXED INCOME MUNI BOND MUNI BOND MUNI BOND MUNI BOND
FUND FUND FUND FUND FUND FUND
<S> <C> <C> <C> <C> <C> <C>
1 Year $ 55 $ 34 $ 56 $ 55 $ 53 $ 54
3 Years $ 75 $ 52 $ 80 $ 78 $ 70 $ 74
5 Years $ 97 $ 72 $ 105 $ 101 $ 88 N/A
10 Years $ 160 $ 130 $ 177 $ 170 $ 141 N/A
<CAPTION>
INTERMEDIATE
FIXED INCOME
FUND
<S> <C>
1 Year $ 55
3 Years $ 75
5 Years N/A
10 Years N/A
</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 and 0% after the seventh
year. year.
Redemption Fees (as a percentage of amount redeemed, if
applicable) None None
Exchange Fee None None
<CAPTION>
ANNUAL CLASS B SHARES OPERATING EXPENSES
(As a percentage of average net assets)
<S> <C> <C>
Management Fee (after waiver, if applicable) (2) 0.64% 0.63%
12b-1 Fees 0.75% 0.75%
Other Expenses 0.51% 0.47%
Shareholder Servicing Fee--0.25%
Total Class B Shares Operating Expenses
(after waiver, if applicable) 1.90% 1.85%
<CAPTION>
SHAREHOLDER TRANSACTION EXPENSES
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 and 0% after the seventh
year. year.
Redemption Fees (as a percentage of amount redeemed, if
applicable) None None
Exchange Fee None None
<CAPTION>
ANNUAL CLASS B SHARES OPERATING EXPENSES
(As a percentage of average net assets)
<S> <C> <C>
Management Fee (after waiver, if applicable) (2) 0.54% 0.49%
12b-1 Fees 0.75% 0.75%
Other Expenses 0.49% 0.51%
Shareholder Servicing Fee--0.25%
Total Class B Shares Operating Expenses
(after waiver, if applicable) 1.78% 1.75%
</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 a shareholder, 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 Y Shares Operating Expenses would have been 1.21% for the
EQUITY FUND, 1.18% for the QUANTITATIVE EQUITY FUND, 1.94% for the BALANCED
FUND, and 1.86% for the FIXED INCOME FUND, absent the voluntary waiver
described above in Note 2. The Annual Class B Operating Expenses are
expected to be 1.88% for the EQUITY FUND, 1.87% for the QUANTITATIVE EQUITY
FUND, 1.76% for the BALANCED FUND, and 1.74% for the FIXED INCOME FUND.
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 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:
<TABLE>
<CAPTION>
QUANTITATIVE
EQUITY EQUITY BALANCED FIXED INCOME
FUND FUND FUND FUND
<S> <C> <C> <C> <C>
1 Year $ 71 $ 70 $ 70 $ 69
3 Years $ 93 $ 91 $ 89 $ 88
5 Years $ 126 $ 123 $ 120 $ 118
10 Years $ 222 $ 217 $ 209 $ 206
</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 $ 58 $ 56 $ 55
5 Years $ 103 $ 100 $ 96 $ 95
10 Years $ 222 $ 217 $ 209 $ 206
</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 SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
<TABLE>
<CAPTION>
Net Realized and Distributions from
Unrealized Gain/ Net Realized Gain
(Loss) on on Investment
Net Investments, Transactions,
Net Asset Investment Futures Distributions Futures
Value, Income/ Contracts, and Total from from Net Contracts and
Period Ended beginning (Operating Foreign Currency Investment Investment Foreign Currency Total
November 30, of period Loss) Transactions Operations Income Transactions Distributions
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
WACHOVIA EQUITY FUND
1993(a) $ 10.00 0.12 0.25 0.37 (0.09) -- (0.09)
1994 $ 10.28 0.20 0.12 0.32 (0.20) (0.08) (0.28)
1995 $ 10.32 0.23 2.64 2.87 (0.25) (0.23) (0.48)
1996 $ 12.71 0.22(i) 2.83 3.05 (0.22) (0.73) (0.95)
1997 $ 14.81 0.14(i) 2.43 2.57 (0.13) (1.86) (1.99)
WACHOVIA QUANTITATIVE EQUITY FUND
1994(b) $ 10.00 0.12 (0.43) (0.31) (0.09) -- (0.09)
1995 $ 9.60 0.22 3.51 3.73 (0.22) -- (0.22)
1996 $ 13.11 0.24(i) 2.77 3.01 (0.21) (0.24) (0.45)
1997 $ 15.67 0.18(i) 4.14 4.32 (0.20) (0.79) (0.99)
WACHOVIA EQUITY INDEX FUND
1993(a) $ 10.00 0.15 0.43 0.58 (0.11) -- (0.11)
1994 $ 10.47 0.25 (0.19) 0.06 (0.24) (0.02) (0.26)
1995 $ 10.27 0.28 3.37 3.65 (0.27) (0.03) (0.30)
1996 $ 13.62 0.32(i) 3.13 3.45 (0.31) (0.78) (1.09)
1997 $ 15.98 0.25(i) 3.85 4.10 (0.28) (0.91) (1.19)
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) (0.33)
1995 $ 9.75 0.09 2.42 2.51 (0.02) (0.06) (0.08)
1996 $ 12.18 0.35 4.13 4.48 (0.08) (0.91) (0.99)
1997 $ 15.67 0.13(i) 4.53 4.66 (0.08) (1.61) (1.69)
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) -- (0.03)
1997 $ 11.67 0.03(i) (0.47) (0.44) (0.11) -- (0.11)
WACHOVIA BALANCED FUND
1993(a) $ 10.00 0.19 0.29 0.48 (0.15) -- (0.15)
1994 $ 10.33 0.35 (0.38) (0.03) (0.33) (0.04) (0.37)
1995 $ 9.93 0.40 2.13 2.53 (0.38) (0.16) (0.54)
1996 $ 11.92 0.38(i) 1.72 2.10 (0.38) (0.34) (0.72)
1997 $ 13.30 0.34(i) 1.40 1.74 (0.34) (1.44) (1.78)
WACHOVIA FIXED INCOME FUND
1993(a) $ 10.00 0.31 (0.01) 0.30 (0.30) -- (0.30)
1994 $ 10.00 0.56 (0.98) (0.42) (0.55) (0.06) (0.61)
1995 $ 8.97 0.58 0.92 1.50 (0.57) -- (0.57)
1996 $ 9.90 0.61(i) (0.09) 0.52 (0.59) -- (0.59)
1997 $ 9.83 0.54(i) 0.04 0.58 (0.56) -- (0.56)
WACHOVIA SHORT-TERM FIXED INCOME FUND
1993(a) $ 10.00 0.27 (0.10) 0.17 (0.26) -- (0.26)
1994 $ 9.91 0.45 (0.33) 0.12 (0.45) -- (0.45)
1995 $ 9.58 0.59 0.24 0.83 (0.52) -- (0.52)
1996 $ 9.89 0.56(i) (0.06) 0.50 (0.60) -- (0.60)
1997 $ 9.79 0.50(i) (0.01) 0.49 (0.51) -- (0.51)
WACHOVIA GEORGIA MUNICIPAL BOND FUND
1995(c) $ 10.00 0.41 0.96 1.37 (0.41) -- (0.41)
1996 $ 10.96 0.47 0.05 0.52 (0.47) (0.01) (0.48)
1997 $ 11.00 0.44 0.13 0.57 (0.44) (0.02) (0.46)
WACHOVIA NORTH CAROLINA MUNICIPAL BOND FUND
1995(c) $ 10.00 0.43 0.99 1.42 (0.43) -- (0.43)
1996 $ 10.99 0.45 0.09 0.54 (0.45) (0.05) (0.50)
1997 $ 11.03 0.43 0.14 0.57 (0.43) (0.02) (0.45)
WACHOVIA SOUTH CAROLINA MUNICIPAL BOND FUND (D)
9/30/91(e) $ 10.00 0.43 0.17 0.60 (0.43) -- (0.43)
9/30/92 $ 10.17 0.60 0.36 0.96 (0.60) -- (0.60)
9/30/93 $ 10.53 0.59 0.74 1.33 (0.59) -- (0.59)
11/30/93(f) $ 11.27 0.10 (0.15) (0.05) (0.10) -- (0.10)
11/30/94 $ 11.12 0.56 (1.04) (0.48) (0.56) (0.03) (0.59)
11/30/95 $ 10.05 0.56 1.10 1.66 (0.56) (0.10) (0.66)
11/30/96 $ 11.05 0.55 0.03 0.58 (0.55) (0.03) (0.58)
11/30/97 $ 11.05 0.53 0.11 0.64 (0.52) (0.05) (0.57)
</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 fiscal 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) Represents total commissions paid on portfolio securities divided by total
portfolio shares purchased or sold on which commissions were charged.
(See Notes which are an integral part of the Financial Statements)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
THE WACHOVIA FUNDS AND THE WACHOVIA MUNICIPAL FUNDS
FINANCIAL HIGHLIGHTS--CLASS A SHARES--CONTINUED
(FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
<TABLE>
<CAPTION>
Ratios to Average Net Assets Average
Net Asset Net Net Assets, Commission
Period Ended Value, end Total Investment Expense Waiver/ end of period Rate Portfolio
November 30, of period Return(g) Expenses Income Reimbursement(h) (000 omitted) Paid(j) Turnover Rate
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
WACHOVIA EQUITY FUND
1993(a) $ 10.28 3.68% 0.81%* 2.18%* 0.32%* $ 61,997 -- 50%
1994 $ 10.32 3.10% 0.87% 1.98% 0.16% $ 87,022 -- 35%
1995 $ 12.71 28.74% 0.90% 1.99% 0.07% $ 130,150 -- 65%
1996 $ 14.81 25.56% 0.90% 1.62% 0.15% $ 20,774 $ 0.0652 64%
1997 $ 15.39 20.22% 1.14% 0.95% 0.07% $ 39,494 $ 0.0434 124%
WACHOVIA QUANTITATIVE EQUITY FUND
1994(b) $ 9.60 (3.08%) 0.90%* 1.83%* 0.10%* $ 91,979 -- 64%
1995 $ 13.11 39.33% 0.87% 1.93% 0.10% $ 121,895 -- 63%
1996 $ 15.67 23.74% 0.87% 1.70% 0.15% $ 15,742 $ 0.0532 44%
1997 $ 19.00 29.38% 1.11% 1.09% 0.07% $ 35,413 $ 0.0493 74%
WACHOVIA EQUITY INDEX FUND
1993(a) $ 10.47 5.80% 0.43%* 2.54%* 0.12%* $ 149,266 -- 9%
1994 $ 10.27 0.56% 0.46% 2.44% 0.08% $ 183,852 -- 9%
1995 $ 13.62 36.15% 0.48% 2.39% 0.05% $ 186,841 -- 60%
1996 $ 15.98 27.19% 0.48% 2.23% 0.13% $ 18,154 $ 0.0137 12%
1997 $ 18.89 27.55% 0.72% 1.46% 0.02% $ 50,917 $ 0.0247 4%
WACHOVIA SPECIAL VALUES FUND
1993(a) $ 10.24 2.40% 1.25%* (0.03%)* 1.79%* $ 12,072 -- 68%
1994 $ 9.75 (1.61%) 1.13% 0.63% 1.09% $ 17,431 -- 62%
1995 $ 12.18 25.91% 1.29% 0.80% 0.58% $ 24,093 -- 57%
1996 $ 15.67 39.78% 1.21% 0.47% 0.29% $ 6,642 $ 0.0650 38%
1997 $ 18.64 33.08% 1.35% 0.74% 0.01% $ 37,766 $ 0.0534 46%
WACHOVIA EMERGING MARKETS FUND
1995(c) $ 10.41 4.10% 1.80%* 0.85%* 0.28%* $ 71,276 -- 17%
1996 $ 11.67 12.45% 1.69% 0.73% 0.09% $ 5,488 $ 0.0009 30%
1997 $ 11.12 (3.82%) 1.79% 0.26% 0.00% $ 7,996 $ 0.0011 60%
WACHOVIA BALANCED FUND
1993(a) $ 10.33 4.89% 0.75%* 3.30%* 0.19%* $ 166,271 -- 60%
1994 $ 9.93 (0.39%) 0.75% 3.46% 0.17% $ 194,430 -- 74%
1995 $ 11.92 26.32% 0.76% 3.58% 0.16% $ 207,421 -- 102%
1996 $ 13.30 18.55% 0.76% 3.05% 0.24% $ 18,619 $ 0.0545 99%
1997 $ 13.26 15.17% 1.02% 2.77% 0.16% $ 50,968 $ 0.0732 143%
WACHOVIA FIXED INCOME FUND
1993(a) $ 10.00 3.02% 0.68%* 5.44%* 0.19%* $ 140,325 -- 149%
1994 $ 8.97 (4.30%) 0.71% 5.90% 0.13% $ 148,751 -- 148%
1995 $ 9.90 17.20% 0.74% 6.07% 0.10% $ 169,846 -- 155%
1996 $ 9.83 5.51% 0.74% 6.05% 0.18% $ 4,853 -- 181%
1997 $ 9.85 6.14% 0.98% 5.65% 0.11% $ 10,039 -- 174%
WACHOVIA SHORT-TERM FIXED INCOME FUND
1993(a) $ 9.91 1.69% 0.58%* 4.78%* 0.22%* $ 154,459 -- 73%
1994 $ 9.58 1.27% 0.60% 4.62% 0.18% $ 148,326 -- 151%
1995 $ 9.89 8.82% 0.63% 5.83% 0.18% $ 124,720 -- 147%
1996 $ 9.79 5.29% 0.63% 5.50% 0.27% $ 1,675 -- 145%
1997 $ 9.77 5.10% 0.87% 5.49% 0.19% $ 7,233 -- 215%
WACHOVIA GEORGIA MUNICIPAL BOND FUND
1995(c) $ 10.96 13.93% 0.92%* 4.30%* 1.88%* $ 10,220 -- 14%
1996 $ 11.00 4.97% 0.89% 4.40% 1.61% $ 7,531 -- 14%
1997 $ 11.11 5.41% 1.14% 4.03% 1.11% $ 6,531 -- 25%
WACHOVIA NORTH CAROLINA MUNICIPAL BOND FUND
1995(c) $ 10.99 14.40% 0.85%* 4.40%* 1.19%* $ 18,679 -- 19%
1996 $ 11.03 5.17% 0.84% 4.24% 0.77% $ 13,752 -- 7%
1997 $ 11.15 5.36% 1.07% 3.91% 0.44% $ 11,563 -- 17%
WACHOVIA SOUTH CAROLINA MUNICIPAL BOND FUND (D)
9/30/91(e) $ 10.17 6.32% 0.82%* 5.73%* 0.86%* $ 21,438 -- 0%
9/30/92 $ 10.53 9.73% 0.61% 5.83% 0.73% $ 63,139 -- 0%
9/30/93 $ 11.27 13.03% 0.55% 5.46% 0.62% $ 82,674 -- 4%
11/30/93(f) $ 11.12 (0.48%) 0.55%* 5.11%* 0.60%* $ 83,371 -- 2%
11/30/94 $ 10.05 (4.52%) 0.60% 5.22% 0.59% $ 75,995 -- 23%
11/30/95 $ 11.05 16.97% 0.58% 5.23% 0.55% $ 93,725 -- 15%
11/30/96 $ 11.05 5.54% 0.57% 5.10% 0.59% $ 65,981 -- 20%
11/30/97 $ 11.12 6.01% 0.81% 4.79% 0.48% $ 64,696 -- 12%
</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 fiscal 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) Represents total commissions paid on portfolio securities divided by total
portfolio shares purchased or sold on which commissions were charged.
(See Notes which are an integral part of the Financial Statements)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
THE WACHOVIA FUNDS AND THE WACHOVIA MUNICIPAL FUNDS
FINANCIAL HIGHLIGHTS--CLASS B SHARES
(FOR A SHARE OUTSTANDING THROUGHOUT THE PERIOD)
<TABLE>
<CAPTION>
Distributions
Net Realized and from Net Realized
Unrealized Gain/ Gain on
(Loss) on Investment
Investments, Transactions,
Net Asset Futures Distributions Futures Contracts
Value, Net Contracts and Total From from Net and Foreign
Period Ended beginning Investment Foreign Currency Investment Investment Currency Total
November 30, of period Income Transactions Operations Income Transactions Distributions
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
WACHOVIA EQUITY FUND
1996(a) $ 12.43 0.02 2.37 2.39 (0.03) -- (0.03)
1997 $ 14.79 0.04 2.42 2.46 (0.04) (1.86) (1.90)
WACHOVIA QUANTITATIVE EQUITY FUND
1996(a) $ 13.09 0.04 2.56 2.60 (0.04) -- (0.04)
1997 $ 15.65 0.08 4.10 4.18 (0.09) (0.79) (0.88)
WACHOVIA BALANCED FUND
1996(a) $ 11.68 0.09 1.59 1.68 (0.07) -- (0.07)
1997 $ 13.29 0.26 1.38 1.64 (0.26) (1.44) (1.70)
WACHOVIA FIXED INCOME FUND
1996(a) $ 9.45 0.15 0.40 0.55 (0.17) -- (0.17)
1997 $ 9.83 0.48 0.01 0.49 (0.48) -- (0.48)
</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) Represents total commissions paid on portfolio securities divided by total
portfolio shares purchased or sold on which commissions were charged.
(See Notes which are an integral part of the Financial Statements)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
THE WACHOVIA FUNDS AND THE WACHOVIA MUNICIPAL FUNDS
FINANCIAL HIGHLIGHTS--CLASS B SHARES--CONTINUED
(FOR A SHARE OUTSTANDING THROUGHOUT THE PERIOD)
<TABLE>
<CAPTION>
Ratios to Average Net Assets Average
Net Asset Net Expense Net Assets, Commission
Period Ended Value, Total Investment Waiver/ end of period Rate
November 30, end of period Return(b) Expenses Income Reimbursement(c) (000 omitted) Paid(d)
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
WACHOVIA EQUITY FUND
1996(a) $ 14.79 19.25% 1.90%* 0.02%* 0.20%* $ 976 $ 0.0652
1997 $ 15.35 19.27% 1.90% 0.18% 0.06% $ 3,448 $ 0.0434
WACHOVIA QUANTITATIVE EQUITY FUND
1996(a) $ 15.65 19.90% 1.87%* 0.46%* 0.11%* $ 1,414 $ 0.0532
1997 $ 18.95 28.33% 1.85% 0.31% 0.07% $ 6,564 $ 0.0493
WACHOVIA BALANCED FUND
1996(a) $ 13.29 14.47% 1.76%* 1.93%* 0.16%* $ 1,821 $ 0.0545
1997 $ 13.23 14.19% 1.78% 2.01% 0.16% $ 5,916 $ 0.0732
WACHOVIA FIXED INCOME FUND
1996(a) $ 9.83 5.83% 1.74%* 5.20%* 0.13%* $ 113 --
1997 $ 9.84 5.21% 1.75% 4.89% 0.11% $ 140 --
<CAPTION>
Portfolio
Period Ended Turnover
November 30, Rate
<S> <C>
- ------------
WACHOVIA EQUITY FUND
1996(a) 64%
1997 124%
WACHOVIA QUANTITATIVE EQUITY FUND
1996(a) 44%
1997 74%
WACHOVIA BALANCED FUND
1996(a) 99%
1997 143%
WACHOVIA FIXED INCOME FUND
1996(a) 181%
1997 174%
</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) Represents total commissions paid on portfolio securities divided by total
portfolio shares purchased or sold on which commissions were charged.
(See Notes which are an integral part of the Financial Statements)
- ---------------------------------------------------------
- ---------------------------------------------------------
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 Board of Trustees ("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 Depository 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 ("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 GROWTH & INCOME FUND
The investment objective of the GROWTH & INCOME FUND is to provide total return
through growth of capital and current income. The Fund pursues its investment
objective by investing primarily in a professionally-managed and diversified
portfolio of equity securities. Under normal market conditions, the Fund intends
to invest at least 65% of its total assets in equity securities. The Fund's
investment adviser selects securities based on a number of factors, including
return on equity, price to earnings ratio, dividend paying ability, and
liquidity. The securities in which the Fund invests may be expected to produce
some income, but income alone is not the primary criterion for the securities'
selection by the Fund's investment adviser.
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, warrants and rights to purchase common stocks;
investments in ADRs of foreign companies traded on the New York Stock Exchange
or in the over-the-counter markets, and investments in European Depository
Receipts ("EDRs," sometimes also referred to as Continental Depository
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
domestic issues of corporate debt obligations rated A or better by Moody's or
S&P.
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 Fund's 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 EDRs and Global Depository
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;
with respect to 5% of the Fund's total assets, corporate debt obligations,
including demand master notes rated at the time of purchase Baa by Moody's or
BBB by S&P or, if unrated, of comparable quality as determined by the Fund's
investment adviser;
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 four 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 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;
with respect to 5% of the Fund's total assets, corporate debt obligations,
including demand master notes rated at the time of purchase Baa by Moody's or
BBB by S&P or, if unrated, of comparable quality as determined by the Fund's
investment adviser;
securities of foreign issuers;
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 INTERMEDIATE FIXED INCOME FUND
The investment objective of the INTERMEDIATE FIXED INCOME FUND is to seek
current income consistent with preservation of capital. The Fund pursues its
investment objective by investing primarily in a diversified portfolio of fixed
income securities that, at the time of purchase, are rated in the top four
investment categories by an NRSRO or, if unrated, are of comparable quality to
securities with such ratings. The Fund will maintain an average dollar-weighted
maturity of between 3 to 10 years. The Fund will invest, under normal
circumstances, at least 65% of the value of its total assets in fixed income
securities with stated maturities or estimated average lives of 10 years or
less.
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;
with respect to 5% of the Fund's total assets, corporate debt obligations,
including demand master notes rated at the time of purchase Baa by Moody's or
BBB 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.
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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").
WACHOVIA VIRGINIA MUNICIPAL BOND FUND
The investment objective of the VIRGINIA MUNICIPAL BOND FUND is to provide as
high a level of current
income that is exempt from federal regular income tax and the income tax imposed
by the Commonwealth of Virginia as is consistent with the preservation of
capital. 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 Commonwealth of Virginia ("Virginia
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. In addition to the portfolio investments identified 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, demand master
notes and engage in when-issued and delayed delivery transactions.
ACCEPTABLE INVESTMENTS
The Funds invest primarily in Georgia Municipal Securities, North Carolina
Municipal Securities, South Carolina Municipal Securities, and Virginia
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, and of the Commonwealth
of Virginia, 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, and the
Commonwealth of Virginia, 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 Funds 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;
with respect to 5% of total Fund assets, rated Baa by Moody's or BBB by 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).
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PORTFOLIO INVESTMENTS
AND STRATEGIES
INVESTMENT CONSIDERATIONS
EQUITY INVESTMENTS. As with other mutual funds that invest in equity securities,
the EQUITY FUND, QUANTITATIVE EQUITY FUND, GROWTH & INCOME 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, GROWTH
& INCOME FUND, SPECIAL VALUES FUND, EMERGING MARKETS FUND, BALANCED FUND, FIXED
INCOME FUND, INTERMEDIATE FIXED INCOME FUND and SHORT-TERM FIXED INCOME 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 the 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." Each Fund 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 or the
SPECIAL VALUES 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 commonwealth) or its
municipalities could impact a Fund's portfolio. A municipal bond fund's
concentration in securities issued by a specific state (or commonwealth) 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 (or
commonwealth'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, South Carolina, or Virginia 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 commonwealth) 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 permissible 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 FUND AND SHORT-TERM FIXED INCOME FUND. 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 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, 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 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 a 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,
GROWTH & INCOME 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.
FUTURES CONTRACTS ON FOREIGN GOVERNMENT DEBT OBLIGATIONS. The BALANCED FUND,
FIXED INCOME FUND, INTERMEDIATE FIXED INCOME FUND and SHORT-TERM FIXED INCOME
FUND may invest in futures contracts on foreign government debt obligations in
order to establish exposure to a particular foreign government and/or currency
in a fast and cost-effective manner. These transactions will be entered into
primarily for speculative purposes. These types of futures contracts implicate
the same risks presented by investing in futures contracts generally, as well as
currency risk and the risks involved in investing in foreign issuers. Please
refer to the Statement of Additional Information for a further discussion of
these risk factors.
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, INTERMEDIATE 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 may 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. Each of the FIXED INCOME FUND, the SHORT-TERM FIXED INCOME FUND and
the INTERMEDIATE FIXED INCOME FUND may also invest up to 5% of its total assets
in CMOs which are rated Aa, A, or Baa by Moody's or AA, A, or BBB by S&P.
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, INTERMEDIATE 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, a Fund's
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, INTERMEDIATED 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. Each of the FIXED
INCOME FUND, the SHORT-TERM FIXED INCOME FUND and the INTERMEDIATE FIXED INCOME
FUND may invest up to 5% of its total assets in asset-backed securities rated
Baa by Moody's or BBB by S&P. 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 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), each of the Funds
(except EQUITY INDEX 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;
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;
obligations issued or guaranteed by the U.S. government, its agencies, or
instrumentalities; 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).
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.
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, North Carolina, or Virginia 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 the 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. A Fund's investment adviser monitors the
pricing, quality, and liquidity of the variable rate municipal securities,
including participation interests held by the 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, SOUTH
CAROLINA MUNICIPAL BOND FUND, and VIRGINIA 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 that 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 that are insured. The VIRGINIA MUNICIPAL BOND FUND'S investment
adviser anticipates that between 30% and 60% of the Fund's net assets will be
invested in municipal securities that 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 four 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 the 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 of
1986, as amended (the "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.
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INVESTMENT LIMITATIONS
BORROWING MONEY
The EQUITY FUND, QUANTITATIVE EQUITY FUND, GROWTH & INCOME FUND, EQUITY INDEX
FUND, SPECIAL VALUES FUND, EMERGING MARKETS FUND, BALANCED FUND, FIXED INCOME
FUND, INTERMEDIATE 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, SOUTH CAROLINA MUNICIPAL BOND FUND, and VIRGINIA
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, each of the EQUITY FUND,
QUANTITATIVE EQUITY FUND, GROWTH & INCOME FUND, EQUITY INDEX FUND, SPECIAL
VALUES FUND, BALANCED FUND, FIXED INCOME FUND, INTERMEDIATE 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.
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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 Adviser and Twin Capital Management, Inc. ("Twin Capital"
or the "Sub-Adviser"), Twin Capital furnishes certain investment advisory
services to the Adviser, 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 the Adviser, 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 the Adviser. Twin Capital provides investment counsel to
both individuals and institutions, including banks, thrift institutions, and
pension and profit-sharing plans. As of December 31, 1997, Twin Capital
furnished services, substantially similar to the services it provides to the
Adviser, to other accounts with assets in excess of $1 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 and INTERMEDIATE FIXED INCOME FUND; 0.70 of 1% of EQUITY FUND, QUANTITATIVE
EQUITY FUND, GROWTH & INCOME FUND, and BALANCED FUND; 0.74 of 1% of VIRGINIA
MUNICIPAL BOND 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.
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 $33 billion in
managed assets as of December 31, 1997. 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.
Paul P. Baran is a Chartered Financial Analyst and is a Senior Vice President of
Wachovia Asset Management. He is the portfolio manager of the GROWTH & INCOME
FUND. Mr. Baran joined Wachovia Bank, N.A. in 1997. From 1987 to 1997, he had
served as the chief investment officer of the investment management department
of Central Fidelity National Bank ("CFNB"), and was a Senior Vice President of
CFNB. While at CFNB, Mr. Baran served as the portfolio manager of the
MarketWatch Equity Fund, which was subsequently reorganized as the Growth &
Income Fund. Prior to joining CFNB, Mr. Baran was with BancOklahoma and National
Bank of Detroit. Mr. Baran received a bachelors degree from Ohio Wesleyan and an
MBA from Wayne State University.
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 bachelors 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 a portfolio manager of the BALANCED FUND, the FIXED INCOME FUND and
the INTERMEDIATE FIXED INCOME FUND. Mr. Gibbs is a 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.
Roger L. Glenski is a portfolio manager of the SPECIAL VALUES FUND. Mr. Glenski
joined Wachovia Bank, N.A. in 1996, specializing in the valuation of closely-
held businesses and small companies. Prior to joining Wachovia Bank, N.A., Mr.
Glenski was employed by the accounting firm of Deloitte & Touche LLP in Chicago,
Illinois. Mr. Glenski received a bachelors degree from the University of
Missouri-Kansas City and an MBA from the University of Chicago. He is a
Certified Public Accountant.
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 bachelors 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 bachelors 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 a portfolio manager of the BALANCED FUND, the FIXED INCOME
FUND and the INTERMEDIATE FIXED INCOME FUND. 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 bachelors degree in economics from Virginia
Polytechnical Institute and State University and an MBA from the University of
North Carolina at Greensboro. 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 bachelors and masters 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 an 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.
Wayne F. Morgan is a portfolio manager of the BALANCED FUND, the FIXED INCOME
FUND and the INTERMEDIATE FIXED INCOME FUND. Mr. Morgan is a Senior Vice
President of Wachovia Asset Management. Mr. Morgan joined Wachovia Bank, N.A. in
June, 1997 as a senior fixed income portfolio manager. Prior to joining Wachovia
Bank, N.A., Mr. Morgan served as the Director of Investments at the University
of North Carolina at Chapel Hill, where he oversaw the management of the
University's endowment fund. Mr. Morgan received both a bachelors degree and an
MBA from the University of North Carolina at Chapel Hill. Mr. Morgan is a
Chartered Financial Analyst.
J. Joseph Muster is a Vice President and a Manager of Money Market and Municipal
Investments in the
Fixed Income Section of Wachovia Asset Management. He is the portfolio manager
of THE WACHOVIA MUNICIPAL FUNDS (with the exception of the VIRGINIA MUNICIPAL
BOND FUND). Mr. Muster joined Wachovia Bank, N.A. in 1992 as a credit analyst.
Mr. Muster is a graduate of the University of Georgia and received an MBA from
Duke University.
Harold (Rick) Nelson III is a Senior Vice President and fixed income portfolio
manager of Wachovia Asset Management in Atlanta. Mr. Nelson joined Wachovia
Bank, N.A. in June, 1985 as a fixed income portfolio manager. He became a
portfolio manager of the BALANCED FUND in May, 1996. Mr. Nelson is also a
portfolio manager of the FIXED INCOME FUND and the INTERMEDIATE FIXED INCOME
FUND. He received a bachelors of science degree in management from St. Francis
College and an MBA in Finance from Mercer University in 1990.
Robert E. Pike is a Chartered Financial Analyst and a Senior Vice President of
Wachovia Asset Management. Mr. Pike joined Wachovia Bank, N.A. in 1985 as a bond
sales associate and assumed his present position in June, 1989. He is a
portfolio manager of the BALANCED FUND, the FIXED INCOME FUND and the
INTERMEDIATE 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 bachelors degree in economics. Mr. Sadler is a Chartered
Financial Analyst.
Michael G. Sebesta is a portfolio manager of the BALANCED FUND, the FIXED INCOME
FUND, the INTERMEDIATE FIXED INCOME FUND and the VIRGINIA MUNICIPAL BOND FUND.
He is a Vice President and Fixed Income Portfolio Manager for Wachovia Asset
Management. Mr. Sebesta joined Wachovia Bank, N.A. in Wachovia's Columbia, South
Carolina Funds Management area as an assistant vice president/portfolio manager
in July, 1989. He became a mortgage securities trader for the Bond and Money
Market Group in February, 1992 and was elected Vice President in 1993. In June,
1995 he became the investment portfolio manager for the Wachovia Bank Funds
Management Group and joined Wachovia Asset Management as a fixed income
portfolio manager in July, 1997. He has a bachelors degree in economics from
Wake Forest University.
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
bachelors degree in mathematical economics, and of the University of Rochester
with a masters 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, the EQUITY FUND, and
the QUANTITATIVE EQUITY FUND. He joined Wachovia Bank, N.A. in 1976 as an
employee benefit portfolio manager. He was elected Senior Vice President in
1990. Mr. Waterfill received a bachelors 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 Quantitative 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 the 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 Plan 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
by 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 Services Company, Pittsburgh, Pennsylvania, a subsidiary of Federated
Investors, through its various subsidiaries, provides the Funds with the
administrative personnel and services, portfolio recordkeeping and transfer
agency services necessary to operate the Funds. Such services include legal,
accounting and other administrative services. Federated Services Company
provides these at an annual rate, computed and payable daily, as specified
below:
<TABLE>
<CAPTION>
AVERAGE AGGREGATE DAILY NET
ASSETS OF THE WACHOVIA FUNDS
MAXIMUM (EXCLUDING WACHOVIA PRIME
ADMINISTRATIVE CASH MANAGEMENT FUND) AND OF
FEE THE WACHOVIA MUNICIPAL FUNDS
<S> <C>
0.10 of 1% on the first $3.5 billion
on assets in excess of $3.5
0.06 of 1% billion
</TABLE>
Federated Services Company 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 a 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 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
$750,000 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 "Retirement 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 Retirement Plan ("Eligible Wachovia Funds," and together,
the "Eligible Funds") and purchases made by companies participating in the
Retirement 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 tables 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 Retirement 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 Retirement
Plan with Fund purchases made outside the Retirement 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 offered only by the
Equity Fund, the Quantitative Equity Fund, the Balanced Fund and the Fixed
Income Fund.
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 account 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 MUNICIPAL 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 (the
"Transfer Agent") maintains a share account for each shareholder of record.
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 GROWTH & INCOME 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, the INTERMEDIATE
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 the 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.
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- ---------------------------------------------------------
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 a 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 Retirement
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 Retirement 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).
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- ---------------------------------------------------------
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 the
shareholder's 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.
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- ---------------------------------------------------------
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.
The GROWTH & INCOME FUND, the INTERMEDIATE FIXED INCOME FUND and the VIRGINIA
MUNICIPAL BOND FUND are newly-organized portfolios that were formed to continue
the operations of the MarketWatch Equity Fund (the "Prior Equity Fund"), the
MarketWatch Intermediate Fixed Income Fund (the "Prior Income Fund") and the
MarketWatch Virginia Municipal Bond Fund (the "Prior Virginia Fund") series,
respectively. The Prior Equity Fund, the Prior Income Fund and the Prior
Virginia Fund were series of another investment company. Pursuant to a Plan of
Reorganization, the Prior Equity Fund transferred all of its assets to the
GROWTH & INCOME FUND in exchange for shares of the GROWTH & INCOME FUND.
Similarly, pursuant to a Plan of Reorganization, the Prior Income Fund
transferred all of its assets to the INTERMEDIATE FIXED INCOME FUND in exchange
for shares of the INTERMEDIATED FIXED INCOME FUND. Also, pursuant to a Plan of
Reorganization, the Prior Virginia Fund transferred all of its assets to the
VIRGINIA MUNICIPAL BOND FUND in exchange for shares of the VIRGINIA MUNICIPAL
BOND FUND. (These transfers of assets are collectively the "Reorganization.")
Shareholders of the Prior Equity Fund, the Prior Income Fund and of the Prior
Virginia Fund approved the Reorganization at a shareholder meeting held on
, 1998. On March , 1998, the effective date of the Reorganization,
shares of the GROWTH & INCOME FUND, the INTERMEDIATE FIXED INCOME FUND and the
VIRGINIA MUNICIPAL BOND FUND were distributed on a pro rata basis to the Prior
Equity Fund's, the Prior Income Fund's, and the Prior Virginia Fund's
shareholders, respectively.
As of March , 1998, 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 Funds, 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.
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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.
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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 a Fund's
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.
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- ---------------------------------------------------------
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 these Funds 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 Code, 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 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.
VIRGINIA TAXES
Distributions by the VIRGINIA MUNICIPAL BOND FUND to a shareholder will not be
subject to the Virginia income tax to the extent that the distributions are
attributable to income received by the Fund as interest from Virginia Municipal
Securities. Additionally, distributions by the Virginia Municipal Bond Fund to a
shareholder will not be subject to the Virginia income tax to the extent that
the distributions are attributable to interest income from United States
obligations exempted from state taxation by the United States Constitution,
treaties, and statutes. These Virginia income tax exemptions will be available
only if the Fund complies with the requirement that at least 50% of the Fund's
assets consist of obligations the interest on which is exempt from federal
income tax at the close of each taxable quarter.
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, or
the Commonwealth of Virginia, 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.
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- ---------------------------------------------------------
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 a Fund. 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 the amount 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.
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- ---------------------------------------------------------
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 yields 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 funds
quantitative equity fund
balanced fund
fixed income fund
Addresses
<TABLE>
<S> <C>
WACHOVIA EQUITY FUND 101 Greystone Boulevard
WACHOVIA QUANTITATIVE EQUITY FUND SC-9215
WACHOVIA GROWTH & INCOME FUND Columbia, SC 29226
WACHOVIA EQUITY INDEX FUND
WACHOVIA SPECIAL VALUES FUND
WACHOVIA EMERGING MARKETS FUND
WACHOVIA BALANCED FUND
WACHOVIA FIXED INCOME FUND
WACHOVIA INTERMEDIATE FIXED INCOME FUND
WACHOVIA SHORT-TERM FIXED INCOME FUND
WACHOVIA GA MUNICIPAL BOND FUND
WACHOVIA NC MUNICIPAL BOND FUND
WACHOVIA SC MUNICIPAL BOND FUND
WACHOVIA VA MUNICIPAL BOND FUND
Investment Adviser Wachovia Asset Management
(THE WACHOVIA FUNDS) 100 North Main Street
(THE WACHOVIA MUNICIPAL FUNDS) Winston-Salem, NC 27101
COUNSEL TO THE WACHOVIA FUNDS AND Kirkpatrick & Lockhart LLP THE WACHOVIA
MUNICIPAL FUNDS 1800 Massachusetts Avenue, N.W.
Washington, DC 20036-1800
COUNSEL TO THE INDEPENDENT TRUSTEES Piper & Marbury L.L.P.
1200 Nineteenth Street, N.W.
Washington, DC 20036-2430
</TABLE>
G02308-01-A (2/98)
Information contained herein is subject to completion or amendment. A
registration statement relating to these securities has been filed with the
Securities and Exchange Commission. These securities may not be sold nor may any
offers to buy be accepted prior to the time the registration statement becomes
effective. This Prospectus shall not constitute an offer to sell or the
solicitation of an offer to buy nor shall there be any sale of these securities
in any State in which such offer, solicitation, or sale would be unlawful prior
to registration or qualification under the securities laws of any such State.
SUBJECT TO COMPLETION
PRELIMINARY PROSPECTUS
DATED FEBRUARY 4, 1998
------------------------------------------------------------------------
------------------------------------------------------------------------
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"):
-----------------------------------------------------------
-----------------------------------------------------------
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<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
Wachovia Growth & Income Fund Municipal Bond Fund
Wachovia Equity Index Fund Wachovia South Carolina
Wachovia Special Values Fund Municipal Bond Fund
Wachovia Emerging Markets Fund Wachovia Virginia Municipal Bond Fund
Wachovia Balanced Fund
Wachovia Fixed Income Fund
Wachovia Intermediate 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
March , 1998, 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 prospectus, 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 Growth & Income Fund 6
Wachovia Equity Index Fund 7
Wachovia Special Values Fund 7
Wachovia Emerging Markets Fund 7
Wachovia Balanced Fund 8
Wachovia Fixed Income Fund 8
Wachovia Intermediate Fixed Income Fund 9
Wachovia Short-Term Fixed Income Fund 9
Additional Acceptable Investments 9
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THE WACHOVIA MUNICIPAL FUNDS 9
Wachovia Georgia Municipal Bond Fund 9
Wachovia North Carolina Municipal Bond Fund 9
Wachovia South Carolina Municipal Bond Fund 9
Wachovia Virginia Municipal Bond Fund 10
Acceptable Investments 10
State Municipal Securities 10
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PORTFOLIO INVESTMENTS AND STRATEGIES 10
Investment Considerations 10
Equity Investments 10
Securities of Foreign Issuers 11
Securities in Emerging Markets 11
Investments in Debt Obligations 12
Investments in Lower-Rated Debt Obligations 12
Municipal Security Investments 12
Investment Processes 13
Quantitative Equity Fund 13
Equity Index Fund 13
S&P 500 Index 14
Emerging Markets Fund 14
Fixed Income Fund and Short-Term Fixed
Income Fund 15
Portfolio Investments 15
Corporate Debt Obligations 15
Fixed Rate Corporate Debt Obligations 15
Floating Rate Corporate Debt Obligations 15
Convertible Securities 15
Put and Call Options 16
Stock Index Futures and Options 16
Futures Contracts on Foreign Government
Debt Obligations 17
Forward Foreign Currency Exchange
Contracts 17
Index Participation Contracts 17
Mortgage-Backed Securities 17
Adjustable Rate Mortgage Securities 18
Collateralized Mortgage Obligations 18
Real Estate Mortgage Investment Conduits 18
Stripped Mortgage-Backed Securities 18
Asset-Backed Securities 18
U.S. Government Obligations 19
Demand Master Notes 19
Temporary Investments 19
Restricted and Illiquid Securities 20
Repurchase Agreements 20
Demand Features 20
When-Issued and Delayed Delivery
Transactions 20
Lending of Portfolio Securities 21
Investing in Securities of Other Investment
Companies 21
Ratings 21
Municipal Leases 21
Participation Interests 21
Variable Rate Municipal Securities 21
Municipal Bond Insurance 21
Non-Diversification 22
Duration 22
- ----------------------------------------------------------
INVESTMENT LIMITATIONS 22
Borrowing Money 22
Diversification 22
- ----------------------------------------------------------
TRUST INFORMATION 23
Management of the Trusts 23
Board of Trustees 23
Investment Adviser 23
Sub-Adviser 23
Advisory Fees 23
Adviser's Background 23
Distribution of Shares 25
Administrative Arrangements 26
Administration of the Funds 26
Expenses of the Funds and Class Y Shares 26
Brokerage Transactions 26
- ----------------------------------------------------------
NET ASSET VALUE 26
- ----------------------------------------------------------
INVESTING IN THE FUNDS 26
Share Purchases 26
Minimum Investment Required 27
Systematic Investment Program 27
Certificates and Confirmations 27
Subaccounting Services 27
Dividends and Capital Gains 27
- ----------------------------------------------------------
EXCHANGE PRIVILEGE 27
Exchange by Telephone 28
- ----------------------------------------------------------
REDEEMING SHARES 28
By Telephone 28
By Mail 28
Signatures 28
Systematic Withdrawal Program 29
Accounts With Low Balances 29
- ----------------------------------------------------------
SHAREHOLDER INFORMATION 29
Voting Rights 29
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
TABLE OF CONTENTS (CONT'D)
- ----------------------------------------------------------
EFFECT OF BANKING LAWS 29
- ----------------------------------------------------------
TAX INFORMATION 30
- ----------------------------------------------------------
THE WACHOVIA MUNICIPAL FUNDS TAX INFORMATION 30
Federal Income Tax 30
Georgia and North Carolina Taxes 31
South Carolina Taxes 31
Virginia Taxes 31
Other State and Local Taxes 31
- ----------------------------------------------------------
OTHER CLASSES OF SHARES 31
- ----------------------------------------------------------
PERFORMANCE INFORMATION 32
- ----------------------------------------------------------
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 ten professionally managed diversified portfolios
and four 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 GROWTH & INCOME FUND ("GROWTH & INCOME FUND")--seeks to provide total
return through growth of capital and current 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 INTERMEDIATE FIXED INCOME FUND ("INTERMEDIATE FIXED INCOME
FUND")--seeks current income consistent with preservation of capital;
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;
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; and
WACHOVIA VIRGINIA MUNICIPAL BOND FUND ("VIRGINIA MUNICIPAL BOND FUND")--seeks to
provide a high level of current income that is exempt from federal regular
income tax and the income tax imposed by the Commonwealth of Virginia as is
consistent with the preservation of capital.
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 Y SHARES
SHAREHOLDER TRANSACTION EXPENSES
<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>
--------- --------- --------- --------- --------- ---------
Maximum Sales Charge Imposed on Purchases
(as a percentage of offering price) None None None None None None
Maximum Sales Charge Imposed on Reinvested
Dividends (as a percentage of offering price) None None None None None None
Contingent Deferred Sales Charge (as a
percentage of original purchase price of
redemption proceeds, as applicable) None None None None None None
Redemption Fees (as a percentage of amount
redeemed, if applicable) None None None None None None
Exchange Fee None None None None None None
<CAPTION>
GROWTH &
INCOME
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 of
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 average net assets)
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
Management Fee (after waiver, if applicable)
(1) 0.63% 0.62% 0.28% 0.78% 1.00% 0.54%
12b-1 Fees None None None None None None
Other Expenses (after reimbursement, if
applicable) (2) 0.27% 0.25% 0.19% 0.33% 0.54% 0.23%
Total Class Y Shares Operating Expenses
(after waiver and reimbursement, if
applicable) (3) 0.90% 0.87% 0.47% 1.11% 1.54% 0.77%
<CAPTION>
Management Fee (after waiver, if applicable)
(1) 0.70%
12b-1 Fees None
Other Expenses (after reimbursement, if
applicable) (2) 0.19%
Total Class Y Shares Operating Expenses
(after waiver and reimbursement, if
applicable) (3) 0.89%
</TABLE>
SHAREHOLDER TRANSACTION EXPENSES
<TABLE>
<CAPTION>
SHORT-TERM NORTH SOUTH
FIXED FIXED GEORGIA CAROLINA CAROLINA VIRGINIA
INCOME INCOME MUNI BOND MUNI BOND MUNI BOND MUNI BOND
FUND FUND FUND FUND FUND FUND
--------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Maximum Sales Charge Imposed on
Purchases (as a percentage of
offering price) None None None None None None
Maximum Sales Charge Imposed on
Reinvested Dividends (as a
percentage of offering price) None 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 None
Redemption Fees (as a percentage
of amount redeemed, if
applicable) None None None None None None
Exchange Fee None None None None None None
<CAPTION>
INTERMEDIATE
FIXED
INCOME
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 average net assets)
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
Management Fee (after waiver,
if applicable) (1) 0.49% 0.35% 0.00% 0.33% 0.27% 0.45%
12b-1 Fees None None None None None None
Other Expenses (after
reimbursement,
if applicable) (2) 0.25% 0.28% 0.92% 0.52% 0.31% 0.25%
Total Class Y Shares
Operating
Expenses (after waiver and
reimbursement, if
applicable) (3) 0.74% 0.63% 0.92% 0.85% 0.58% 0.70%
<CAPTION>
Management Fee (after waiver,
if applicable) (1) 0.48%
12b-1 Fees None
Other Expenses (after
reimbursement,
if applicable) (2) 0.26%
Total Class Y Shares
Operating
Expenses (after waiver and
reimbursement, if
applicable) (3) 0.74%
</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 and INTERMEDIATE FIXED INCOME FUND, 0.70% for the
EQUITY FUND, QUANTITATIVE EQUITY FUND, BALANCED FUND, and GROWTH & INCOME
FUND, 0.75% for the Georgia MUNICIPAL BOND FUND, NORTH CAROLINA MUNICIPAL
BOND FUND, SOUTH CAROLINA MUNICIPAL BOND FUND, and VIRGINIA 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 would have
been 1.23% for the GEORGIA MUNICIPAL BOND FUND, absent the reimbursement by
the adviser.
(3) The Annual Class Y Shares Operating Expenses would have been 0.97% for the
EQUITY FUND, 0.95% for the QUANTITATIVE EQUITY FUND, 0.49% for the EQUITY
INDEX FUND, 1.13% for the SPECIAL VALUES FUND, 0.93% for the BALANCED FUND,
0.85% for the FIXED INCOME FUND, 0.83% for the SHORT-TERM FIXED INCOME
FUND, 1.98% for the GEORGIA MUNICIPAL BOND FUND, 1.27% for the NORTH
CAROLINA MUNICIPAL BOND FUND, and 1.06% for the SOUTH CAROLINA MUNICIPAL
BOND FUND, absent the voluntary waivers/reimbursement described above in
Notes 1 and 2. The Annual Class Y Operating Expenses are expected to be
1.00% for the VIRGINIA MUNICIPAL BOND FUND and 0.86% for the INTERMEDIATE
FIXED INCOME FUND absent the voluntary waiver described above in Note 1.
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 "THE WACHOVIA FUNDS INFORMATION", "THE WACHOVIA MUNICIPAL FUNDS 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 load. As noted in the table above, the Fund charges no sales
loads or redemption fees.
<TABLE>
<CAPTION>
QUANTITATIVE EQUITY SPECIAL EMERGING GROWTH &
EQUITY EQUITY INDEX VALUES MARKETS BALANCED INCOME
FUND FUND FUND FUND FUND FUND FUND
<S> <C> <C> <C> <C> <C> <C> <C>
1 Year $ 9 $ 9 $ 5 $ 11 $ 16 $ 8 $ 9
3 Years $ 29 $ 28 $ 15 $ 35 $ 49 $ 25 $ 28
5 Years $ 50 $ 48 $ 26 $ 61 $ 84 $ 43 N/A
10 Years $ 111 $ 107 $ 59 $ 135 $ 183 $ 95 N/A
</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
5 Years $ 41 $ 35 $ 51 $ 47 $ 32
10 Years $ 92 $ 79 $ 113 $ 105 $ 73
<CAPTION>
VIRGINIA INTERMEDIATE
MUNI BOND INCOME
FUND FUND
<S> <C> <C>
1 Year $ 7 $ 8
3 Years $ 22 $ 24
5 Years N/A N/A
10 Years N/A N/A
</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 SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
<TABLE>
<CAPTION>
Net Realized and Distributions from
Unrealized Gain/ Net Realized Gain
(Loss) on on Investment
Investments, Transactions,
Net Asset Futures Distributions Futures Contracts
Value, Net Contracts, and Total From from Net and Foreign
Period Ended beginning Investment Foreign Currency Investment Investment Currency Total
November 30, of period Income Transactions Operations Income Transactions Distributions
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
WACHOVIA EQUITY FUND
1996(a) $ 12.43 0.03 2.40 2.43 (0.05) -- (0.05)
1997 $ 14.81 0.17 2.43 2.60 (0.16) (1.86) (2.02)
WACHOVIA QUANTITATIVE EQUITY FUND
1996(a) $ 13.09 0.04 2.60 2.64 (0.06) -- (0.06)
1997 $ 15.67 0.23 4.12 4.35 (0.23) (0.79) (1.02)
WACHOVIA EQUITY INDEX FUND
1996(a) $ 13.37 .09(d) 2.60 2.69 (0.08) -- (0.08)
1997 $ 15.98 0.29 3.86 4.15 (0.31) (0.91) (1.22)
WACHOVIA SPECIAL VALUES FUND
1996(a) $ 13.62 0.03 2.02 2.05 -- -- --
1997 $ 15.67 0.16 4.53 4.69 (0.08) (1.61) (1.69)
WACHOVIA EMERGING MARKETS FUND
1996(a) $ 11.92 0.01(d) (0.26) (0.25) -- -- --
1997 $ 11.67 0.07 (0.50) (0.43) (0.11) -- (0.11)
WACHOVIA BALANCED FUND
1996(a) $ 11.68 0.08 1.63 1.71 (0.09) -- (0.09)
1997 $ 13.30 0.38 1.39 1.77 (0.37) (1.44) (1.81)
WACHOVIA FIXED INCOME FUND
1996(a) $ 9.45 0.17 0.40 0.57 (0.19) -- (0.19)
1997 $ 9.83 0.57 0.03 0.60 (0.58) -- (0.58)
WACHOVIA SHORT-TERM FIXED INCOME FUND
1996(a) $ 9.67 0.11(d) 0.18 0.29 (0.17) -- (0.17)
1997 $ 9.79 0.56 (0.05) 0.51 (0.53) -- (0.53)
WACHOVIA GEORGIA MUNICIPAL BOND FUND
1996(a) $ 10.71 0.17 0.29 0.46 (0.17) -- (0.17)
1997 $ 11.00 0.47 0.13 0.60 (0.47) (0.02) (0.49)
WACHOVIA NORTH CAROLINA MUNICIPAL BOND FUND
1996(a) $ 10.71 0.16 0.32 0.48 (0.16) -- (0.16)
1997 $ 11.03 0.46 0.13 0.59 (0.45) (0.02) (0.47)
WACHOVIA SOUTH CAROLINA MUNICIPAL BOND FUND
1996(a) $ 10.73 0.20 0.32 0.52 (0.20) -- (0.20)
1997 $ 11.05 0.55 0.12 0.67 (0.55) (0.05) (0.60)
</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) Represents total commissions paid on portfolio securities divided by total
portfolio shares purchased or sold on which commissions were charged.
(See Notes which are an integral part of the Financial Statements)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
THE WACHOVIA FUNDS AND THE WACHOVIA MUNICIPAL FUNDS
FINANCIAL HIGHLIGHTS--CLASS Y SHARES--CONTINUED
(FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
<TABLE>
<CAPTION>
Ratios to Average Net Assets Average
Net Asset Net Expense Net Assets, Commission
Period Ended Value, Total Investment Waiver/ end of period Rate
November 30, end of period Return(b) Expenses Income Reimbursement(c) (000 omitted) Paid(e)
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
WACHOVIA EQUITY FUND
1996(a) $ 14.81 19.57% 0.90%* 0.91%* 0.19%* $ 129,205 $ 0.0652
1997 $ 15.39 20.44% 0.90% 1.18% 0.07% $ 156,238 $ 0.0434
WACHOVIA QUANTITATIVE EQUITY FUND
1996(a) $ 15.67 20.19% 0.87%* 1.19%* 0.11%* $ 152,571 $ 0.0532
1997 $ 19.00 29.60% 0.87% 1.35% 0.08% $ 183,019 $ 0.0493
WACHOVIA EQUITY INDEX FUND
1996(a) $ 15.98 20.14% 0.48%* 1.92%* 0.06%* $ 213,833 $ 0.0137
1997 $ 18.91 27.91% 0.47% 1.72% 0.02% $ 248,030 $ 0.0247
WACHOVIA SPECIAL VALUES FUND
1996(a) $ 15.67 15.05% 1.15%* 1.76%* 0.24%* $ 58,697 $ 0.0650
1997 $ 18.67 33.29% 1.11% 0.88% 0.02% $ 84,501 $ 0.0534
WACHOVIA EMERGING MARKETS FUND
1996(a) $ 11.67 0.00% 0.63%* 0.45%* 0.13%* $ 123,036 $ 0.0009
1997 $ 11.13 (3.73%) 1.54% 0.54% 0.00% $ 139,700 $ 0.0011
WACHOVIA BALANCED FUND
1996(a) $ 13.30 14.69% 0.76%* 2.85%* 0.16%* $ 235,791 $ 0.0545
1997 $ 13.26 15.37% 0.77% 3.02% 0.16% $ 250,083 $ 0.0732
WACHOVIA FIXED INCOME FUND
1996(a) $ 9.83 6.12% 0.75%* 6.33%* 0.14%* $ 175,836 --
1997 $ 9.85 6.38% 0.74% 5.91% 0.11% $ 185,398 --
WACHOVIA SHORT-TERM FIXED INCOME FUND
1996(a) $ 9.79 3.00% 0.64%* 5.77%* 0.19%* $ 116,138 --
1997 $ 9.77 5.33% 0.63% 5.63% 0.20% $ 91,063 --
WACHOVIA GEORGIA MUNICIPAL BOND FUND
1996(a) $ 11.00 4.31% 0.89%* 4.84%* 1.57%* $ 6,803 --
1997 $ 11.11 5.63% 0.92% 4.24% 1.06% $ 12,308 --
WACHOVIA NORTH CAROLINA MUNICIPAL BOND FUND
1996(a) $ 11.03 4.55% 0.84%* 4.16%* 0.65%* $ 28,283 --
1997 $ 11.15 5.57% 0.85% 4.16% 0.42% $ 44,104 --
WACHOVIA SOUTH CAROLINA MUNICIPAL BOND FUND
1996(a) $ 11.05 4.86% 0.57%* 5.56%* 0.54%* $ 36,511 --
1997 $ 11.12 6.23% 0.58% 5.01% 0.48% $ 43,881 --
<CAPTION>
Portfolio
Period Ended Turnover
November 30, Rate
<S> <C>
- ------------
WACHOVIA EQU
1996(a) 64%
1997 124%
WACHOVIA QUA
1996(a) 44%
1997 74%
WACHOVIA EQU
1996(a) 12%
1997 4%
WACHOVIA SPE
1996(a) 38%
1997 46%
WACHOVIA EME
1996(a) 30%
1997 60%
WACHOVIA BAL
1996(a) 99%
1997 143%
WACHOVIA FIX
1996(a) 181%
1997 174%
WACHOVIA SHO
1996(a) 145%
1997 215%
WACHOVIA GEO
1996(a) 14%
1997 25%
WACHOVIA NOR
1996(a) 7%
1997 17%
WACHOVIA SOU
1996(a) 20%
1997 12%
</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) Represents total commissions paid on portfolio securities divided by total
portfolio shares purchased or sold on which commissions were charged.
(See Notes which are an integral part of the Financial Statements)
- ---------------------------------------------------------
- ---------------------------------------------------------
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 Board of Trustees ("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 Depository 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 ("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 GROWTH & INCOME FUND The investment objective of the GROWTH & INCOME
FUND is to provide total return through growth of capital and current income.
The Fund pursues its investment objective by investing primarily in a
professionally-managed and diversified portfolio of equity securities. Under
normal market conditions, the Fund intends to invest at least 65% of its total
assets in equity securities. The Fund's investment adviser selects securities
based on a number of factors, including return on equity, price to earnings
ratio, dividend paying ability, and liquidity. The securities in which the Fund
invests may be expected to produce some income, but income alone is not the
primary criterion for the securities' selection by the Fund's investment
adviser.
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, warrants and rights to purchase common stocks;
investments in ADRs of foreign companies traded on the New York Stock Exchange
or in the over-the-counter markets, and investments in European Depository
Receipts ("EDRs," sometimes also referred to as Continental Depository
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
domestic issues of corporate debt obligations rated A or better by Moody's or
S&P.
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 Fund's 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 EDRs and Global Depository
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;
with respect to 5% of the Fund's total assets, corporate debt obligations,
including demand master notes rated at the time of purchase Baa by Moody's or
BBB by S&P or, if unrated, of comparable quality as determined by the Fund's
investment adviser;
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 four 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 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;
with respect to 5% of the Fund's total assets, corporate debt obligations,
including demand master notes rated at the time of purchase Baa by Moody's or
BBB by S&P or, if unrated, of comparable quality as determined by the Fund's
investment adviser;
securities of foreign issuers;
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 INTERMEDIATE FIXED INCOME FUND
The investment objective of the INTERMEDIATE FIXED INCOME FUND is to seek
current income consistent with preservation of capital. The Fund pursues its
investment objective by investing primarily in a diversified portfolio of fixed
income securities that, at the time of purchase, are rated in the top four
investment categories by an NRSRO or, if unrated, are of comparable quality to
securities with such ratings. The Fund will maintain an average dollar-weighted
maturity of between 3 to 10 years. The Fund will invest, under normal
circumstances, at least 65% of the value of its total assets in fixed income
securities with stated maturities or estimated average lives of 10 years or
less.
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;
with respect to 5% of the Fund's total assets, corporate debt obligations,
including demand master notes rated at the time of purchase Baa by Moody's or
BBB 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.
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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").
WACHOVIA VIRGINIA MUNICIPAL BOND FUND
The investment objective of the VIRGINIA MUNICIPAL BOND FUND is to provide as
high a level of current income that is exempt from federal regular income tax
and the income tax imposed by the Commonwealth of Virginia as is consistent with
the preservation of capital. 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 Commonwealth of Virginia
("Virginia 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. In addition to the portfolio investments identified 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, demand master
notes and engage in when-issued and delayed delivery transactions.
ACCEPTABLE INVESTMENTS
The Funds invest primarily in Georgia Municipal Securities, North Carolina
Municipal Securities, South Carolina Municipal Securities, and Virginia
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 and of the Commonwealth
of Virginia, 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 and the
Commonwealth of Virginia, 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 Funds 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;
with respect to 5% of total Fund assets, rated Baa by Moody's or BBB by S&P at
the 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).
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PORTFOLIO INVESTMENTS
AND STRATEGIES
INVESTMENT CONSIDERATIONS
EQUITY INVESTMENTS. As with other mutual funds that invest in equity securities,
the EQUITY FUND, QUANTITATIVE EQUITY FUND, GROWTH & INCOME 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, GROWTH
& INCOME FUND, SPECIAL VALUES FUND, EMERGING MARKETS FUND, BALANCED FUND, FIXED
INCOME FUND, INTERMEDIATE FIXED INCOME FUND and SHORT-TERM FIXED INCOME 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 the 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." Each Fund 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 or the
SPECIAL VALUES 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 commonwealth) or its
municipalities could impact a Fund's portfolio. A municipal bond fund's
concentration in securities issued by a specific state (or commonwealth) 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 (or
commonwealth'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, South Carolina, or Virginia 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 commonwealth) 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 permissible 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 FUND AND SHORT-TERM FIXED INCOME FUND. 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 Funds 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, 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
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 a 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,
GROWTH & INCOME FUND, EQUITY INDEX FUND, SPECIAL VALUES FUND, EMERGING MARKETS
FUND, BALANCED FUND and 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.
FUTURES CONTRACTS ON FOREIGN GOVERNMENT DEBT OBLIGATIONS. The BALANCED FUND,
FIXED INCOME FUND, INTERMEDIATE FIXED INCOME FUND and SHORT-TERM FIXED INCOME
FUND may invest in futures contracts on foreign government debt obligations in
order to establish exposure to a particular foreign government and/or currency
in a fast and cost-effective manner. These transactions will be entered into
primarily for speculative purposes. These types of futures contracts implicate
the same risks presented by investing in futures contracts generally, as well as
currency risk and the risks involved in investing in foreign issuers. Please
refer to the Statement of Additional Information for a further discussion of
these risk factors.
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, INTERMEDIATE 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 may 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. Each of the FIXED INCOME FUND, the SHORT-TERM FIXED INCOME FUND and
the INTERMEDIATE FIXED INCOME FUND may also invest up to 5% of its total assets
in CMOs which are rated Aa, A, or Baa by Moody's or AA, A, or BBB by S&P.
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, INTERMEDIATE 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, a Fund's
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, INTERMEDIATE 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. Each of the FIXED
INCOME FUND, the SHORT-TERM FIXED INCOME FUND and the INTERMEDIATE FIXED INCOME
FUND may invest up to 5% of its total assets in asset-backed securities rated
Baa by Moody's or BBB by S&P. 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 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), each of the Funds
(except EQUITY INDEX 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;
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;
obligations issued or guaranteed by the U.S. government, its agencies or
instrumentalities; 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).
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.
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, North Carolina or Virginia 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 the 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. A Fund's investment adviser monitors the
pricing, quality, and liquidity of the variable rate municipal securities,
including participation interests held by the 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, SOUTH
CAROLINA MUNICIPAL BOND FUND, and VIRGINIA 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 that 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 that are insured. The VIRGINIA MUNICIPAL BOND FUND'S investment
adviser anticipates that between 30% and 60% of the Fund's net assets will be
invested in municipal securities that 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 four 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 the 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 of
1986, as amended (the "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.
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INVESTMENT LIMITATIONS
BORROWING MONEY
The EQUITY FUND, QUANTITATIVE EQUITY FUND, GROWTH & INCOME FUND, EQUITY INDEX
FUND, SPECIAL VALUES FUND, EMERGING MARKETS FUND, BALANCED FUND, FIXED INCOME
FUND, INTERMEDIATE 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, SOUTH CAROLINA MUNICIPAL BOND FUND, and VIRGINIA
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, each of the EQUITY FUND,
QUANTITATIVE EQUITY FUND, GROWTH & INCOME FUND, EQUITY INDEX FUND, SPECIAL
VALUES FUND, BALANCED FUND, FIXED INCOME FUND, INTERMEDIATE 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.
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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 Adviser and Twin Capital Management, Inc. ("Twin Capital"
or the "Sub-Adviser"), Twin Capital furnishes certain investment advisory
services to the Adviser, 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 the Adviser, 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 the Adviser. Twin Capital provides investment counsel to
both individuals and institutions, including banks, thrift institutions, and
pension and profit-sharing plans. As of December 31, 1997, Twin Capital
furnished services, substantially similar to the services it provides to the
Adviser, to other accounts with assets in excess of $1 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 and INTERMEDIATE FIXED INCOME FUND; 0.70 of 1% of EQUITY FUND, QUANTITATIVE
EQUITY FUND, GROWTH & INCOME FUND, and BALANCED FUND; 0.74 of 1% of VIRGINIA
MUNICIPAL BOND 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.
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 $33 billion in
managed assets as of December 31, 1997. 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.
Paul P. Baran is a Chartered Financial Analyst and is a Senior Vice President
of Wachovia Asset Management. He is the portfolio manager of the GROWTH &
INCOME FUND. Mr. Baran joined Wachovia Bank, N.A. in 1997. From 1987 to 1997,
he had served as the chief investment officer of the investment management
department of Central Fidelity National Bank ("CFNB"), and was a Senior Vice
President of CFNB. While at CFNB, Mr. Baran served as the portfolio manager of
the MarketWatch Equity Fund, which was subsequently reorganized as the Growth &
Income Fund. Prior to joining CFNB, Mr. Baran was with BancOklahoma and
National Bank of Detroit. Mr. Baran received a bachelors degree from Ohio
Wesleyan and an MBA from Wayne State University.
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 bachelors 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 a portfolio manager of the BALANCED FUND, the FIXED INCOME FUND and
the INTERMEDIATE FIXED INCOME FUND. Mr. Gibbs is a 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.
Roger L. Glenski is a portfolio manager of the SPECIAL VALUES FUND. Mr. Glenski
joined Wachovia Bank, N.A. in 1996, specializing in the valuation of closely-
held businesses and small companies. Prior to joining Wachovia Bank, N.A., Mr.
Glenski was employed by the accounting firm of Deloitte & Touche LLP in Chicago,
Illinois. Mr. Glenski received a bachelors degree from the University of
Missouri-Kansas City and an MBA from the University of Chicago. He is a
Certified Public Accountant.
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 bachelors 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 bachelors 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 a portfolio manager of the BALANCED FUND, the FIXED INCOME
FUND, and the INTERMEDIATE FIXED INCOME FUND. 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 bachelors degree in economics from Virginia
Polytechnical Institute and State University and an MBA from the University of
North Carolina at Greensboro. 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 bachelors and masters 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 an 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.
Wayne F. Morgan is a portfolio manager of the BALANCED FUND, the FIXED INCOME
FUND and the INTERMEDIATE FIXED INCOME FUND. Mr. Morgan is a Senior Vice
President of Wachovia Asset Management. Mr. Morgan joined Wachovia Bank, N.A. in
June, 1997 as a senior fixed income portfolio manager. Prior to joining Wachovia
Bank, N.A., Mr. Morgan served as the Director of Investments at the University
of North Carolina at Chapel Hill, where he oversaw the management of the
University's endowment fund. Mr. Morgan received both a bachelors degree and an
MBA from the University of North Carolina at Chapel Hill. Mr. Morgan is a
Chartered Financial Analyst.
J. Joseph Muster is a Vice President and a Manager of Money Market and Municipal
Investments in the Fixed Income Section of Wachovia Asset Management. He is the
portfolio manager of THE WACHOVIA MUNICIPAL FUNDS (with the exception of the
VIRGINIA MUNICIPAL BOND FUND). Mr. Muster joined Wachovia Bank, N.A. in 1992 as
a credit analyst. Mr. Muster is a graduate of the University of Georgia and
received an MBA from Duke University.
Harold (Rick) Nelson III is a Senior Vice President and fixed income portfolio
manager of Wachovia Asset Management in Atlanta. Mr. Nelson joined Wachovia
Bank, N.A. in June, 1985 as a fixed income portfolio manager. He became a
portfolio manager of the BALANCED FUND in May, 1996. Mr. Nelson is also a
portfolio manager of the FIXED INCOME FUND and the INTERMEDIATE FIXED INCOME
FUND. He received a bachelors of science degree in management from St. Francis
College and an MBA in Finance from Mercer University in 1990.
Robert E. Pike is a Chartered Financial Analyst and a Senior Vice President of
Wachovia Asset Management. Mr. Pike joined Wachovia Bank, N.A. in 1985 as a bond
sales associate and assumed his present position in June, 1989. He is the
portfolio manager of the BALANCED FUND, the FIXED INCOME FUND and the
INTERMEDIATE 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 bachelors degree in economics. Mr. Sadler is a Chartered
Financial Analyst.
Michael G. Sebesta is a portfolio manager of the BALANCED FUND, the FIXED INCOME
FUND, the INTERMEDIATE FIXED INCOME FUND, and the VIRGINIA MUNICIPAL BOND FUND.
He is a Vice President and Fixed Income Portfolio Manager for Wachovia Asset
Management. Mr. Sebesta joined Wachovia Bank, N.A. in Wachovia's Columbia, South
Carolina Funds Management area as an assistant vice president/ portfolio manager
in July, 1989. He became a mortgage securities trader for the Bond and Money
Market Group in February 1992 and was elected Vice President in 1993. In June,
1995 he became the investment portfolio manager for the Wachovia Bank Funds
Management Group and joined Wachovia Asset Management as a fixed income
portfolio manager in July, 1997. He received a bachelors degree in economics
from Wake Forest University.
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
bachelors degree in mathematical economics, and of the University of Rochester
with a masters 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, the EQUITY FUND, and
the QUANTITATIVE EQUITY FUND. He joined Wachovia Bank, N.A. in 1976 as an
employee benefit portfolio manager. He was elected Senior Vice President in
1990. Mr. Waterfill received a bachelors 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 its affiliates, and not
by the Funds.
ADMINISTRATION OF THE FUNDS
Federated Services Company, Pittsburgh, Pennsylvania, a subsidiary of Federated
Investors, through its various subsidiaries, provides the Funds with the
administrative personnel and services, portfolio recordkeeping and transfer
agency services necessary to operate the Funds. Such services include legal,
accounting and other administrative services. Federated Services Company
provides these at an annual rate, computed and payable daily, as specified
below:
<TABLE>
<CAPTION>
AVERAGE AGGREGATE DAILY NET
ASSETS OF THE WACHOVIA FUNDS
MAXIMUM (EXCLUDING WACHOVIA PRIME
ADMINISTRATIVE CASH MANAGEMENT FUND) AND OF
FEE THE WACHOVIA MUNICIPAL FUNDS
<S> <C>
0.10 of 1% on the first $3.5 billion
on assets in excess of $3.5
0.06 of 1% billion
</TABLE>
Federated Services Company 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 Class Y 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.
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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 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.
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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 a 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 MUNICIPAL 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 (the "Transfer
Agent") maintains a share account for each shareholder of record. 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 GROWTH & INCOME 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, the INTERMEDIATE
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 the 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.
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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 a 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.
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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 the
shareholder's 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.
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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.
The GROWTH & INCOME FUND, the INTERMEDIATE FIXED INCOME FUND and the VIRGINIA
MUNICIPAL BOND FUND are newly-organized portfolios that were formed to continue
the operations of the MarketWatch Equity Fund (the "Prior Equity Fund"), the
MarketWatch Intermediate Fixed Income Fund (the "Prior Income Fund") and the
MarketWatch Virginia Municipal Bond Fund (the "Prior Virginia Fund") series,
respectively. The Prior Equity Fund, the Prior Income Fund and the Prior
Virginia Fund were series of another investment company. Pursuant to a Plan of
Reorganization, the Prior Equity Fund transferred all of its assets to the
GROWTH & INCOME FUND in exchange for shares of the GROWTH & INCOME FUND.
Similarly, pursuant to a Plan of Reorganization, the Prior Income Fund
transferred all of its assets to the INTERMEDIATE FIXED INCOME FUND in exchange
for shares of the INTERMEDIATE FIXED INCOME FUND. Also, pursuant to a Plan of
Reorganization, the Prior Virginia Fund transferred all of its assets to the
VIRGINIA MUNICIPAL BOND FUND in exchange for shares of the VIRGINIA MUNICIPAL
BOND FUND. (These transfers of assets are collectively the "Reorganization.")
Shareholders of the Prior Equity Fund, the Prior Income Fund and the Prior
Virginia Fund approved the Reorganization at a shareholder meeting held on
, 1998. On March , 1998, the effective date of the Reorganization,
shares of the GROWTH & INCOME FUND, the INTERMEDIATE FIXED INCOME FUND and the
VIRGINIA MUNICIPAL BOND FUND were distributed on a pro rata basis to the Prior
Equity Fund's, the Prior Income Fund's and the Prior Virginia Fund's
shareholders, respectively.
As of March , 1998, 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 Funds, 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.
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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.
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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 Fund's
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.
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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 these Funds 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 corporation'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 Code, 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 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.
VIRGINIA TAXES
Distributions by the VIRGINIA MUNICIPAL BOND FUND to a shareholder will not be
subject to the Virginia income tax to the extent that the distributions are
attributable to income received by the Fund as interest from Virginia Municipal
Securities. Additionally, distributions by the Virginia Municipal Bond Fund to a
shareholder will not be subject to the Virginia income tax to the extent that
the distributions are attributable to interest income from United States
obligations exempted from state taxation by the United States Constitution,
treaties, and statutes. These Virginia income tax exemptions will be available
only if the Fund complies with the requirement that at least 50% of the Fund's
assets consist of obligations the interest on which is exempt from federal
income tax at the close of each taxable quarter.
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, or
the Commonwealth of Virginia, 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 Y Shares are sold to accounts for which Wachovia Bank or its affiliates
act in a fiduciary, 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 a Fund. 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 the amount 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 yields 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
<TABLE>
<S> <C>
WACHOVIA EQUITY FUND 101 Greystone Boulevard
WACHOVIA QUANTITATIVE EQUITY FUND SC-9215
WACHOVIA GROWTH & INCOME FUND Columbia, SC 29226
WACHOVIA EQUITY INDEX FUND
WACHOVIA SPECIAL VALUES FUND
WACHOVIA EMERGING MARKETS FUND
WACHOVIA BALANCED FUND
WACHOVIA FIXED INCOME FUND
WACHOVIA INTERMEDIATE FIXED INCOME FUND
WACHOVIA SHORT-TERM FIXED INCOME FUND
WACHOVIA GA MUNICIPAL BOND FUND
WACHOVIA NC MUNICIPAL BOND FUND
WACHOVIA SC MUNICIPAL BOND FUND
WACHOVIA VA MUNICIPAL BOND FUND
Investment Adviser Wachovia Asset Management
(THE WACHOVIA FUNDS) 100 North Main Street
(THE WACHOVIA MUNICIPAL FUNDS) Winston-Salem, NC 27101
COUNSEL TO THE WACHOVIA FUNDS AND Kirkpatrick & Lockhart LLP THE WACHOVIA
MUNICIPAL FUNDS 1800 Massachusetts Avenue, N.W.
Washington, DC 20036-1800
COUNSEL TO THE INDEPENDENT TRUSTEES Piper & Marbury L.L.P.
1200 Nineteenth Street, N.W.
Washington, DC 20036-2430
</TABLE>
G02308-02-Y (2/98)
[IN RED INK ON THE LEFT SIDE PANEL] Information contained herein is subject to
completion or amendment. A registration statement relating to these securities
has been filed with the Securities and Exchange Commission. These securities may
not be sold nor may any offers to buy be accepted prior to the time the
registration statement becomes effective. This Statement of Additional
Information shall not constitute an offer to sell or the solicitation of an
offer to buy nor shall there be any sale of these securities in any State in
which such offer, solicitation, or sale would be unlawful prior to registration
or qualification under the securities laws of any such State.
SUBJECT TO COMPLETION
PRELIMINARY STATEMENT OF ADDITIONAL INFORMATION
DATED February 4, 1998
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
a "Trust," and collectively as the "Trusts"), dated March __, 1998. This
Statement is not a prospectus itself. To receive a copy of the prospectuses,
call the Funds toll-free at 1-800-994-4414.
5800 Corporate Drive
Pittsburgh, Pennsylvania 15237-7010
Statement dated March __, 1998
FEDERATED INVESTORS
Federated Investors Tower
Pittsburgh, PA 15222-3779
Federated Securities Corp. is the distributor of the Funds
and is a subsidiary of Federated Investors.
<PAGE>
Table of Contents
General Information Determining Net Asset Value
Investment Objectives, Policies, and Determining Market Value of Securities
Limitations
of the Funds Redeeming Fund Shares
State Investment Risks Redemption in Kind
Portfolio Turnover
Investment Limitations Massachusetts Business Trusts
The Wachovia Funds and The Wachovia Tax Status
Municipal Funds Management The Funds' Tax Status
Officers and Trustees Shareholders' Tax Status
Fund Ownership Capital Gains
Trustees Compensation
Trustee Liability Total Return
Investment Advisory Services Yield
Adviser to the Funds
Advisory and Sub-Advisory Fees Tax-Equivalent Yield
Brokerage Transactions Performance Comparisons
Other Services Financial Statements
- ------------------------------------ --------------------
Administration
Custodian Standard & Poor's Corporation
-----------------------------
Transfer Agent
Legal Services Appendix
--------
Independent Auditors
Distribution Plan (Class B Shares
Only) and
Shareholder Services Plan (Class A
Shares and Class B Shares Only)
Purchasing Fund Shares
Conversion to Federal Funds
Exchanging Securities for Fund
Shares
<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 Boards 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 of Additional Information (the "Statement")
shall have the same meaning assigned in the prospectuses. The following Funds
(individually referred to as a "Fund," and 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 Growth & Income Fund ("Growth & Income Fund") are
currently offered in two classes: Class A 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 Intermediate Fixed Income Fund ("Intermediate Fixed
Income Fund") are currently offered in two classes: Class A
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.
Shares of Wachovia Virginia Municipal Bond Fund ("Virginia Municipal Bond
Fund") are currently offered in two classes: Class A Shares
and Class Y Shares.
Prior to July 22, 1996, each Fund, other than the Growth & Income Fund,
the Intermediate Fixed Income Fund and Virginia Municipal Bond Fund, offered a
single class of shares, which is currently designated as Class A Shares.
The Growth & Income Fund; the Intermediate Fixed Income Fund and the
Virginia Municipal Bond Fund are newly-organized portfolios that were formed to
continue the operations of the MarketWatch Equity Fund (the "Prior Equity
Fund"), the MarketWatch Intermediate Fixed Income Fund (the "Prior Income Fund")
and the MarketWatch Virginia Municipal Bond Fund (the "Prior Virginia Fund")
series, respectively. The Prior Equity Fund, the Prior Income Fund and the Prior
Virginia Fund were series of another investment company. Pursuant to a Plan of
Reorganization, the Prior Equity Fund transferred all of its assets to the
Growth & Income Fund in exchange for shares of the Growth & Income Fund.
Similarly, pursuant to a Plan of Reorganization, the Prior Income Fund
transferred all of its assets to the Intermediate Fixed Income Fund in exchange
for shares of the Intermediate Fixed Income Fund. Also, pursuant to a Plan of
Reorganization, the Prior Virginia Fund transferred all of its assets to the
Virginia Municipal Bond Fund in exchange for shares of the Virginia Municipal
Bond Fund. (These transfers of assets and assumptions of liabilities are
collectively the "Reorganization.") Shareholders of the Prior Equity Fund, the
Prior Income Fund and the Prior Virginia Fund approved the Reorganization at a
shareholder meeting held on __________, 1998. On March ___, 1998, the effective
date of the Reorganization, shares of the Growth & Income Fund, the Intermediate
Fixed Income Fund and the Virginia Municipal Bond Fund were distributed on a pro
rata basis to the Prior Equity Fund's, the Prior Income Fund's and the Prior
Virginia Fund's shareholders, respectively.
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'
investment 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:
o 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;
o 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, Inc. ("Moody's") or, if unrated, are of comparable quality as
determined by the Funds' investment adviser;
o 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
o bankers' acceptances.
Wachovia Funds (except the Equity Index 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, a 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 the 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 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 their portfolios. 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 their portfolios or which they
have the right to obtain without payment of further consideration or
for which they have 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, Growth & Income Fund,
Special Values Fund, Emerging Markets Fund, Balanced Fund, Fixed
Income Fund, Intermediate 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. A 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, Growth & Income Fund,
Special Values Fund, Emerging Markets Fund, Balanced Fund, Fixed
Income Fund, Intermediate 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, Growth & Income Fund,
Special Values Fund, Emerging Markets Fund, Balanced Fund, Fixed
Income Fund, Intermediate 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 Funds purchase and
write 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, Growth
& Income 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). A 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 the 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 Fund's
investment adviser could be incorrect in its expectations about the
direction or extent of market factors such as stock price movements.
In these events, the 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' investment 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 the Fund's
ability to effectively hedge its portfolio.
Futures Contracts on Foreign Government Debt Obligations
These transactions are subject to the risk of governmental actions
affecting the trading or prices of the contracts. The value of the
Funds' positions could also be adversely affected by (i) other
foreign political and economic factors, (ii) less available data
than in the U.S. on which to base trading decisions, (iii) delays in
the Funds' ability to act upon economic events occurring in foreign
markets during non-business hours in the U.S., (iv) the imposition
of exercise and settlement terms and procedures, and margin
requirements different from those in the U.S., and (v) lesser
trading volume.
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 ("SEC" or the "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 Funds believe that the SEC staff 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:
o the frequency of trades and quotes for the security;
o the number of dealers willing to purchase or sell the security and the
number of other potential buyers;
o dealer undertakings to make a market in the security; and
o 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, Growth & Income Fund, Special
Values Fund, Emerging Markets Fund, Balanced Fund, Fixed Income Fund,
Intermediate Fixed Income Fund and Short-Term Fixed Income 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 (the "World Bank"),
European Investment Bank (the "EIB") and the 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, Growth & Income Fund, Special
Values Fund, Emerging Markets Fund, Balanced Fund, Fixed Income Fund,
Intermediate 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, Intermediate
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 a 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 a 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, Intermediate
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, Intermediate 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, Intermediate
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 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 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 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
Funds. 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 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:
o the full faith and credit of the U.S. Treasury;
o the issuer's right to borrow from the U.S. Treasury;
o the discretionary authority of the U.S. government to purchase certain
obligations of agencies or instrumentalities; or
o 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:
o Farm Credit System, including the National Bank for Cooperatives and Banks
for Cooperatives;
o Federal Home Loan Banks;
o Federal Home Loan Mortgage Corporation;
o Fannie Mae;
o Government National Mortgage Association; and
o Student Loan Marketing Association.
The 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 a 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 Funds 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.
Ratings
The Fixed Income Fund, Intermediate Fixed Income Fund, Georgia Municipal
Bond Fund, North Carolina Municipal Bond Fund, South Carolina Municipal Bond
Fund, and Virginia Municipal Bond Fund may invest up to 5% of their respective
total assets in securities rated Baa by Moody's or BBB by S&P. These securities
have speculative characteristics. Changes in economic conditions or other
circumstances are more likely to lead to weakened capacity to make principal and
interest payments than higher rated bonds. Downgrades will be evaluated on a
case by case basis by the Funds' investment adviser. The Funds' investment
adviser will determine whether or not the security continues to be an acceptable
investment. If not, the security will be sold.
High Yield Securities
The Special Values Fund and Emerging Markets Fund may invest in high yield
securities. Generally, the lowest-rated securities in which a 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 a 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. A 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 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 Philosophy of the Emerging Markets Fund
As described in the Fund's prospectuses 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
prospectuses. 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, Romania,
Russia, Slovak Republic, South Africa, 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 World Bank, the EIB and the
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 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 Fund's 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 Fund's 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, South
Carolina Municipal Bond Fund and Virginia 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 prospectuses.
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
investment 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 a 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. A 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 Fund's 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 Funds.
The premiums for the Policies are paid by a Fund and the yield on the
Fund's portfolio is reduced thereby. Premiums for the Policies are paid by a
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 a 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 a 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. A Fund reserves
the right to terminate any of the Policies if it determines that the benefits to
the 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, South
Carolina Municipal Bond Fund, and Virginia 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 they hold.
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 March __, 1998, 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 March __, 1998, 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 March __, 1998, 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, South
Carolina Municipal Bond Fund, and Virginia 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.
State Investment Risks
As a general matter, concentration by the Georgia Municipal Bond Fund, the
North Carolina Municipal Bond Fund, the South Carolina Municipal Bond Fund, and
the Virginia Municipal Bond Fund in securities issued by the State (or
Commonwealth, as applicable) identified in each Fund's name and each such
State's (or Commonwealth's) political subdivisions provides a greater level of
risk than a fund which is diversified across numerous states and municipal
entities. The ability of each State (or Commonwealth) or its municipalities to
meet its obligations will depend on the availability of tax and other revenues;
and economic, political, and demographic conditions within the State (or the
Commonwealth), its counties, and its municipalities.
Georgia Investment Risks
The State of Georgia's economy is based on manufacturing (textiles, food
products, paper products, electronic equipment and aircraft), trade and a
growing services sector. Atlanta, with a service-oriented economy, is a trade,
service and transportation center for the Southeast region of the United States
and is the focus of economic growth in the State. In most other cities in
Georgia, manufacturing predominates. The State economy was only mildly affected
by the early 1980's recession and grew rapidly for most of the decade, with
employment and personal income growth in excess of comparable national rates.
Despite continued population growth, personal income per capita has steadily
gained relative to the nation. The economy began to slow in 1989, with less
vigorous job growth evident and the State's relative per capita income position
slipping.
Throughout the 1980s the State's expanding economy fostered strong income
and sales tax growth. This enabled the State to record fairly strong fiscal
operations for fiscal years 1984-1989.
The State experienced an economic downturn in the early 1990's, as
operating deficits were recorded in fiscal years 1990-1992. However, in fiscal
years 1993 and 1994, the State ended with operating surpluses due to strong
revenue growth which will be used to augment reserves. The State's debt rating
was affirmed as "Aaa" by Moody's in July, 1994. Preparations for the 1996 Summer
Olympics helped propel Georgia's economy. Businesses and local governments
created a total of 400,000 jobs over the period of 1991-1994 and the
unemployment rate dropped during the period to just 4.9%.
The Georgia Municipal Bond Fund's investment adviser believes that the
information presented above describes some of the more significant matters
relating to the Georgia Municipal Bond Fund. The sources of the information are
the official statements of issuers located in Georgia, other publicly available
documents, and oral statements from various State agencies. The Georgia
Municipal Bond Fund's investment adviser has not independently verified any of
the information contained in the official statements, other publicly available
documents, or oral statements from various State agencies.
North Carolina Investment Risks
The State of North Carolina's credit strength is derived from a
diversified economy, relatively low unemployment rates, strong financial
management, and a low debt burden. In recent years, the State's economy has
become less dependent on agriculture (primarily tobacco) and manufacturing
(textiles and furniture) and has experienced increased activity in financial
services, research, high technology manufacturing, and tourism. North Carolina
did not escape the effects of the economic slowdown; however, the State is now
experiencing an increase in economic development. North Carolina ranks among the
top ten states in terms of economic growth, as measured by job and personal
income growth. Long-term personal income trends indicate gains; however, wealth
levels still continue to lag the national average. State unemployment rates
consistently fall below the national average. For November 1995, North Carolina
reported an unemployment rate of 4.2%, versus the national average of 5.6%.
North Carolina is a very conservative debt issuer and has maintained debt
levels that are low due to constitutional debt limitations. Conservative
policies also dominate the State's financial operations. The State's
administration continually demonstrates its ability and willingness to adjust
financial planning and budgeting to preserve financial balance. The State's
finances, which enjoyed surpluses and adequate reserves throughout the 1980's,
began reflecting the economic downtown in fiscal 1990. To close the shortfalls
that emerged because of weakening revenues, the State increased its sales and
corporate tax rates and implemented expenditure reductions and restrictions.
Actions by the State resulted in a budget surplus for fiscal 1992, 1993 and
1994. Available unreserved balances and budget stabilization reserves are
projected to be $359 million for 1995. The financials of many North Carolina
municipalities are also strong, and over 25% of all "Aaa" rated tax-exempt bonds
issued by local municipalities throughout the United States are issued by cities
and towns located in the State.
The North Carolina Municipal Bond Fund's investment adviser believes that
the information summarized above describes some of the more significant matters
relating to the North Carolina Municipal Bond Fund. The sources of the
information are the official statements of issuers located in North Carolina,
other publicly available documents, and oral statements from various State
agencies. The North Carolina Municipal Bond Fund's investment adviser has not
independently verified any of the information contained in the official
statements, other publicly available documents, or oral statements from various
State agencies.
South Carolina Investment Risks
The State of South Carolina has an economy that has been dominated from
the early 1920s through the present by the textile industry, with more than one
of every three manufacturing jobs directly or indirectly related to the textile
industry. However, since 1950, the economic bases of the State have become more
diversified, as the trade and service sectors and durable goods manufacturing
industries have developed. Currently, Moody's rates South Carolina's general
obligation bonds "Aaa" and S&P rates such bonds "AA+." There can be no assurance
that the economic conditions on which those ratings are based will continue or
that particular bond issues may not be adversely affected by changes in economic
or political conditions.
The South Carolina State Constitution (the "Constitution") mandates a
balanced budget. If a deficit occurs, the General Assembly must account for it
in the succeeding fiscal year. In addition, if a deficit appears likely, the
State Budget and Control Board (the "State Board") may reduce appropriations
during the current fiscal year as necessary to prevent the deficit. The
Constitution limits annual increases in State employees' wages to the average
growth rate of the economy of the State and annual increases in the number of
State employees to the average growth of the State's population.
The Constitution requires a General Reserve Fund ("General Fund") that
equals three percent of General Fund revenue for the latest fiscal year. When
deficits have occurred, the State has funded them out of the General Fund. The
Constitution also requires a Capital Reserve Fund ("Capital Fund") equal to two
percent of General Fund revenue. Before March 1st of each year, the Capital Fund
must be used to offset mid-year budget reductions before mandating cuts in
operating appropriations. After March 1st, the Capital Fund may be appropriated
by a special vote of the General Assembly to finance previously authorized
capital improvement bond projects, to retire bond principal or pay interest on
bonds previously issued, and to pay for capital improvements or other
nonrecurring purposes. Monies in the Capital Fund not appropriated or any
appropriation for a particular project or item that has been reduced due to
application of the monies to a year-end deficit must go back to the General
Fund.
The shutdown of the Charleston Naval Base exacted a heavy toll in North
Charleston. In addition, contractors at the Savannah River Site nuclear complex
laid off more than 4,000 workers. However, plant expansions and openings by
companies such as BMW, Michelin, AMP, and Fuji Photo have helped to mitigate
these negative economic developments.
As discussed above, the South Carolina Municipal Bond Fund's concentration
in securities issued by the State or its subdivisions provides a greater level
of risk than an investment company which is diversified across a larger
geographical area. For example, the passage of the North American Free Trade
Agreement could result in increased competition for the State's textile industry
due to the availability of less-expensive foreign labor.
Presently, South Carolina subjects bonds issued by other states to its
income tax. If this tax was declared unconstitutional, the value of bonds in the
South Carolina Municipal Bond Fund could decline a small but measurable amount.
Also, the South Carolina Municipal Bond could become slightly less attractive to
potential future investors.
The South Carolina Municipal Bond Fund's investment adviser believes that
the information summarized above describes some of the more significant matters
relating to the South Carolina Municipal Bond Fund. The sources of the
information are the official statements of issuers located in South Carolina,
other publicly available documents, and oral statements from various State
agencies. The South Carolina Municipal Bond Fund's investment adviser has not
independently verified any of the information contained in the official
statements, other publicly available documents, or oral statements from various
State agencies.
Virginia Investment Risks
The rate of economic growth in the Commonwealth of Virginia has slowed in
the 1990's compared to the late 1980's. From 1986 to 1995, the Commonwealth's
5.0% rate of growth in per capita personal income was approximately equal to the
national rate of growth. In 1995, Virginia's growth rate was 4.9% compared to
5.0% for the nation. Per capita income in Virginia has been consistently above
national levels over the past decade and, in 1995, was $23,597 compared with the
national average of $22,788.
The services sector in Virginia generates the largest number of jobs,
followed by wholesale and retail trade, government employment, and
manufacturing. Employment in the services sector increased by 19.1% from 1991 to
1995, making it the fastest growing sector in the Commonwealth. Because of
Virginia's proximity to Washington, D.C. and the concentration of military
installations in the Hampton Roads area of the Commonwealth (the largest such
concentration in the United States), the United States federal government has a
greater economic impact on Virginia relative to its size than on any of the
other states except Alaska and Hawaii.
According to statistics published by the U.S. Department of Labor, the
Commonwealth of Virginia typically has one of the lowest unemployment rates in
the nation. This is generally attributed to the balance among the various
sections represented in the economy. During 1995, an average of 4.5% of
Virginians were unemployed as compared with the national average of 5.6%. The
population of the state has continued to grow over the last decade at a rate
that is higher than the national average. During the last decade, the rate of
increase in such population growth reached a high of 2.1% annually in 1987 and,
in 1995, was approximately 1.4%.
Virginia is one of twenty states with a right-to-work law and is generally
regarded as having a favorable business climate marked by few strikes or work
stoppages. Virginia is also one of the least unionized among the industrial
states. The percentage of non-agricultural employees who belong to unions in the
Commonwealth of Virginia has been approximately half the national average.
Currently, NRSROs assign their highest rating to general obligation bonds
issued by the Commonwealth of Virginia, reflecting in part, its sound fiscal
management, diversified economic base and low debt ratios. There can be no
assurance that the economic conditions on which these ratings are based will
continue or that particular bond issues may not be adversely affected by changes
in economic or political conditions. Furthermore, the Virginia Municipal Bond
Fund also invests in securities issued by the political authorities of the
Commonwealth of Virginia, all of which are separately rated (if rated at all) by
NRSROs.
The Virginia Municipal Bond Fund's investment adviser believes that the
information summarized above describes some of the more significant matters
relating to the Virginia Municipal Bond Fund. The sources of the information are
the official statements of issuers located in Virginia, other publicly available
documents, and oral statements from various Commonwealth agencies. The Virginia
Municipal Bond Fund's investment adviser has not independently verified any of
the information contained in the official statements, other publicly available
documents, or oral statements from various Commonwealth agencies.
Portfolio Turnover
No Fund will 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 the 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 the Fund's portfolio.
During the fiscal years ended November 30, 1997 and 1996, the Equity
Fund's portfolio turnover rates were __% and 64%, respectively.
During the fiscal years ended November 30, 1997 and 1996, the Quantitative
Equity Fund's portfolio turnover rates were __% and 44%, respectively.
During the fiscal years ended November 30, 1997 and 1996, the MarketWatch
Equity Fund, which was reorganized into the Growth & Income Fund, had portfolio
turnover rates that were __% and 12%, respectively.
During the fiscal years ended November 30, 1997 and 1996, the Equity Index
Fund's portfolio turnover rates were __% and 14%, respectively.
During the fiscal years ended November 30, 1997 and 1996, the Special
Values Fund's portfolio turnover rates were __% and 38%, respectively.
During the fiscal years ended November 30, 1997 and 1996, the Emerging
Markets Fund's portfolio turnover rates were __% and 30%, respectively.
During the fiscal years ended November 30, 1997 and 1996, the Balanced
Fund's portfolio turnover rates were __% and 99%, respectively.
During the fiscal years ended November 30, 1997 and 1996, the Fixed Income
Fund's portfolio turnover rates were ___% and 181%, respectively.
During the fiscal years ended November 30, 1997 and 1996, the MarketWatch
Intermediate Fixed Income Fund, which was reorganized into the Intermediate
Fixed Income Fund, had portfolio turnover rates that were ___% and 84%,
respectively.
During the fiscal years ended November 30, 1997 and 1996, the Short-Term
Fixed Income Fund's portfolio turnover rates were ___% and 145%, respectively.
During the fiscal years ended November 30, 1997 and 1996, the Georgia
Municipal Bond Fund's portfolio turnover rates were __% and 14%, respectively.
During the fiscal years ended November 30, 1997 and 1996, the North
Carolina Municipal Bond Fund's portfolio turnover rates were __% and 7%,
respectively.
During the fiscal years ended November 30, 1997 and 1996, the South
Carolina Municipal Bond Fund's portfolio turnover rates were __% and 20%,
respectively.
During the fiscal years ended November 30, 1997 and 1996, the MarketWatch
Virginia Municipal Bond Fund, which was reorganized into the Virginia Municipal
Bond Fund, had portfolio turnover rates that were __% and 37%, respectively.
Investment Limitations
Selling Short and Buying On Margin
The Equity Fund, Quantitative Equity Fund, Growth & Income 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, Intermediate Fixed Income Fund, Georgia
Municipal Bond Fund, North Carolina Municipal Bond Fund, South
Carolina Municipal Bond Fund, and Virginia 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 Growth & Income Fund, 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,
Intermediate 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,
South Carolina Municipal Bond Fund, and Virginia 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 (except for the Growth & Income Fund, the Intermediate
Fixed Income Fund and the Virginia Municipal Bond Fund) 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, Growth & Income 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,
Intermediate 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,
South Carolina Municipal Bond Fund, and Virginia 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 the Georgia Municipal Bond Fund, North Carolina
Municipal Bond Fund, South Carolina Municipal Bond Fund, and
Virginia 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,
South Carolina Municipal Bond Fund, and Virginia 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, Growth & Income 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 and the Intermediate 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,
South Carolina Municipal Bond Fund, and Virginia 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, Intermediate 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, Growth & Income Fund, Equity Index
Fund, Emerging Markets Fund, Georgia Municipal Bond Fund, North
Carolina Municipal Bond Fund, South Carolina Municipal Bond Fund,
and Virginia Municipal Bond Fund will not underwrite any issue of
securities, except as each Fund 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, South Carolina Municipal Bond Fund,
and Virginia 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 each Fund's 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, South Carolina Municipal
Bond Fund and Virginia 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, North Carolina Municipal Bond Fund,
and Virginia 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.
The 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, Growth & Income 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 each 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 the Fund's investment objective,
policies and limitations.
The Balanced Fund, Fixed Income Fund, Intermediate Fixed Income Fund
and Short-Term Fixed Income Fund will not lend any of their assets,
except portfolio securities up to one-third of the value of their
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
Funds' investment objectives, policies, and limitations.
The Georgia Municipal Bond Fund, North Carolina Municipal Bond Fund,
and Virginia 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 each Fund's
investment objective, policies, limitations and the Trust's
Declaration of Trust.
The 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
The 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
The 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 their 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, South Carolina Municipal Bond Fund, and
Virginia 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 the Fund's total assets would be invested in premiums
on open put option positions.
The Georgia Municipal Bond Fund, North Carolina Municipal Bond Fund,
South Carolina Municipal Bond Fund, and Virginia 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 their 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.
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
715 Whitemore Court, N.W.
Atlanta, GA
March 4, 1929
Trustee
Independent Consultant; President, Percival Hudgins & Company, LLC (investment
bankers/financial consultants) (until September 1997); Director, Atlantic
American Corporation (insurance holding company).
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).
Charles S. Way, Jr.*
211 King Street
Suite 300
Charleston, SC
December 18, 1937
Trustee
President and CEO, The Beach Company and its various affiliated companies and
partnerships.
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 Vice President and Director of Proprietary Funds Services,
Federated Services Company.
* 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 each 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 _______________, 1998:
Trustees Compensation
NAME AND TOTAL COMPENSATION PAID
POSITION WITH THE TO THE TRUSTEES FROM THE TRUSTS
TRUST AND FUND COMPLEX*+#
- -------------------------------------------------------------------------------
James A. Hanley, $
Trustee
Samuel E. Hudgins, $
Trustee
J. Berkley Ingram, Jr., $
Trustee
D. Dean Kaylor, $
Trustee
Charles S. Way, Jr., $
Trustee
- -------------------------------------------------------------------------------
*Information is furnished for the fiscal year ended November 30, 1997.
+The total compensation is paid by The Wachovia Funds, which, at November
30, 1997, was comprised of twelve portfolios and The Wachovia Municipal Funds,
which was comprised of three portfolios.
#The Fund Complex was, at November 30, 1997, 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 the Adviser 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 Adviser receives an annual investment
advisory fee as described in the prospectuses. 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 the Adviser, as described in the prospectuses.
Year Amount Year Ended Amount Year Ended Amount
Ended Waived-199Nov. 30, Waived-19Nov. 30, Waived-1995
Nov. 30, 1996 1995
Fund Name 1997
Equity Fund -- -- $1,003,098 $107,888 $754,597 $76,995
Quantitative -- -- $984,868 $100,131 $728,298 $89,503
Equity Fund
Equity Index -- -- $616,302 $88,233 $545,415 $97,171
Fund
Special Value -- -- $324,764 $76,655 $160,840 $59,075
Fund
Emerging -- -- $1,057 $371,458** $60,903
Markets Fund $1,006,829
Balanced Fund -- -- $1,588,214 $1,394,516 $316,346
$352,189
Fixed Income -- -- $1,047,666 $177,507 $957,389 $159,425
Fund
Short-Term -- -- $649,181 $211,508 $768,294 $220,989
Fixed Income
Fund
Georgia -- -- $ 84,212 $78,762 $49,436** $40,609
Municipal Bond
Fund
North Carolina -- -- $210,288 $77,710** $63,053
Municipal Bond $176,041
Fund
South Carolina -- -- $743,153 $500,413 $639,686 $469,407
Municipal Bond
Fund
**Represents the period from December 26, 1994 (date of initial public
investment) to November 30, 1995.
During the fiscal years ended November 30, 1997, 1996, and 1995, the
MarketWatch Equity Fund, which was reorganized into the Growth & Income Fund,
paid investment advisory fees of $_____, $1,070,702 and $797,122 to Central
Fidelity National Bank ("CFNB"), the investment adviser to the Prior Equity, the
Prior Income and the Prior Virginia Funds, of which amounts CFNB waived
$_______, $371,422 and $315,926, respectively. During the fiscal years ended
November 30, 1997, 1996, and 1995, the Prior Virginia Fund, which was
reorganized into the Virginia Municipal Bond Fund, paid investment advisory fees
of $_______, $250,321 and $172,550 to CFNB, of which amounts CFNB waived
$_______, $225,219 and $155,972, respectively. During the fiscal years ended
November 30, 1997, 1996, and 1995, the Prior Income Fund, which was reorganized
into the Intermediate Fixed Income Fund, paid investment advisory fees of $____,
$188,872 and $195,026 to CFNB, of which amounts CFNB waived $_____, $99,835 and
$99,607, respectively.
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 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 Adviser
makes decisions on portfolio transactions and selects brokers and dealers
subject to guidelines established by the Trustees. The Adviser may select
brokers and dealers who offer brokerage and research services. These services
may be furnished directly to a Fund or to the 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 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 Adviser or its affiliates might otherwise have paid, it
would tend to reduce its expenses. The 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, 1997, 1996,
and 1995, the Equity Fund paid $________, $252,493, and $176,610, respectively,
in commissions on brokerage transactions. For the fiscal years ended November
30, 1997, 1996, and 1995, the Quantitative Equity Fund paid $________, $165,434,
and $98,771, respectively, in commissions on brokerage transactions. For the
fiscal years ended November 30, 1997, 1996, and 1995, the MarketWatch Equity
Fund, which was reorganized into the Growth & Income Fund, paid $_______,
$89,768 and $85,138, respectively, in commissions on brokerage transactions. For
the fiscal years ended November 30, 1997, 1996, and 1995, the Equity Index Fund
paid $________, $15,333, and $28,337, respectively, in commissions on brokerage
transactions. For the fiscal years ended November 30, 1997, 1996, and 1995, the
Special Values Fund paid $________, $155,248, and $57,052, respectively, in
commissions on brokerage transactions. For the fiscal year ended November 30,
1997, 1996 and 1995, the Emerging Markets Fund paid $________, $538,172, and
$437,055, respectively, in commissions on brokerage transactions. For the fiscal
years ended November 30, 1997, 1996, and 1995, the Balanced Fund paid $________,
$269,729, and $140,316, respectively, in commissions on brokerage transactions.
For the fiscal years ended November 30, 1997, 1996, and 1995, the Fixed Income
Fund, Short-Term Fixed Income Fund, Georgia Municipal Bond Fund, North Carolina
Municipal Bond Fund, South Carolina Municipal Bond Fund, the MarketWatch
Intermediate Fixed Income Fund, the predecessor to the Intermediate Fixed Income
Fund, and the MarketWatch Virginia Municipal Bond Fund, the predecessor to the
Virginia Municipal Bond Fund, paid no commissions on brokerage transactions.
As of November 30, 1997, the MarketWatch Equity Fund, which was
reorganized into the Growth & Income Fund, owned $_______ of securities issued
by __________, respectively, several of its regular broker/dealers, which derive
more than 15% of their gross revenues from securities-related activities.
As of November 30, 1997, the Balanced Fund owned $_________ of securities
issued by ____________________, one of its regular broker/dealers, which derives
more than 15% of its gross revenues from securities-related activities.
As of November 30, 1997, the Fixed Income Fund owned $_________ of
securities issued by _____________________________________, one of its regular
broker/dealers, which derive more than 15% of its gross revenues from
securities-related activities.
As of November 30, 1997, the MarketWatch Intermediate Fixed Income Fund,
which was reorganized into the Intermediate Fixed Income Fund, owned $_____ of
securities issued by _____, respectively, several of its regular broker/dealers,
which derive more than 15% of other gross revenues from securities-related
activities.
As of November 30, 1997, the Short-Term Fixed Income Fund owned $_________
of securities issued by ___________________, 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 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 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 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 participating
Fund.
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:
Year Amount Year Ended Amount Year Ended Amount
Fund Name Ended Waived-199Nov. 30, Waived-19Nov. 30, Waived-1995
Nov. 30, 1996 1995
1997
Equity Fund -- -- $124,288 $0 $96,714 $0
Quantitative -- -- $121,949 $0 $93,391 $0
Equity Fund
Equity Index -- -- $178,161 $0 $163,299 $0
Fund
Special Value -- -- $35,122 $0 $75,000 $56,955
Fund
Emerging -- -- $87,231 $0 $75,000** $41,860
Markets Fund
Balanced Fund -- -- $196,750 $0 $178,968 $46,191
Fixed Income -- -- $151,450 $0 $143,274 $0
Fund
Short-Term -- -- $102,429 $0 $125,580 $0
Fixed Income
Fund
Georgia -- -- $9,732 $0 $50,000** $44,142
Municipal Bond
Fund
North Carolina -- -- $24,266 $0 $50,000** $40,270
Municipal Bond
Fund
South Carolina -- -- $86,019 $0 $76,587 $0
Municipal Bond
Fund
**Represents the period from December 26, 1994 (date of initial public
investment) to November 30, 1995.
During the fiscal years ended November 30, 1997, 1996, and 1995, the
MarketWatch Equity Fund, which was reorganized into the Growth & Income Fund,
paid administration fees to the Prior Equity Fund's administrator (the "Prior
Administrator") of $_______, $216,046, and $166,890, respectively, of which
amounts the Prior Administrator waived administration fees of $_______, $72,379
and $55,720, respectively. During the fiscal years ended November 30, 1997,
1996, and 1995, the MarketWatch Virginia Municipal Bond Fund, which was
reorganized into the Virginia Municipal Bond Fund, paid administration fees to
the Prior Administrator of $_______, $96,326 and $66,535, respectively, of which
amounts the Prior Administrator waived administration fees of $_______, $32,198
and $22,255, respectively. During the fiscal years ended November 30, 1997, 1996
and 1995, the MarketWatch Intermediate Fixed Income Fund, which was reorganized
into the Intermediate Fixed Income Fund, paid administration fees to the Prior
Administrator of $_____, $58,491 and $59,777, respectively, of which amounts the
Prior Administrator waived and/or reimbursed administration fees of $_____,
$19,538 and $44,670, respectively.
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. The Transfer Agent 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 shareholders' 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 each 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, 1997, payments in the amount of
$________ 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 $_______, of which $_________ was waived, and Class B Shares
paid $_______.
For the fiscal year ended November 30, 1997, payments in the amount of
$_____ 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 $_______, of which $________ was
waived, and Class B Shares paid $_____.
For the fiscal year ended November 30, 1997, the Equity Index Fund Class A
Shares paid shareholder service fees in the amount of $_______, of which
$________ was waived.
For the fiscal year ended November 30, 1997, the Special Values Fund Class
A Shares paid shareholder service fees in the amount of $______, of which
$________ was waived.
For the fiscal year ended November 30, 1997, the Emerging Markets Fund
Class A Shares paid shareholder service fees in the amount of $______, of which
$________ was waived.
For the fiscal year ended November 30, 1997, payments in the amount of
$_____ 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 $_______, of which $________ was waived, and Class B
Shares paid $_____.
For the fiscal year ended November 30, 1997, payments in the amount of
$_____ 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 $_______, of which $________ was
waived, and Class B Shares paid $_____.
For the fiscal year ended November 30, 1997, the Short-Term Fixed Income
Fund Class A Shares paid shareholder service fees in the amount of $______, of
which $________ was waived.
For the fiscal year ended November 30, 1997, Georgia Municipal Bond Fund
Class A Shares paid shareholder service fees in the amount of $_____ of which
$________ was waived.
For the fiscal year ended November 30, 1997, North Carolina Municipal Bond
Fund Class A Shares paid shareholder service fees in the amount of $______, of
which $________ was waived.
For the fiscal year ended November 30, 1997, South Carolina Municipal Bond
Fund Class A Shares paid shareholder service fees in the amount of $______, of
which $__________ was waived.
The Class A Shares of the Growth & Income Fund, the Intermediate Fixed
Income Fund and the Virginia Municipal Bond Fund were not offered during the
fiscal year ending November 30, 1997. During the fiscal year ending November 30,
1997, the MarketWatch Equity Fund, which was reorganized into the Growth &
Income Fund, paid $_______ to the MarketWatch Equity Fund's distributor (the
"Prior Distributor"),; the MarketWatch Intermediate Fixed Income Fund, which was
reorganized into the Intermediate Fixed Income Fund, paid $_____ to the Prior
Distributor; and the MarketWatch Virginia Municipal Bond Fund, which was
reorganized into the Virginia Municipal Bond Fund, paid $_______ to the Prior
Distributor. For the same period, the Prior Distributor received $_______,
$_____ and $_____ in sales loads, in connection with purchases of shares of the
Prior Equity Fund, the Prior Income Fund and the Prior Virginia Fund,
respectively, of which the Prior Distributor retained $_______, $_____ and
$_____, respectively. The balance was paid to selling dealers.
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 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 SEC 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 1940 Act
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, Growth & Income
Fund, Equity Index Fund, Special Values Fund, Emerging Markets Fund, Balanced
Fund, Fixed Income Fund, Intermediate 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, South Carolina Municipal Bond
Fund, and Virginia 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 the
shares.
Capital gains or losses may be realized by the Georgia Municipal Bond
Fund, North Carolina Municipal Bond Fund, South Carolina Municipal Bond Fund,
and Virginia 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.
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.
Fund Name Class A Class A Class A Class B Class Y
Shares Shares Shares Shares Shares
Average Average Average Cumulative Cumulative
Annual Annual Annual Total Return Total Return
Total Return Total Return Total Return Since Since
1-year 5-Year Since Inception Inception
Period* Period* Inception**
- -------------------------------------------------------------------------------
Equity Fund % % %+ %++ %++
Quantitative % % %# %++ %++
Equity
Fund
Growth & % % % % %
Income
Fund+
Equity Index % % %+ % %++
Fund
Special % % %+ % %++
Values
Fund
Emerging % % %## % %++
Markets
Fund
Balanced Fund % % %+ %++ %++
Fixed Income % % %+ %++ %++
Fund
Intermediate
Fixed
Income Fund
Short-Term % % %+ % %++
Fixed
Income Fund
Georgia % % %## % %++
Municipal
Bond Fund
North % % %## % %++
Carolina
Municipal
Bond Fund
South % % %### % %++
Carolina
Municipal
Bond Fund
Virginia % % % % %
Municipal
Bond Fund+
* For the fiscal year ended November 30, 1997 ** Start of performance + May 7,
1993 through November 30, 1997 ++ July 23, 1996 through November 30, 1997 #
March 25, 1994 through November 30, 1997 ## December 23, 1994 through November
30, 1997 ### January 11, 1991 through November 30, 1997
+ Performance quoted reflects the performance of the MarketWatch Equity Fund,
the MarketWatch Intermediate Fixed Income Fund and the MarketWatch Virginia
Municipal Bond Fund, which were reorganized into the Growth & Income Fund, the
Intermediate Fixed Income Fund and the Virginia Municipal Bond Fund,
respectively.
Yield
The yield for a Fund is determined each day by dividing the net investment
income per share (as defined by the SEC) 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 SEC 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' yields for the thirty-day period ended November 30, 1997, were
as follows:
Fund Name Class A Shares Class B Shares class Y Shares
- -------------------------------------------------------------------------------
Equity Fund % % %
Quantitative Equity Fund % % %
Equity Index Fund % % %
Growth & Income Fund+ % % %
Special Values Fund % % %
Emerging Markets Fund % % %
Balanced Fund % % %
Fixed Income Fund % % %
Intermediate Fixed
Income
Fund
Short-Term Fixed Income % % %
Fund
Georgia Municipal Bond % % %
Fund
North Carolina Municipal % % %
Bond Fund
South Carolina Municipal % % %
Bond Fund
Virginia Municipal Bond % % %
Fund+
+ Performance quoted reflects the performance of the MarketWatch Equity Fund,
MarketWatch Intermediate Fixed Income Fund, and the MarketWatch Virginia
Municipal Bond Fund, which were reorganized into the Growth & Income Fund, the
Intermediate Fixed Income Fund and the Virginia Municipal Bond Fund,
respectively.
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 the 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, 1997 was ____%, assuming a 31% tax bracket.
Georgia Municipal Bond Fund Class Y Shares' tax-equivalent yield for the
thirty-day period ended November 30, 1997 was ____%, assuming a 31% tax bracket.
- -------------------------------------------------------------------------------
TAXABLE YIELD EQUIVALENT FOR 1998
STATE OF GEORGIA
- -------------------------------------------------------------------------------
TAX BRACKET:
FEDERAL COMBINED 15.00% 28.00% 31.00% 36.00% 39.60%
COMBINED FEDERAL 21.00% 34.00% 37.00% 42.00% 45.60%
AND STATE
- -------------------------------------------------------------------------------
JOINT RETURN $1- $40,101- $96,901- $147,701- OVER
40,100 96,900 147,700 263,750 $263,750
SINGLE RETURN $1- $24,001- $58,151- $121,301- OVER
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, 1997 was ____%, assuming a 31% tax
bracket.
North Carolina Municipal Bond Fund Class Y Shares' tax-equivalent yield
for the thirty-day period ended November 30, 1997 was ____%, assuming a 31% tax
bracket.
<PAGE>
- -------------------------------------------------------------------------------
TAXABLE YIELD EQUIVALENT FOR 1998
STATE OF NORTH CAROLINA
- -------------------------------------------------------------------------------
TAX BRACKET:
FEDERAL COMBINED 15.00% 28.00% 31.00% 36.00% 39.60%
COMBINED FEDERAL 22.00% 35.00% 38.75% 43.75% 47.35%
AND STATE
- -------------------------------------------------------------------------------
JOINT RETURN $1- $40,101- $96,901- $147,701- OVER
40,100 96,900 147,700 263,750 $263,750
SINGLE RETURN $1- $24,001- $58,151- $121,301- OVER
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%
South Carolina Municipal Bond Fund Class A Shares' tax-equivalent yield
for the thirty-day period ended November 30, 1997 was ____%, assuming a 31% tax
bracket.
South Carolina Municipal Bond Fund Class Y Shares' tax-equivalent yield
for the thirty-day period ended November 30, 1997 was ____%, assuming a 31% tax
bracket.
- -------------------------------------------------------------------------------
TAXABLE YIELD EQUIVALENT FOR 1998
STATE OF SOUTH CAROLINA
- -------------------------------------------------------------------------------
TAX BRACKET:
FEDERAL COMBINED 15.00% 28.00% 31.00% 36.00% 39.60%
COMBINED FEDERAL 22.00% 35.00% 38.00% 43.00% 46.60%
AND STATE
- -------------------------------------------------------------------------------
JOINT RETURN $1- $40,101- $96,901- $147,701- OVER
40,100 96,900 147,700 263,750 $263,750
SINGLE RETURN $1- $24,001- $58,151- $121,301- OVER
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%
MarketWatch Virginia Municipal Bond Fund's tax-equivalent yield for the
thirty-day period ended November 30, 1997 was __%, assuming a 31% tax bracket.
- -------------------------------------------------------------------------------
TAXABLE YIELD EQUIVALENT FOR 1998
COMMONWEALTH OF VIRGINIA
- -------------------------------------------------------------------------------
TAX BRACKET:
FEDERAL COMBINED 15.00% 28.00% 31.00% 36.00% 39.60%
COMBINED FEDERAL 22.00% 35.00% 38.00% 43.00% 46.60%
AND STATE
- -------------------------------------------------------------------------------
JOINT RETURN $1- $40,101- $96,901- $147,701- OVER
40,100 96,900 147,700 263,750 $263,750
SINGLE RETURN $1- $24,001- $58,151- $121,301- OVER
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%
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.
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 a 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 regard 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 a 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
inception of the index, 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
inception of the index, 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 Funds may quote total
returns which are calculated on non-standardized base periods. These total
returns also represent the historic change in the value of investments in the
Funds 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.
Financial Statements
The financial statements for the fiscal period ended November 30, 1997 are
incorporated herein by reference from the Funds' Annual Reports dated November
30, 1997 (File Nos. 33-44590 and 811-6504). The financial statements for the
fiscal period ended November 30, 1997 for the MarketWatch Equity Fund, the
MarketWatch Intermediate Fixed Income Fund and the MarketWatch Virginia
Municipal Bond Fund, the predecessors to the Growth & Income Fund, the
Intermediate Fixed Income Fund and the Virginia Municipal Bond Fund,
respectively, are also incorporated herein by reference from the MarketWatch
Funds' Annual Reports dated November 30, 1997 (File Nos. 33-___ and 811-___). No
other parts of the MarketWatch Funds' 1997 Annual Report are incorporated by
this reference. 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
prospectuses or by calling the Funds at 1-800-994-4414.
Standard & Poor's
Standard & Poor's ("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 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 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 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 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.
