BILTMORE SPECIAL VALUES FUND
(A PORTFOLIO OF THE BILTMORE FUNDS)
PROSPECTUS
The shares of Biltmore Special Values Fund (the "Fund") offered by this
prospectus represent interests in a diversified portfolio of securities, which
is one of a series of investment portfolios in The Biltmore Funds (the "Trust"),
an open-end management investment company (a mutual fund).
The investment objective of the Fund is to produce growth of principal. The Fund
pursues this objective by investing primarily in a portfolio of equity
securities comprising the small capitalization sector of the United States
equity market.
THE INVESTMENT COMPANY SHARES ARE NOT DEPOSITS OR OBLIGATIONS OF, OR ENDORSED OR
GUARANTEED BY, WACHOVIA BANK OF NORTH CAROLINA, N.A. OR 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.
This prospectus contains the information an investor should read and know before
investing in the Fund. Keep this prospectus for future reference.
The Fund has also filed a Statement of Additional Information dated January 31,
1994 (Revised June 1, 1994) with the Securities and Exchange Commission. 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 Fund, Trust customers of the Wachovia Banks (as defined
herein) may write the Fund or call their Wachovia Bank Officer. Customers of
Wachovia Brokerage Service may write the Fund or call 1-800-462-7538.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
Prospectus dated January 31, 1994
(Revised June 1, 1994)
TABLE OF CONTENTS
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SUMMARY OF FUND EXPENSES 1
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FINANCIAL HIGHLIGHTS 2
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GENERAL INFORMATION 3
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INVESTMENT INFORMATION 3
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Investment Objective 3
Investment Policies 3
Acceptable Investments 4
Corporate Obligations 4
Securities of Foreign Issuers 5
Stock Index Futures and Options 6
Put and Call Options 6
Restricted and Illiquid Securities 7
Temporary Investments 7
Repurchase Agreements 7
When-Issued and Delayed
Delivery Transactions 7
Lending of Portfolio Securities 7
Investment Considerations 8
Investment Limitations 8
THE BILTMORE FUNDS INFORMATION 8
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Management of the Trust 8
Board of Trustees 8
Investment Adviser 8
Advisory Fees 9
Adviser's Background 9
Distribution of Shares 9
Administrative Arrangements 10
Shareholder Servicing Arrangements 10
Administration of the Fund 10
Administrative Services 10
Custodian 10
Transfer Agent, Dividend Disbursing
Agent, and Portfolio Accounting
Services 11
Legal Services 11
Independent Auditors 11
Brokerage Transactions 11
Expenses of the Fund 11
NET ASSET VALUE 12
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INVESTING IN THE FUND 12
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Share Purchases 12
Through Wachovia Brokerage Service 12
By Mail 12
By Wire 12
Through the Trust Divisions of the
Wachovia Banks 13
Minimum Investment Required 13
What Shares Cost 13
Purchases at Net Asset Value 13
Sales Charge Reallowance 14
Reducing the Sales Charge 14
Quantity Discounts and Accumulated
Purchases 14
Letter of Intent 14
Reinvestment Privilege 15
Concurrent Purchases 15
Systematic Investment Program 15
Exchanging Securities for Fund Shares 15
Certificates and Confirmations 16
Dividends 16
Capital Gains 16
Exchange Privilege 16
Exchange by Telephone 17
REDEEMING SHARES 17
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By Telephone 17
By Mail 18
Signatures 18
Systematic Withdrawal Program 18
Accounts with Low Balances 19
SHAREHOLDER INFORMATION 19
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Voting Rights 19
Massachusetts Business Trusts 19
EFFECT OF BANKING LAWS 20
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TAX INFORMATION 21
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PERFORMANCE INFORMATION 21
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FINANCIAL STATEMENTS 22
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REPORT OF ERNST & YOUNG,
INDEPENDENT AUDITORS 35
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ADDRESSES 36
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SUMMARY OF FUND EXPENSES
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<TABLE>
<S> <C> <C>
SHAREHOLDER TRANSACTION EXPENSES
Maximum Sales Load Imposed on Purchases
(as a percentage of offering price)......................................................................... 4.50%
Maximum Sales Load Imposed on Reinvested Dividends
(as a percentage of offering price)......................................................................... None
Deferred Sales Load (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
ANNUAL FUND OPERATING EXPENSES
(As a percentage of average net assets)
Management Fee (after waiver) (1)............................................................................. 0.40%
12b-1 Fees.................................................................................................... None
Other Expenses (after waiver and reimbursement) (2)........................................................... 0.75%
Shareholder Servicing Agent Fee (3)............................................................ 0.00%
Total Fund Operating Expenses (after waiver and reimbursement) (4)............................................ 1.15%
</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 0.80%.
(2) Other expenses are estimated to be 1.49% absent the voluntary waiver and the
reimbursement by the administrator. The administrator may terminate this
voluntary waiver at any time at its sole discretion.
(3) As of the date of this prospectus, the Fund is not paying or accruing
shareholder servicing agent fees. The Fund will not pay or accrue
shareholder servicing agent fees until a separate class of shares has been
created for certain trust and institutional investors, including qualified
employee benefit plans. At that point, the Fund will be able to pay up to
0.25 of 1% of the Fund's average daily net assets for shareholder servicing
agent fees. See "The Biltmore Funds information".
(4) The Annual Fund Operating Expenses were 1.25% for the fiscal year ended
November 30, 1993. The Annual Fund Operating Expenses in the table above are
based on expenses expected during the fiscal year ending November 30, 1994.
The Annual Fund Operating Expenses are expected to be 2.29% absent the
voluntary waivers and reimbursement described above in notes 1 and 2.
THE PURPOSE OF THIS TABLE IS TO ASSIST AN INVESTOR IN UNDERSTANDING THE
VARIOUS COSTS AND EXPENSES THAT A SHAREHOLDER OF THE FUND WILL BEAR, EITHER
DIRECTLY OR INDIRECTLY. FOR MORE COMPLETE DESCRIPTIONS OF THE VARIOUS COSTS AND
EXPENSES, SEE "THE BILTMORE FUNDS INFORMATION" AND "INVESTING IN THE FUND."
<TABLE>
<CAPTION>
EXAMPLE 1 year 3 years
<S> <C> <C>
You would pay the following expenses on a $1,000 investment, assuming (1) 5% annual return and
(2) redemption at the end of each time period. As noted in the table above, the Fund charges no
redemption fees................................................................................ $56 $80
</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.
BILTMORE SPECIAL VALUES FUND
FINANCIAL HIGHLIGHTS
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(FOR A SHARE OUTSTANDING THROUGHOUT THE PERIOD)
Reference is made to the Report of Ernst & Young, Independent Auditors, on page
35.
<TABLE>
<CAPTION>
PERIOD ENDED
NOVEMBER 30,
1993*
<S> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $ 10.00
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INCOME FROM INVESTMENT OPERATIONS
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Net investment loss (0.002)
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Net realized and unrealized gain on investments 0.242
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Total from investment operations 0.24
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NET ASSET VALUE, END OF PERIOD $ 10.24
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TOTAL RETURN** 2.40%
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RATIOS TO AVERAGE NET ASSETS
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Expenses 1.25%(b)
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Net investment (loss) (0.03)%(b)
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Expense waiver/reimbursement (a) 1.79%(b)
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SUPPLEMENTAL DATA
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Net assets, end of period (000 omitted) $12,072
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Portfolio turnover rate 68%
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</TABLE>
* Reflects operations for the period from May 10, 1993 (date of initial public
investment) to November 30, 1993.
** Based on net asset value, which does not reflect the sales load or
redemption fee, if applicable.
(a) This expense decrease is reflected in both the expenses and net investment
income ratios shown above (Note 5).
(b) Computed on an annualized basis.
Further information about the Fund's performance is contained in the Fund's
Annual Report for the fiscal year ended November 30, 1993, which can be obtained
free of charge.
(See Notes, which are an integral part of the Financial Statements)
GENERAL INFORMATION
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The Biltmore Funds was established as a Massachusetts business trust under a
Declaration of Trust dated November 19, 1991. The Declaration of Trust permits
the Trust to offer separate series of shares of beneficial interest representing
interests in separate portfolios of securities. This prospectus relates only to
one portfolio, Biltmore Special Values Fund. The shares in any one portfolio may
be offered in separate classes. As of the date of this prospectus, the Board of
Trustees (the "Trustees") has not established classes of shares of the Fund.
The Fund is designed for institutions, pension plans and individuals as a
convenient means of accumulating an interest in a professionally-managed,
diversified portfolio investing primarily in common stocks. A minimum initial
investment of $250 is required. This amount may be waived from time to time. For
further information, Trust customers of the Wachovia Banks may telephone their
account officer and customers of Wachovia Brokerage Service may telephone a
broker at 1-800-462-7538.
Except as otherwise noted in this prospectus, shares are currently sold and
redeemed at net asset value plus a sales charge, if applicable, and are redeemed
at net asset value.
The other portfolios in the Trust are Biltmore Balanced Fund, Biltmore Equity
Fund, Biltmore Equity Index Fund, Biltmore Fixed Income Fund, Biltmore Money
Market Fund (Institutional Shares and Investment Shares), Biltmore Prime Cash
Management Fund (Institutional Shares), Biltmore Quantitative Equity Fund,
Biltmore Short-Term Fixed Income Fund, Biltmore Tax-Free Money Market Fund
(Institutional Shares and Investment Shares), and Biltmore U.S. Treasury Money
Market Fund (Institutional Shares and Investment Shares) (collectively,
hereinafter referred to as the "Funds").
INVESTMENT INFORMATION
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INVESTMENT OBJECTIVE
The investment objective of the Fund is to produce growth of principal. While
there is no assurance that the Fund will achieve its investment objective, it
endeavors to do so by following the investment policies described in this
prospectus. The investment objective cannot be changed without the approval of
shareholders. Unless indicated otherwise, the investment policies described
below may be changed by the Trustees without the approval of shareholders.
Shareholders will be notified before any material change in these policies
becomes effective.
INVESTMENT POLICIES
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. In the investment adviser's opinion, small capitalization
stocks have special value in the marketplace and can provide greater growth of
principal than large capitalization stocks. The Fund attempts to select
companies with potential for above-average capital appreciation commensurate
with increased risk. The Fund invests in stocks believed by the investment
adviser to be significantly undervalued. Typical investments by the Fund 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.
ACCEPTABLE INVESTMENTS. In pursuing its investment objective, the Fund will
employ investment strategies that utilize a value-oriented approach (such as
identifying stocks that have not been widely followed by securities analysts) in
order to select the small capitalization stocks which will comprise the Fund's
investment portfolio.
Acceptable investment 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;
restricted and illiquid securities;
securities of other investment companies;
master limited partnerships;
demand master notes; and
securities issued or guaranteed by the U.S. government, its agencies, or
instrumentalities.
In addition, the Fund may borrow money, lend portfolio securities, and engage in
when-issued and delayed delivery transactions, and may also invest in high yield
corporate bonds (commonly known as junk bonds), speculative grade preferred
stocks, put and call options, futures, and options on futures, for hedging
purposes.
CORPORATE OBLIGATIONS. The Fund may invest in preferred stocks, bonds,
notes, and debentures of corporate issuers. Domestic issues of corporate
debt obligations will normally be rated BBB or better by Moody's Investors
Service, Inc. ("Moody's"), Standard & Poor's Corporation ("S&P") or Fitch
Investors Service, Inc. ("Fitch"). If a security's rating is reduced below
the required minimum after the Fund has purchased it, the Fund is not
required to sell the security, but may consider doing so. Bonds rated BBB
by S&P or Baa by Moody's are investment grade, but have more speculative
characteristics than A-rated bonds. 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.
In addition, the Fund may invest in convertible securities, which are fixed
income securities that 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 preferred stock, convertible bonds 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 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 non-convertible securities of
similar quality.
The Fund will exchange or convert the convertible securities held in its
portfolio into shares of the underlying common stock in instances in which,
in its 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 the Fund, the Fund's
investment adviser evaluates the investment characteristics of the
convertible security as a fixed income instrument, and the investment
potential of the underlying equity security for capital appreciation. In
evaluating these matters with respect to a particular convertible security,
the Fund's investment adviser considers numerous factors, including the
economic and political outlook, the value of the security relative to other
investment alternatives, trends in the determination of the issuer's
profits, and the issuer's management capability and practices.
SECURITIES OF FOREIGN ISSUERS. The Fund may invest up to 20% of its assets
in the securities of foreign issuers which are freely traded on United
States securities exchanges or in the over-the-counter market in the form
of depository receipts ("American Depository Receipts" or "ADRs"). In
addition, the Fund may invest up to 10% of its assets in other securities
of foreign issuers ("Non-ADRs"). 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, the 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.
STOCK INDEX FUTURES AND OPTIONS. The 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 the Fund's total assets. Also, the Fund will not purchase
options to the extent that more than 5% of the value of the Fund's total
assets would be invested in premiums on open put option positions. These
futures contracts and options will be used to handle cash flows into and
out of the 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.
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 Fund plans 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.
The effective use of futures and options as hedging techniques depends on
the correlation between their prices and the behavior of the 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 the 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, the Fund may be
unable to anticipate the extent of its losses from futures transactions.
Please refer to the Statement of Additional Information for a further
discussion of futures and options transactions.
PUT AND CALL OPTIONS. The Fund may purchase put options on its portfolio
securities. These options will be used only as a hedge to attempt to
protect securities which the Fund holds against decreases in value. The
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. The 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 the Fund writes and
sells must be listed on a recognized options exchange. Writing of calls by
the Fund is intended to generate income for the Fund and thereby protect
against price movements in particular securities in the Fund's portfolio.
Prior to exercise or expiration, an option position can only be terminated
by entering into a closing purchase or sale transaction. This requires a
secondary market on an exchange which may or may not exist for any
particular call or put option at any specific time. The absence of a liquid
secondary market also may limit the Fund's ability to dispose of the
securities underlying an option. The inability to close options also could
have an adverse impact on the Fund's ability to effectively hedge its
portfolio.
RESTRICTED AND ILLIQUID SECURITIES. The Fund may invest in restricted
securities. Restricted securities are any securities in which the Fund may
otherwise invest pursuant to its investment objective and policies, but
which are subject to restriction on resale under federal securities law.
The 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.
TEMPORARY INVESTMENTS. In such proportions as, in the judgment of its
investment adviser, market conditions warrant, during periods of other than
normal market conditions, the Fund may, for temporary defensive purposes,
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, or by the
Savings Association Insurance Fund, both of which are administered by the
FDIC;
securities issued and/or guaranteed as to payment of principal and
interest by the U.S. government, its agencies, or instrumentalities;
commercial paper (including Canadian Commercial Paper and Europaper) rated
A-1 or better by S&P, Prime-1 by Moody's, or F-1 by Fitch, or, if unrated,
of comparable quality as determined by the Fund's investment adviser; and
repurchase agreements.
REPURCHASE AGREEMENTS. The securities in which the 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 the Fund, the Fund could receive less than the repurchase price on any sale
of such securities.
WHEN-ISSUED AND DELAYED DELIVERY TRANSACTIONS. The Fund may purchase securities
on a when-issued or delayed delivery basis. These transactions are arrangements
in which the Fund purchases securities with payment and delivery scheduled for a
future time. In when-issued and delayed delivery transactions, the Fund relies
on the seller to complete the transaction. The seller's failure to complete the
transaction may cause the Fund to miss a price or yield considered to be
advantageous.
LENDING OF PORTFOLIO SECURITIES. In order to generate additional income, the
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
Fund will only enter into loan arrangements with broker/dealers, banks, or other
institutions which the Fund's investment adviser has determined are
creditworthy under guidelines established by the Trustees and will receive
collateral in the form of cash or U.S. government securities equal to at least
102% of the value of the securities loaned.
INVESTMENT CONSIDERATIONS
As with other mutual funds that invest primarily in equity securities, the Fund
is subject to market risks. That is, the possibility exists that common stocks
will decline over short or even extended periods of time, and the United States
equity market tends to be cyclical, experiencing both periods when stock prices
generally increase and periods when stock prices generally decrease. However,
because the 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 Standard & Poor's 500
Composite Stock Price Index ("Standard & Poor's 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 Standard & Poor's 500 Index.
INVESTMENT LIMITATIONS
The Fund will not:
borrow money directly or through reverse repurchase agreements
(arrangements in which the 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, the Fund
may borrow up to one-third of the value of its total assets and pledge up
to 15% of the value of those assets to secure such borrowings; nor
with respect to 75% of the value of its total assets, 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 BILTMORE FUNDS INFORMATION
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MANAGEMENT OF THE TRUST
BOARD OF TRUSTEES. The Trustees are responsible for managing the Trust's
business affairs and for exercising all the Trust's powers except those reserved
for the shareholders.
INVESTMENT ADVISER. Pursuant to an investment advisory contract with the Trust
on behalf of the Fund, investment decisions for the Fund are made by Wachovia
Investment Management Group (the
"Adviser"), a business unit of Wachovia Bank of North Carolina, N.A., subject to
direction by the Trustees. The Adviser continually conducts investment research
and supervision of investments for the Fund and is responsible for the purchase
or sale of portfolio instruments, for which it receives an annual fee from the
assets of the Fund.
ADVISORY FEES. The Adviser receives an annual investment advisory fee
equal to 0.80 of 1% of the Fund's average daily net assets. The investment
advisory contract provides that such fee shall be accrued and paid daily.
The fee paid by the Fund, while higher than the advisory fee paid by other
mutual funds in general, is comparable to fees paid by other mutual funds
with similar objectives and policies. The Adviser has undertaken to
reimburse the Fund for operating expenses in excess of limitations
established by certain states. The Adviser may voluntarily choose to waive
a portion of its fee or reimburse the Fund for certain other expenses of
the Fund but reserves the right to terminate such waiver or reimbursement
at any time at its sole discretion.
ADVISER'S BACKGROUND. Wachovia Bank of North Carolina, N.A. is a direct,
wholly-owned subsidiary of Wachovia Corporation, a registered bank holding
company headquartered in Winston-Salem, North Carolina and Atlanta,
Georgia. Through offices in eight states, Wachovia Corporation and its
subsidiaries provide a broad range of financial services to individuals and
businesses.
Wachovia Bank of North Carolina, N.A., a national banking association,
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 of North Carolina, N.A., Wachovia Bank of
Georgia, N.A., Wachovia Bank of South Carolina, N.A. (formerly known as The
South Carolina National Bank), and their affiliates (collectively, the
"Wachovia Banks") have been managing trust assets for over 100 years, with
approximately $18 billion in managed assets as of September 30, 1993.
Wachovia Investment Management Group has served as investment adviser to
The Biltmore Funds since March 9, 1992.
Scott C. Satterwhite is the Fund's portfolio manager. Mr. Satterwhite is a
Chartered Financial Analyst and Vice President and Manager of Personal
Trust Portfolio Management in Georgia for the Personal Financial Services
Group. Mr. Satterwhite joined Wachovia Bank of North Carolina, N.A. in 1981
and has held positions as a closely-held business analyst and capital
management counselor. Mr. Satterwhite has a bachelor's degree from the
University of the South and an MBA from Tulane University.
DISTRIBUTION OF SHARES
Federated Securities Corp. is the distributor (the "Distributor") for shares of
the Fund. 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. This fee, if
paid, will be reimbursed by the Adviser and not the Fund.
SHAREHOLDER SERVICING ARRANGEMENTS
Federated Administrative Services, a subsidiary of Federated Investors, is the
Fund's shareholder servicing agent (the "Shareholder Servicing Agent"). The Fund
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 the Fund's 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 FUND
ADMINISTRATIVE SERVICES. Federated Administrative Services, Pittsburgh,
Pennsylvania, a subsidiary of Federated Investors, provides the Fund with the
administrative personnel and services necessary to operate the Fund. Such
services include the preparation of filings with the Securities and Exchange
Commission and other regulatory authorities, assistance with respect to meetings
of the Trustees, shareholder servicing and accounting services, and other
administrative services. Federated Administrative Services provides these at an
annual rate, computed and payable daily, as specified below:
<TABLE>
<CAPTION>
AVERAGE AGGREGATE DAILY NET
MAXIMUM ASSETS OF THE BILTMORE FUNDS AND
ADMINISTRATIVE FEE THE BILTMORE MUNICIPAL FUNDS
<S> <C>
0.15 of 1% on the first $250 million
0.125 of 1% on the next $250 million
0.100 of 1% of the next $250 million
0.075 of 1% on assets in excess of $750 million
</TABLE>
The administrative fee received during any fiscal year shall aggregate at least
$75,000 for the Fund and for each of the portfolios of The Biltmore Funds.
Federated Administrative Services may choose voluntarily to waive or reimburse a
portion of its fee at any time.
CUSTODIAN. Wachovia Bank of North Carolina, N.A., Winston-Salem, North
Carolina, is custodian (the "Custodian") for the securities and cash of the
Fund. Under the Custodian Agreement, the Custodian holds the Fund's portfolio
securities in safekeeping and keeps all necessary records and documents relating
to its duties. For the services to be provided to the Trust pursuant to the
Custodian Agreement, the Trust pays the Custodian an annual fee calculated based
upon the average daily net assets of each Fund and payable monthly as follows:
<TABLE>
<CAPTION>
MAXIMUM AVERAGE AGGREGATE DAILY
CUSTODIAN FEE NET ASSETS OF FUND
<S> <C>
0.02 of 1% $0 to $250 million
0.015 of 1% $250 million to $500 million
0.01 of 1% over $500 million
</TABLE>
The Custodian will also charge transaction fees and out-of-pocket expenses.
TRANSFER AGENT, DIVIDEND DISBURSING AGENT, AND PORTFOLIO ACCOUNTING SERVICES.
Federated Services Company is transfer agent (the "Transfer Agent") for the
shares of the Fund, and dividend disbursing agent for the Fund. Federated
Services Company also provides certain accounting and recordkeeping services
with respect to the Fund's portfolio investments.
LEGAL SERVICES. Legal Services for the Fund are provided by Kirkpatrick &
Lockhart, Washington, D.C. Piper & Marbury, Washington, D.C., serves as counsel
to the independent Trustees.
INDEPENDENT AUDITORS. The independent auditors are Ernst & Young, Pittsburgh,
Pennsylvania.
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 Fund and other funds
distributed by Federated Securities Corp. The Adviser makes decisions on
portfolio transactions and selects brokers and dealers subject to review by the
Trustees.
EXPENSES OF THE FUND
The Fund pays all of its own expenses and its allocable share of Trust expenses.
These expenses include, but are not limited to, the costs of: organizing the
Trust and continuing its existence; Trustees' fees; investment advisory and
administrative services; printing prospectuses and other Fund documents for
shareholders; registering the Trust, the Fund and shares of the Fund; taxes and
commissions; issuing, purchasing, repurchasing, and redeeming shares; fees for
custodian, transfer agent, dividend disbursing agent, shareholder servicing
agents, and registrars; printing, mailing, auditing, accounting, and legal
expenses; reports to shareholders and government agencies; meetings of Trustees
and shareholders and proxy solicitations therefor; insurance premiums;
association membership dues; and such nonrecurring and extraordinary items as
may arise. However, the Adviser may voluntarily waive and/ or reimburse some
expenses.
NET ASSET VALUE
- --------------------------------------------------------------------------------
The 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.
INVESTING IN THE FUND
- --------------------------------------------------------------------------------
SHARE PURCHASES
Shares are sold on days on which the New York Stock Exchange and the Federal
Reserve Wire System are open for business. Shares may be purchased through the
Trust Divisions of the Wachovia Banks or Wachovia Brokerage Service and
authorized broker/dealers. Purchase orders must be received by the Fund by 4:00
p.m. (Eastern time) in order for shares to be purchased at that day's public
offering price. 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. The Fund and the Distributor reserve the right to reject any purchase
request.
Texas residents must purchase, exchange, and redeem shares through Federated
Securities Corp. at
1-800-618-8573.
THROUGH WACHOVIA BROKERAGE SERVICE. Customers of Wachovia Brokerage Service may
place an order to purchase shares by telephoning (1-800-462-7538), sending
written instructions, or placing an order in person. Payment may be made by
check, by wire of federal funds (the customer's bank sends money to the Fund's
bank through the Federal Reserve Wire System) or by debiting a customer's
account at Wachovia Brokerage Service. Purchase orders must be received by
Wachovia Brokerage Service before 4:00 p.m. (Eastern time). Wachovia Brokerage
Service is a division of Wachovia Securities, Inc., a registered broker/dealer
and member of the National Association of Securities Dealers, Inc., Wachovia
Securities, Inc. is a wholly-owned subisidiary of Wachovia Corporation.
BY MAIL. To purchase shares of the Fund by mail, send a check made payable
to Biltmore Special Values Fund to Wachovia Securities, Inc., P.O. Box 110,
MC 32022, Winston-Salem, N.C. 27102. Orders by mail are considered received
after payment by check is converted by Wachovia Brokerage Service into
federal funds. This is normally the next business day after Wachovia
Brokerage Service receives the check.
BY WIRE. To purchase shares of the Fund by wire, wire funds as follows:
Wachovia Securities, Inc.
ABA Number 0531-00494
Credit: 8735-001342
Further credit to: Biltmore Special Values Fund
Re: (Customer name and brokerage account number)
Shares of the Fund cannot be purchased by wire on any day on which Wachovia
Bank of North Carolina, N.A., the New York Stock Exchange and the Federal
Reserve Wire System are not open for business.
THROUGH THE TRUST DIVISIONS OF THE WACHOVIA BANKS. Trust customers of the
Wachovia Banks may place an order to purchase shares of the Fund by telephoning,
sending written instructions, or placing the order in person with their account
officer in accordance with the procedures established by the Wachovia Banks and
as set forth in the relevant account agreement.
Payment may be made to the Wachovia Banks by check, by wire of federal funds, or
by debiting a customer's account with the Wachovia Banks. Orders are considered
received after payment by check is converted into federal funds and received by
the Wachovia Banks, which is normally the next business day. When payment is
made with federal funds, the order is considered received when federal funds are
received by the Wachovia Banks or available in the customer's account. Purchase
orders must be received by the Wachovia Banks by 4:00 p.m. (Eastern time).
Shares of the Fund cannot be purchased by wire on any day on which Wachovia Bank
of North Carolina, N.A., the New York Stock Exchange and the Federal Reserve
Wire System are not open for business.
MINIMUM INVESTMENT REQUIRED
The minimum initial investment in shares of the Fund is $250. This amount may be
waived from time to time.
WHAT SHARES COST
Fund shares are sold at their net asset value next determined after an order is
received plus a sales charge as follows:
<TABLE>
<CAPTION>
SALES CHARGE AS SALES CHARGE 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>
The net asset value is determined at or after the close of the New York Stock
Exchange, Monday through Friday, except on: (i) days on which there are not
sufficient changes in the value of the 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.
PURCHASES AT NET ASSET VALUE. Shares of the Fund may be purchased at net asset
value, without a sales charge, by investment advisers registered under the
Investment Advisers Act of 1940 purchasing on behalf of their clients, and by
the Trust Divisions of the Wachovia Banks for funds which are held in a
fiduciary, agency, custodial, or similar capacity. Trustees, officers, directors
and retired directors, advisory board members, employees and retired employees
of the Fund and the Wachovia Banks, the
spouses and children under the age of 21 of such persons, and any trust, pension
profit-sharing plans and individual retirement accounts operated for such
persons, may purchase shares of the Fund at net asset value. 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 relating to the Fund, may also purchase shares at their net asset
value.
SALES CHARGE REALLOWANCE. For sales of shares of the Fund, a dealer will
normally receive up to 90% of the applicable sales charge. Any portion of the
sales charge which is not paid to a dealer will be retained by the Distributor.
However, the Distributor, at its sole discretion, may uniformly offer to pay to
all dealers selling shares of the Fund, all or a portion of the sales charge it
normally retains. If accepted by the dealer, such additional payments will be
predicated upon the amount of Fund shares sold. In addition, the Distributor may
pay from its assets promotional incentives in the form of cash or other
compensation to the dealers that sell shares of the Fund.
The sales charge for shares sold other than through Wachovia Brokerage Service
or registered
broker/dealers will be retained by the Distributor. The Distributor may pay fees
to banks out of the sales charge in exchange for sales and/or administrative
services performed on behalf of Wachovia Brokerage Service's customers in
connection with the initiation of customer accounts and purchases of shares of
the Fund.
REDUCING THE SALES CHARGE. The sales charge can be reduced on the purchase of
shares of the Fund through:
quantity discounts and accumulated purchases;
signing a 13-month letter of intent;
using the reinvestment privilege; or
concurrent purchases.
QUANTITY DISCOUNTS AND ACCUMULATED PURCHASES. As shown in the table on the
prior page, larger purchases reduce the sales charge paid. The Fund 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.
If an additional purchase of shares of the Fund is made, the Fund will consider
the previous purchases still invested in the Fund. For example, if a shareholder
already owns shares having a current value at the public offering price of
$70,000 and then purchases $40,000 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 Brokerage Service 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 purchase.
LETTER OF INTENT. If a shareholder intends to purchase shares of the Fund 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 4.50% of the
total amount intended to be purchased in escrow (in shares of that Fund) until
such purchase is completed.
The 4.50% 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 any purchases made within the past 90
days.
REINVESTMENT PRIVILEGE. If shares in the Fund have been redeemed, the
shareholder has a one-time right, within 90 days, to reinvest the redemption
proceeds in that Fund at the next-determined net asset value without any sales
charge. Wachovia Brokerage Service 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 the
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 two or more
of the Funds, the purchase price of which includes a sales charge. For example,
if a shareholder concurrently invested $70,000 in one of the other Funds with a
sales charge, and $40,000 in another fund of the Trust with a sales charge, the
sales charge would be reduced.
To receive this sales charge reduction, Wachovia Brokerage Service or the
Distributor must be notified by the agent placing the order at the time the
concurrent purchases are made. The sales charge will be reduced after the
purchase is confirmed.
SYSTEMATIC INVESTMENT PROGRAM
Once a Fund account has been opened, shareholders may add to their investment on
a regular basis in a minimum amount of $50. 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 the Fund, plus the applicable sales charge. A shareholder may apply
for participation in this program through Wachovia Brokerage Service or through
the Distributor.
EXCHANGING SECURITIES FOR FUND SHARES
The Fund may accept securities in exchange for Fund shares. The 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 the
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 an initial investment, plus any cash, must be at least equal to the
minimum investment in the Fund.
Securities accepted by the Fund will be valued in the same manner as the Fund
values its assets. The basis of the exchange will depend upon 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 on the cost basis of the securities exchanged for Fund
shares, a gain or loss may be realized by the investor.
CERTIFICATES AND CONFIRMATIONS
As the transfer agent, Federated Services Company maintains a share account for
each shareholder of record. Share certificates are not issued.
Detailed confirmations of each purchase or redemption are sent to each
shareholder of record. Quarterly statements are sent to report dividends paid
during the quarter.
The transfer agent provides the Wachovia Banks, as shareholders of record, with
detailed statements that include account balances, information on each purchase
or redemption, and a report of dividends paid. These statements will serve as
confirmations of all transactions in the shareholder's account for the statement
period. Investors purchasing through the Wachovia Banks will receive account
statements from those institutions periodically as required by the relevant
account agreement.
DIVIDENDS
Dividends are declared and paid quarterly to all shareholders invested in the
Fund on the record date. Unless shareholders request cash payments by writing to
the Fund or to the Wachovia Banks, dividends are automatically reinvested on
payment dates in additional shares of the Fund on the payment dates at the
ex-dividend date net asset value without a sales charge.
CAPITAL GAINS
Capital gains, when realized by the Fund, will be distributed at least once
every 12 months.
EXCHANGE PRIVILEGE
All shareholders of the Fund are shareholders of the Trust. The Trust currently
consists of the Funds, as previously defined in the "General Information"
section of this prospectus. The Funds are advised by Wachovia Investment
Management Group and distributed by Federated Securities Corp.
Shareholders of the Fund have easy access to the other Funds comprising the
Trust, to a portfolio of The Biltmore Municipal Funds, and to the International
Equity Fund (a mutual fund advised by Fiduciary International, Inc.)
(hereinafter collectively referred to as, the "Participating Funds") through a
telephone exchange program. Shares of the Participating Funds may be exchanged
for shares of the 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, the shareholder should review a copy of the
current prospectus of the Participating Fund into which an exchange is to be
effected.
Shareholders using this privilege must exchange shares having a net asset value
at least equal to the minimum investment of the Participating Fund into which
they are exchanging. 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 on these exchange privileges by calling the shareholder's Wachovia
Bank Officer.
Shares of the Participating 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 Fund's shares and any sales charge of the
Participating Fund into which the shares are to be exchanged, if higher. Shares
of Participating Funds with no sales charge acquired by direct purchase or
reinvestment of dividends on such shares may be exchanged for shares of
Participating Funds with a sales charge at net asset value plus the applicable
sales charge.
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. Instructions for exchanges between Participating Funds
may be given by telephone to Wachovia Brokerage Service. Trust customers should
contact their account officer. Shares may be exchanged by telephone only between
fund accounts having identical shareholder registrations. Exchange instructions
given by telephone may be electronically recorded.
Telephone exchange instructions must be received before 4:00 p.m. (Eastern time)
for shares to be exchanged the same day. 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. If reasonable procedures are not followed by the Fund, it may be liable
for losses due to unauthorized or fraudulent telephone instructions.
REDEEMING SHARES
- --------------------------------------------------------------------------------
The Fund redeems shares at their net asset value next determined after the Trust
Divisions of the Wachovia Banks or Wachovia Brokerage Service receives the
redemption request. Redemptions will be made on days on which the Fund computes
its net asset value. Requests for redemption can be made in person, by
telephone, or by writing to the shareholder's account officer. If at any time
the Fund shall determine it necessary to terminate or modify any of these
methods of redemption, shareholders would be promptly notified.
BY TELEPHONE. A shareholder who is a customer of Wachovia Brokerage Service may
redeem shares of the Fund by telephoning Wachovia Brokerage Service at
1-800-462-7538. Shareholders wishing to
redeem by phone will be required to complete a telephone redemption
authorization form available through Wachovia Brokerage Service. Telephone
redemption instructions may be recorded.
A shareholder who is a customer of a Trust Division of the Wachovia Banks and
whose account agreement with the Wachovia Banks permits telephone redemption may
redeem shares of the Fund by telephoning his account officer. Shares will be
redeemed at the net asset value next determined after the Fund receives the
redemption request. Redemption requests must be received by 4:00 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, such as "By Mail,"
should be considered.
An authorization permitting a Trust Division of the Wachovia Banks to accept
telephone requests is included as part of a shareholder's account agreement. If
reasonable procedures are not followed by the Fund, it may be liable for losses
due to unauthorized or fraudulent telephone instructions.
BY MAIL. A shareholder who is a customer of Wachovia Brokerage Service may
redeem shares by sending a written request to Wachovia Brokerage Service. 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 Brokerage Service for assistance in redeeming
by mail. Normally, a check for the proceeds is mailed within one business day,
but in no event more than seven days, after receipt of a proper written
redemption request.
SIGNATURES. Shareholders requesting a redemption of $50,000 or more, a
redemption of any amount to be sent to an address other than that on record
with the 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 Bank
Insurance Fund;
a member firm of the New York, American, Boston, Midwest, or Pacific Stock
Exchange;
a savings bank or savings and loan association whose deposits are insured
by the Savings Association Insurance Fund; or
any other "eligible guarantor institution," as defined in the Securities
Exchange Act of 1934.
The Fund does not accept signatures guaranteed by a notary public.
The Fund and the Transfer Agent have adopted standards for accepting signature
guarantees from the above institutions. The Fund may elect in the future to
limit eligible signature guarantors to institutions that are members of a
signature guarantee program. The Fund and the Transfer Agent reserve the right
to amend these standards at any time without notice.
SYSTEMATIC WITHDRAWAL PROGRAM
Shareholders 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 an amount
directed by the shareholder. Shareholders may redeem by periodic withdrawal
payments in a minimum amount of $100. Depending upon the amount of the
withdrawal payments, the amount of dividends paid and capital gains
distributions with respect to shares, and the fluctuation of net asset value of
shares redeemed under this program, redemptions may reduce, and eventually
deplete, the shareholder's investment in the Fund. For this reason, payments
under this program should not be considered as yield or income on the
shareholder's investment in the Fund. To be eligible to participate in this
program, a shareholder must have an account value of at least $10,000. A
shareholder may apply for participation in this program through Wachovia
Brokerage Service. Due to the fact that shares are sold with a 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, the Fund may
redeem shares in any account and pay the proceeds to the shareholder if the
account balance falls below the required minimum value of $250 due to
shareholder redemptions. This requirement does not apply, however, if the
balance falls below $250 because of changes in the Fund's net asset value.
Before shares are redeemed to close an account, the shareholder is notified in
writing and allowed 30 days to purchase additional shares to meet the minimum
requirement.
SHAREHOLDER INFORMATION
- --------------------------------------------------------------------------------
VOTING RIGHTS
Each share of the Fund gives the shareholder one vote in Trustee elections and
other matters submitted to shareholders for vote. All shares of each Fund in the
Trust have equal voting rights, except that in matters affecting only a
particular fund, only shares of that fund are entitled to vote.
As a Massachusetts business trust, the Trust is not required to hold annual
shareholder meetings. Shareholder approval will be sought only for certain
changes in the Trust or the Fund's operation and for the election of Trustees
under certain circumstances.
Trustees may be removed by the Trustees or shareholders at a special meeting. A
special meeting of the shareholders shall be called by the Trustees upon the
written request of shareholders owning at least 10% of the Trust's outstanding
shares.
As of December 31, 1993, Wachovia Bank of North Carolina, N.A., Winston-Salem,
North Carolina, acting in various capacities for numerous accounts, was the
owner of record of 1,004,154.69 shares (82.78%) of the Fund, and therefore, may,
for certain purposes, be deemed to control the Fund and be able to affect the
outcome of certain matters presented for a vote of shareholders.
MASSACHUSETTS BUSINESS TRUSTS
Under certain circumstances, shareholders may be held personally liable under
Massachusetts law for acts or obligations of the Trust. To protect shareholders,
the Trust has filed legal documents with Massachusetts that expressly disclaim
the liability of shareholders for such acts or obligations of the Trust. These
documents require notice of this disclaimer to be given in each agreement,
obligation, or instrument the Trust or the Trustees enter into or sign on behalf
of the Fund.
In the unlikely event a shareholder is held personally liable for the Trust's
obligations on behalf of the 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, the Trust will defend any claim made and pay any judgment against a
shareholder of the Fund for any act or obligation of the Trust on behalf of the
Fund. Therefore, financial loss resulting from liability as a shareholder of the
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.
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 customer. The Fund's
investment adviser, Wachovia Investment Management Group, and its affiliate
banks, are subject to such banking laws and regulations.
The Adviser believes, based on the advice of its counsel, that it may perform
the services for the Fund contemplated by its investment advisory contract and
the Custodian Agreement with the Trust without violation of the Glass-Steagall
Act or other applicable banking 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 the Adviser from continuing to perform all or a part
of the above services for its customers and/or the Fund. If it were prohibited
from engaging in these customer-related activities, the Trustees would consider
alternative service providers and means of continuing available investment
services. In such event, changes in the operation of the Fund may occur,
including the possible termination of any automatic or other Fund share
investment and redemption services then being provided by the Adviser. It is not
expected that existing Fund shareholders would suffer any adverse financial
consequences (if another adviser with equivalent abilities to the Adviser 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 and loan association) from being an underwriter or distributor
of most securities. In the event the Glass-Steagall Act is deemed to prohibit
depository institutions from acting in the administrative capacities described
above, or should Congress relax current restrictions on depository institutions,
the Trustees will consider appropriate changes in the services.
State securities laws governing the ability of depository institutions to act as
underwriters or distributors of securities may differ from interpretations given
to the Glass-Steagall Act and, therefore, banks and financial institutions may
be required to register as dealers pursuant to state law.
TAX INFORMATION
- --------------------------------------------------------------------------------
The Fund expects to pay no federal income tax because it intends to meet
requirements of the Internal Revenue Code applicable to regulated investment
companies and to receive the special tax treatment afforded to such companies.
The Fund will be treated as a single, separate entity for federal income tax
purposes so that income (including capital gains) and losses realized by the
Trust's other portfolios will not be combined for tax purposes with those
realized by the Fund.
Unless otherwise exempt, shareholders 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 Fund will provide shareholders with tax information
for reporting purposes. Shareholders are urged to consult their own tax advisers
regarding the status of their accounts under state and local tax laws.
PERFORMANCE INFORMATION
- --------------------------------------------------------------------------------
From time to time the Fund advertises its total return and yield.
Total return represents the change, over a specified period of time, in the
value of an investment in the 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 the 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 yield does not necessarily reflect income actually earned by
the Fund and, therefore, may not correlate to the dividends or other
distributions paid to shareholders.
The performance information reflects the effect of the maximum sales load which,
if excluded, would increase the total return and yield.
From time to time, the Fund may advertise its performance using certain
reporting services and/or compare its performance to certain indices.
Advertisements and other sales literature for the Fund may quote performance
information which does not reflect the effect of a sales load.
BILTMORE SPECIAL VALUES FUND
PORTFOLIO OF INVESTMENTS
NOVEMBER 30, 1993
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES VALUE
<C> <S> <C>
- ------------ ------------------------------------------------------------------------------------ --------------
COMMON STOCKS--92.4%
- --------------------------------------------------------------------------------------------------
CAPITAL GOODS--9.5%
------------------------------------------------------------------------------------
3,900 Danaher Corp. $ 144,300
------------------------------------------------------------------------------------
4,600 Harsco Corp. 181,126
------------------------------------------------------------------------------------
8,100 * Lindsay Manufacturing Co. 247,050
------------------------------------------------------------------------------------
2,694 Moorco International, Inc. 46,471
------------------------------------------------------------------------------------
10,500 Sealright Co., Inc. 149,625
------------------------------------------------------------------------------------
3,500 Standex International Corp. 86,625
------------------------------------------------------------------------------------
20,000 * Tyler Corp. Del 95,000
------------------------------------------------------------------------------------
2,100 Walbro Corp. 55,125
------------------------------------------------------------------------------------
11,500 Wilcox & Gibbs, Inc. 86,250
------------------------------------------------------------------------------------
1,500 York International 50,625
------------------------------------------------------------------------------------ --------------
Total 1,142,197
------------------------------------------------------------------------------------ --------------
CONSUMER DURABLES--9.0%
------------------------------------------------------------------------------------
4,300 Arvin Industries, Inc. 113,412
------------------------------------------------------------------------------------
1,462 Bassett Furniture Industries, Inc. 47,515
------------------------------------------------------------------------------------
11,000 Boston Acoustics, Inc. 181,500
------------------------------------------------------------------------------------
11,400 Gencorp, Inc. 158,175
------------------------------------------------------------------------------------
8,000 Haverty Furniture Co., Inc. 134,000
------------------------------------------------------------------------------------
22,000 * Instrument Systems Corp. 187,000
------------------------------------------------------------------------------------
6,300 * Ren Corp. USA 58,275
------------------------------------------------------------------------------------
4,600 Standard Products Co. 144,900
------------------------------------------------------------------------------------
2,000 Wabash National Corp. 66,000
------------------------------------------------------------------------------------ --------------
Total 1,090,777
------------------------------------------------------------------------------------ --------------
CONSUMER NON-DURABLES--18.0%
------------------------------------------------------------------------------------
2,000 * Allied Clinical Labs, Inc. 29,500
------------------------------------------------------------------------------------
3,500 BIC Corp. 101,937
------------------------------------------------------------------------------------
</TABLE>
BILTMORE SPECIAL VALUES FUND
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES VALUE
<C> <S> <C>
- ------------ ------------------------------------------------------------------------------------ --------------
COMMON STOCKS--CONTINUED
- --------------------------------------------------------------------------------------------------
CONSUMER NON-DURABLES--CONTINUED
------------------------------------------------------------------------------------
12,800 Enquirer/Star Group, Inc., Cl. A $ 230,400
------------------------------------------------------------------------------------
5,406 * Ezcorp, Inc., Cl. A 71,629
------------------------------------------------------------------------------------
7,500 * Fabric Centers of America, Inc. 121,875
------------------------------------------------------------------------------------
3,000 Golden Poultry, Inc. 22,500
------------------------------------------------------------------------------------
7,100 Hancock Fabrics, Inc. 70,112
------------------------------------------------------------------------------------
3,100 House Fabrics, Inc. 25,187
------------------------------------------------------------------------------------
10,000 * International Dairy Queen, Inc., Cl. A 167,500
------------------------------------------------------------------------------------
13,208 * Jan Bell Marketing, Inc. 161,798
------------------------------------------------------------------------------------
4,100 Lee Enterprises, Inc. 127,613
------------------------------------------------------------------------------------
11,000 Monk Austin, Inc. 165,000
------------------------------------------------------------------------------------
7,500 Plenum Publishing Corp. 180,000
------------------------------------------------------------------------------------
4,500 Pulitzer Publishing Co. 148,500
------------------------------------------------------------------------------------
2,000 * Scandinavian Broadcasting 39,250
------------------------------------------------------------------------------------
1,500 * Scotts Co., Cl. A 25,687
------------------------------------------------------------------------------------
4,000 * Smithfield Foods, Inc. 62,000
------------------------------------------------------------------------------------
6,700 * TPI Enterprises, Inc. 68,676
------------------------------------------------------------------------------------
19,000 Texfi Industries, Inc. 87,875
------------------------------------------------------------------------------------
3,000 Triarc Co., Inc., Cl. A 73,500
------------------------------------------------------------------------------------
5,248 * VICORP Restaurants, Inc. 94,464
------------------------------------------------------------------------------------
4,000 WLR Foods, Inc. 73,000
------------------------------------------------------------------------------------
1,000 Weyco Group, Inc. 34,125
------------------------------------------------------------------------------------ --------------
Total 2,182,128
------------------------------------------------------------------------------------ --------------
ENERGY--2.4%
------------------------------------------------------------------------------------
7,000 * Castle Energy Corp. 124,250
------------------------------------------------------------------------------------
2,712 Enterra Corp. 48,816
------------------------------------------------------------------------------------
17,973 * Pride Petroleum Services, Inc. 112,331
------------------------------------------------------------------------------------ --------------
Total 285,397
------------------------------------------------------------------------------------ --------------
</TABLE>
BILTMORE SPECIAL VALUES FUND
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES VALUE
<C> <S> <C>
- ------------ ------------------------------------------------------------------------------------ --------------
COMMON STOCKS--CONTINUED
- --------------------------------------------------------------------------------------------------
FINANCE--14.7%
------------------------------------------------------------------------------------
5,944 American Federal Bank FSB Greenville $ 65,384
------------------------------------------------------------------------------------
7,700 Bank South Corp. 106,837
------------------------------------------------------------------------------------
11,500 * Danielson Holding Co. 96,312
------------------------------------------------------------------------------------
2,200 First American Corp. of Tennessee 65,175
------------------------------------------------------------------------------------
1,500 First Financial Funding, Inc. 25,500
------------------------------------------------------------------------------------
800 Fund American Enterprises 70,800
------------------------------------------------------------------------------------
2,000 John Nuveen Co., Cl. A 54,250
------------------------------------------------------------------------------------
2,700 * Jupiter National, Inc. 146,475
------------------------------------------------------------------------------------
4,900 Leucadia National Corp. 193,550
------------------------------------------------------------------------------------
4,500 * Midland Financial Group 100,687
------------------------------------------------------------------------------------
2,500 NS Bancorp, Inc. 74,687
------------------------------------------------------------------------------------
1,900 Neworld Bancorp, Inc. 63,412
------------------------------------------------------------------------------------
1,000 Peoples Bancorp Worcester 44,750
------------------------------------------------------------------------------------
6,700 * Premier Bancorp, Inc. 117,250
------------------------------------------------------------------------------------
700 Southeastern Thrift & Bank 12,250
------------------------------------------------------------------------------------
2,100 UJB Financial Corp. 50,662
------------------------------------------------------------------------------------
9,000 Uslico Corp. 151,875
------------------------------------------------------------------------------------
10,000 Unico American Corp. 75,000
------------------------------------------------------------------------------------
4,500 Unitrin, Inc. 186,750
------------------------------------------------------------------------------------
500 Wesco Financial Corp. 70,125
------------------------------------------------------------------------------------ --------------
Total 1,771,731
------------------------------------------------------------------------------------ --------------
MATERIAL & SERVICES--28.6%
------------------------------------------------------------------------------------
1,000 * ALC Communcations Corp. 26,750
------------------------------------------------------------------------------------
4,000 Avemco Corp. 75,000
------------------------------------------------------------------------------------
2,300 Birmingham Steel Corp. 52,325
------------------------------------------------------------------------------------
9,500 * Charter Medical Corp. 228,000
------------------------------------------------------------------------------------
6,000 Cleveland Cliffs, Inc. 198,750
------------------------------------------------------------------------------------
</TABLE>
BILTMORE SPECIAL VALUES FUND
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES VALUE
<C> <S> <C>
- ------------ ------------------------------------------------------------------------------------ --------------
COMMON STOCKS--CONTINUED
- --------------------------------------------------------------------------------------------------
MATERIAL & SERVICES--CONTINUED
------------------------------------------------------------------------------------
2,500 * Coventry Corp. $ 105,000
------------------------------------------------------------------------------------
5,457 Engel Homes, Inc. 70,941
------------------------------------------------------------------------------------
8,500 First Mississippi Corp. 100,937
------------------------------------------------------------------------------------
2,601 Fisher Price, Inc. 101,796
------------------------------------------------------------------------------------
2,450 Forest City Enterprises, Inc., Cl. A 96,775
------------------------------------------------------------------------------------
500 Forest City Enterprises, Inc., Cl. B 20,500
------------------------------------------------------------------------------------
9,300 Furon Co. 134,851
------------------------------------------------------------------------------------
2,266 * Galey & Lord, Inc. 27,193
------------------------------------------------------------------------------------
9,000 * Grancare, Inc. 141,750
------------------------------------------------------------------------------------
4,500 * Gulf States Utilities Co. 85,500
------------------------------------------------------------------------------------
6,000 Insituform Middle America, Inc. 85,500
------------------------------------------------------------------------------------
3,862 Insteel Industries, Inc. 38,620
------------------------------------------------------------------------------------
10,000 Intermet Corp. 80,000
------------------------------------------------------------------------------------
5,400 * Lunar Corp. 62,100
------------------------------------------------------------------------------------
4,000 Minerals Technologies, Inc. 104,000
------------------------------------------------------------------------------------
3,600 NCH Corp. 189,450
------------------------------------------------------------------------------------
6,600 New Jersey Steel Corp. 108,900
------------------------------------------------------------------------------------
9,223 * Oceaneering International, Inc. 124,510
------------------------------------------------------------------------------------
4,700 Oregon Steel Mills, Inc. 109,275
------------------------------------------------------------------------------------
11,500 Potash Corp. Saskatchewan, Inc. 238,626
------------------------------------------------------------------------------------
5,500 * Rehability Corp. 50,875
------------------------------------------------------------------------------------
3,000 * Rotech Medical Corp. 39,000
------------------------------------------------------------------------------------
8,201 Ryland Group, Inc. 168,120
------------------------------------------------------------------------------------
1,000 R. P. Scherer Corp. 35,250
------------------------------------------------------------------------------------
18,000 * Saatchi & Saatchi 139,500
------------------------------------------------------------------------------------
3,500 * Sealed Air Corp. 97,563
------------------------------------------------------------------------------------
1,000 * Seattle Filmworks, Inc. 18,000
------------------------------------------------------------------------------------
</TABLE>
BILTMORE SPECIAL VALUES FUND
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES VALUE
<C> <S> <C>
- ------------ ------------------------------------------------------------------------------------ --------------
COMMON STOCKS--CONTINUED
- --------------------------------------------------------------------------------------------------
MATERIAL & SERVICES--CONTINUED
------------------------------------------------------------------------------------
3,000 * Southeastern Public Service Co. $ 58,125
------------------------------------------------------------------------------------
16,300 * Tokos Medical Corp. 97,800
------------------------------------------------------------------------------------
6,000 * Triad Systems, Inc. 96,000
------------------------------------------------------------------------------------
1,500 * U.S. Home Corp. 40,125
------------------------------------------------------------------------------------ --------------
Total 3,447,407
------------------------------------------------------------------------------------ --------------
TECHNOLOGY--6.9%
------------------------------------------------------------------------------------
5,000 * Advance Circuits, Inc. 58,750
------------------------------------------------------------------------------------
4,500 * Ceridian Corp. 84,375
------------------------------------------------------------------------------------
12,500 * Esco Electronics Corp. 148,437
------------------------------------------------------------------------------------
13,500 Geodynamics Corp. 111,376
------------------------------------------------------------------------------------
1,000 Gerber Scientific, Inc. 14,375
------------------------------------------------------------------------------------
4,523 * Input/Output, Inc. 84,807
------------------------------------------------------------------------------------
9,051 * Itel Corp. 231,932
------------------------------------------------------------------------------------
17,000 Penril Datacomm Networks 93,500
------------------------------------------------------------------------------------
260 * Texas Meridian Resources Corp. 2,177
------------------------------------------------------------------------------------ --------------
Total 829,729
------------------------------------------------------------------------------------ --------------
TRANSPORTATION--2.7%
------------------------------------------------------------------------------------
8,000 * Greyhound Lines, Inc. 114,000
------------------------------------------------------------------------------------
2,900 * Hornbeck Offshore Services, Inc. 46,400
------------------------------------------------------------------------------------
4,505 * KLLM Transportation Services, Inc. 70,953
------------------------------------------------------------------------------------
4,458 * M.S. Carriers, Inc. 93,619
------------------------------------------------------------------------------------ --------------
Total 324,972
------------------------------------------------------------------------------------ --------------
UTILITIES--.6%
------------------------------------------------------------------------------------
6,743 Arkla, Inc. 53,102
------------------------------------------------------------------------------------
600 * LDDS Communications, Inc. 25,576
------------------------------------------------------------------------------------ --------------
Total 78,678
------------------------------------------------------------------------------------ --------------
TOTAL COMMON STOCKS (IDENTIFIED COST, $11,196,567) 11,153,016
------------------------------------------------------------------------------------ --------------
</TABLE>
BILTMORE SPECIAL VALUES FUND
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES OR
PRINCIPAL
AMOUNT VALUE
<C> <S> <C>
- ------------ ------------------------------------------------------------------------------------ --------------
COMMON STOCKS--CONTINUED
- --------------------------------------------------------------------------------------------------
PREFERRED STOCKS--1.2%
- --------------------------------------------------------------------------------------------------
1,800 Catellus Development Corp. $ 103,950
------------------------------------------------------------------------------------
1,500 * U.S. Home Corp. 40,125
------------------------------------------------------------------------------------ --------------
TOTAL PREFERRED STOCKS (IDENTIFIED COST, $137,537) 144,075
------------------------------------------------------------------------------------ --------------
**REPURCHASE AGREEMENT--7.0%
- --------------------------------------------------------------------------------------------------
$ 847,800 PaineWebber Inc., 3.20%, dated 11/30/93, due 12/1/93 (at amortized cost) (Note 2B) 847,800
------------------------------------------------------------------------------------ --------------
TOTAL INVESTMENTS (IDENTIFIED COST, $12,181,904) $ 12,144,891+
------------------------------------------------------------------------------------ --------------
</TABLE>
* Non-income producing securities.
** The repurchase agreement is fully collateralized by U.S. government and/or
agency obligations based on market prices at the date of the portfolio.
+ The cost for federal tax purposes amounts to $12,181,904. The net unrealized
depreciation of investments on a federal tax basis amounts to $37,013, which
is comprised of $614,479 appreciation and $651,492 depreciation at November
30, 1993.
Note: The categories of investments are shown as a percentage of net assets
($12,071,748) at November 30, 1993.
(See Notes which are an integral part of the Financial Statements)
BILTMORE SPECIAL VALUES FUND
STATEMENT OF ASSETS AND LIABILITIES
NOVEMBER 30, 1993
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
ASSETS:
- --------------------------------------------------------------------------------------------------
Investments in securities (Notes 2A and 2B)
(identified and tax cost $12,181,904) $ 12,144,891
- --------------------------------------------------------------------------------------------------
Receivable for investments sold 363,215
- --------------------------------------------------------------------------------------------------
Dividends and interest receivable 10,437
- --------------------------------------------------------------------------------------------------
Deferred expenses (Note 2F) 6,048
- -------------------------------------------------------------------------------------------------- --------------
Total assets 12,524,591
- --------------------------------------------------------------------------------------------------
LIABILITIES:
- -------------------------------------------------------------------------------------
Payable for investments purchased $ 410,502
- -------------------------------------------------------------------------------------
Accrued expenses and other liabilities 42,341
- ------------------------------------------------------------------------------------- -----------
Total liabilities 452,843
- -------------------------------------------------------------------------------------------------- --------------
NET ASSETS for 1,178,428 shares of beneficial interest outstanding $ 12,071,748
- -------------------------------------------------------------------------------------------------- --------------
NET ASSETS CONSIST OF:
- --------------------------------------------------------------------------------------------------
Paid-in capital $ 11,776,906
- --------------------------------------------------------------------------------------------------
Net unrealized depreciation of investments (37,013)
- --------------------------------------------------------------------------------------------------
Accumulated net realized gain on investments 333,969
- --------------------------------------------------------------------------------------------------
Net investment loss (2,114)
- -------------------------------------------------------------------------------------------------- --------------
Total $ 12,071,748
- -------------------------------------------------------------------------------------------------- --------------
NET ASSET VALUE, and Redemption Price Per Share:
net assets of ($12,071,748 / 1,178,428 shares of beneficial interest outstanding) $10.24
- -------------------------------------------------------------------------------------------------- --------------
</TABLE>
(See Notes which are an integral part of the Financial Statements)
BILTMORE SPECIAL VALUES FUND
STATEMENT OF OPERATIONS
PERIOD ENDED NOVEMBER 30, 1993*
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C> <C>
INVESTMENT INCOME:
- ----------------------------------------------------------------------------------------------------
Dividends $ 55,618
- ----------------------------------------------------------------------------------------------------
Interest 26,810
- ---------------------------------------------------------------------------------------------------- -----------
Total investment income (Note 2C) 82,428
- ----------------------------------------------------------------------------------------------------
EXPENSES:
- ----------------------------------------------------------------------------------------------------
Investment advisory fee (Note 5) $ 54,274
- ---------------------------------------------------------------------------------------
Administrative personnel and services fee (Note 5) 75,000
- ---------------------------------------------------------------------------------------
Custodian fees (Note 5) 1,363
- ---------------------------------------------------------------------------------------
Recordkeeper fees (Note 5) 28,399
- ---------------------------------------------------------------------------------------
Transfer and dividend disbursing agent fees and expenses (Note 5) 10,650
- ---------------------------------------------------------------------------------------
Legal fees 9,700
- ---------------------------------------------------------------------------------------
Printing and postage 8,712
- ---------------------------------------------------------------------------------------
Insurance premiums 7,900
- ---------------------------------------------------------------------------------------
Miscellaneous 5,232
- ---------------------------------------------------------------------------------------
Trustees' Fees 4,750
- --------------------------------------------------------------------------------------- -----------
Total expenses 205,980
- ---------------------------------------------------------------------------------------
Deduct--
- ---------------------------------------------------------------------------------------
Waiver of investment advisory fee (Note 5) $ 14,352
- ----------------------------------------------------------------------------
Waiver of administrative personnel and services fee (Note 5) 66,674
- ----------------------------------------------------------------------------
Reimbursement of other operating expenses by Administrator (Note 5) 39,049
- ----------------------------------------------------------------------------
Waiver of custodian fees (Note 5) 1,363 121,438
- ---------------------------------------------------------------------------- --------- -----------
Net expenses 84,542
- ---------------------------------------------------------------------------------------------------- -----------
Net investment loss (2,114)
- ---------------------------------------------------------------------------------------------------- -----------
REALIZED AND UNREALIZED GAIN/(LOSS) ON INVESTMENTS:
- ----------------------------------------------------------------------------------------------------
Net realized gain on investment transactions (identified cost basis) 333,969
- ----------------------------------------------------------------------------------------------------
Net change in unrealized depreciation on investments (37,013)
- ---------------------------------------------------------------------------------------------------- -----------
Net realized and unrealized gain (loss) on investments 296,956
- ---------------------------------------------------------------------------------------------------- -----------
Change in net assets resulting from operations $ 294,842
- ---------------------------------------------------------------------------------------------------- -----------
</TABLE>
* For the period from May 10, 1993 (date of initial public investment) to
November 30, 1993.
(See Notes which are an integral part of the Financial Statements)
BILTMORE SPECIAL VALUES FUND
STATEMENT OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PERIOD ENDED
NOVEMBER 30,
1993*
<S> <C>
INCREASE (DECREASE) IN NET ASSETS:
- -------------------------------------------------------------------------------------------
OPERATIONS--
- -------------------------------------------------------------------------------------------
Net investment loss $ (2,114)
- -------------------------------------------------------------------------------------------
Net realized gain on investment transactions
($333,969 net gain, as computed for federal tax purposes) (Note 2D) 333,969
- -------------------------------------------------------------------------------------------
Change in unrealized depreciation of investments (37,013)
- ------------------------------------------------------------------------------------------- ---------------------
Change in net assets resulting from operations 294,842
- ------------------------------------------------------------------------------------------- ---------------------
FUND SHARE (PRINCIPAL) TRANSACTIONS (NOTE 4)--
- -------------------------------------------------------------------------------------------
Proceeds from sale of shares 13,082,211
- -------------------------------------------------------------------------------------------
Cost of shares redeemed (1,305,305)
- ------------------------------------------------------------------------------------------- ---------------------
Change in net assets from Fund share transactions 11,776,906
- ------------------------------------------------------------------------------------------- ---------------------
Change in net assets 12,071,748
- -------------------------------------------------------------------------------------------
NET ASSETS:
- -------------------------------------------------------------------------------------------
Beginning of period --
- ------------------------------------------------------------------------------------------- ---------------------
End of period $ 12,071,748
- ------------------------------------------------------------------------------------------- ---------------------
</TABLE>
* For the period from May 10, 1993 (date of initial public investment) to
November 30, 1993.
(See Notes which are an integral part of the Financial Statements)
BILTMORE SPECIAL VALUES FUND
NOTES TO FINANCIAL STATEMENTS
NOVEMBER 30, 1993
- --------------------------------------------------------------------------------
(1) ORGANIZATION
The Biltmore Funds (the "Trust") is registered under the Investment Company Act
of 1940, as amended, as an open-end, management investment company. The Trust
was established as a Massachusetts business trust under a Declaration of Trust
dated November 19, 1991. The Declaration of Trust permits the Trust to offer
shares of beneficial interest representing interests in separate portfolios of
the Trust. The shares in any one portfolio may be offered in separate classes.
The financial statements included herein present only those of the Biltmore
Special Values Fund (the "Fund"), one of the portfolios of the Trust. The
financial statements of the other portfolios in the Trust are presented
separately. The assets of each portfolio are segregated and a shareholder's
interest is limited to the portfolio in which shares are held.
(2) SIGNIFICANT ACCOUNTING POLICIES
The following is a summary of significant accounting policies consistently
followed by the Fund in the preparation of its financial statements. The
policies are in conformity with generally accepted accounting principles.
A. INVESTMENT VALUATIONS--Listed equity securities are valued at the last
sales price reported on national securities exchanges. Unlisted securities,
or listed securities in which there were no sales, and private placement
securities, are valued at the mean between bid and asked prices. Bonds and
other fixed income securities are valued at the last sale price on a
national securities exchange, if available. Otherwise they are valued on
the basis of prices furnished by independent pricing services.
Short-term obligations are ordinarily valued at the mean between bid and
asked prices as furnished by an independent pricing service. However,
short-term obligations with maturities of sixty days or less are valued at
amortized cost, which approximates value. All other securities are
appraised at fair value as determined in good faith by the Board of
Trustees ("Trustees").
B. REPURCHASE AGREEMENTS--It is the policy of the Fund to require the
custodian bank to take possession, to have legally segregated in the
Federal Reserve Book Entry System, or to have segregated within the
custodian bank's vault, all securities held as collateral in support of
repurchase agreement investments. Additionally, procedures have been
established by the Fund to monitor, on a daily basis, the market value of
each repurchase agreement's underlying securities to ensure the existence
of a proper level of collateral.
The Fund will only enter into repurchase agreements with banks and other
recognized financial institutions, such as broker/dealers, which are deemed
by the Fund's adviser to be creditworthy pursuant to guidelines established
by the Trustees. Risks may arise from the potential inability of
counterparties to honor the terms of the repurchase agreement. Accordingly,
the Fund could receive less than the repurchase price on the sale of
collateral securities.
C. INCOME--Dividend income is recorded on the ex-dividend date. Interest
income is recorded on the accrual basis. Interest income includes interest
and discount earned (net of premium) on short-term obligations, and
interest earned on all other debt securities including original issue
discount, as required by the Internal Revenue Code (the "Code"). Dividends
to shareholders and capital gain distributions, if any, are recorded on the
ex-dividend date.
D. FEDERAL TAXES--It is the Fund's policy to comply with the provisions of the
Code applicable to regulated investment companies and to distribute to
shareholders each year all of its taxable income, including any net
realized gain on investments. Accordingly, no provision for federal income
tax is necessary.
E. WHEN-ISSUED AND DELAYED DELIVERY TRANSACTIONS--The Fund may engage in
when-issued or delayed delivery transactions. To the extent the Fund
engages in such transactions, it will do so for the purpose of acquiring
portfolio securities consistent with its investment objectives and policies
and not for the purpose of investment leverage. The Fund will record a
when-issued security and the related liability on the trade date. Until the
securities are received and paid for, the Fund will maintain security
positions such that sufficient liquid assets will be available to make
payment for the securities purchased. Securities purchased on a when-issued
or delayed delivery basis are marked to market daily and begin earning
interest on the settlement date.
F. DEFERRED EXPENSES--Costs incurred by the Fund with respect to the
registration of its shares in its first fiscal year, excluding the initial
expense of registering the shares, have been deferred and are being
amortized on a straight-line basis over a period of five years from the
Fund's commencement date.
G. OTHER--Investment transactions are accounted for as of the trade date of
the transaction.
(3) DIVIDENDS
Dividends are declared and paid quarterly to all shareholders invested in the
Fund on the record date. Dividends are paid from the net investment income of
the Fund. Net investment income consists of all dividends or interest received
by the Fund, less its expenses. Capital gains realized by the Fund, if any, are
distributed at least once every twelve months.
(4) SHARES OF BENEFICIAL INTEREST
The Declaration of Trust permits the Trustees to issue an unlimited number of
full and fractional shares of beneficial interest (without par value).
Transactions in Fund shares were as follows:
<TABLE>
<CAPTION>
PERIOD ENDED
NOVEMBER 30, 1993*
<S> <C>
Shares outstanding, beginning of period --
- ----------------------------------------------------------------------------------------
Shares sold 1,307,697
- ----------------------------------------------------------------------------------------
Shares redeemed (129,269)
- ---------------------------------------------------------------------------------------- ------------------------
Shares outstanding, end of period 1,178,428
- ---------------------------------------------------------------------------------------- ------------------------
</TABLE>
* For the period from May 10, 1993 (date of initial public investment) to
November 30, 1993.
(5) INVESTMENT ADVISORY FEE AND OTHER TRANSACTIONS WITH AFFILIATES
Wachovia Investment Management Group, the Funds investment adviser ("Adviser"),
is entitled to receive for its services an annual investment advisory fee equal
to .80 of 1% of the Fund's average daily net assets. The Adviser may voluntarily
choose to waive a portion of its fee or reimburse certain operating expenses of
the Fund in excess of limitations imposed by certain states. The Adviser can
modify or terminate the voluntary waiver or reimbursement of expenses at any
time at its sole discretion. For the period ended November 30, 1993, the Adviser
earned an investment advisory fee of $54,274, of which $14,352 was voluntarily
waived.
Federated Administrative Services ("FAS") provides the Fund with certain
administrative personnel and services, and receives an annual administrative fee
equal to .145 of 1% on the first $400 million of the Trusts average aggregate
daily net assets; .120 of 1% on the next $300 million; .095 of 1% on the next
$300 million and .070 of 1% of the average aggregate daily net assets of the
Trust in excess of $1 billion. FAS may voluntarily waive a portion of its fee.
For the period ended November 30, 1993, FAS earned administrative fees of
$75,000, of which $66,674 was voluntarily waived. In addition, FAS reimbursed
$39,049 of other operating expenses. FAS can modify or terminate the voluntary
waiver and reimbursement at any time at its sole discretion.
Organization expenses of the Fund ($31,492) were borne initially by FAS. The
Fund has agreed to reimburse FAS for the organization expenses initially borne
by FAS during the five year period following the date the Fund's registration
statement first became effective. During the period ended November 30, 1993, the
Fund paid $700 pursuant to this agreement.
Federated Services Company ("FSC"), is the transfer agent and dividend
disbursing agent for the Fund. It also provides certain accounting and
recordkeeping services with respect to the Fund's portfolio of investments. FSC
may voluntarily waive a portion of its fees. FSC can modify or terminate the
voluntary waiver at any time at its sole discretion. For the year ended November
30, 1993 FSC earned recordkeeper fees of $28,399 and transfer and dividend
disbursing agent fees of $10,650.
For the services provided to the Fund pursuant to the Custodian Agreement, the
Fund pays Wachovia Bank of North Carolina, N.A. (the "Custodian") an annual fee
equal to .02 of 1% on the first $250 million of average aggregate daily net
assets of the Fund; .015 of 1% on average aggregate daily net assets from $250
million to $500 million and .01 of 1% on average aggregate daily net assets over
$500 million. The Custodian may voluntarily waive a portion of its fee. The
Custodian can modify or terminate the voluntary waiver at any time at its sole
discretion. For the period ended November 30, 1993, the Custodian earned $1,363,
all of which was waived.
Certain Officers of the Trust are Officers and Directors of FSC and FAS.
(6) INVESTMENT TRANSACTIONS
Purchases, and sales and maturities of investments, excluding securities subject
to repurchase agreements, for the period from May 10, 1993 (date of initial
public investment) to November 30, 1993, were as follows:
<TABLE>
<S> <C>
- --------------------------------------------------------------------------------------------------
PURCHASES $ 18,309,686
- -------------------------------------------------------------------------------------------------- --------------
SALES $ 7,309,551
- -------------------------------------------------------------------------------------------------- --------------
</TABLE>
REPORT OF ERNST & YOUNG, INDEPENDENT AUDITORS
- --------------------------------------------------------------------------------
To the Trustees and Shareholders of
THE BILTMORE FUNDS:
We have audited the accompanying statement of assets and liabilities, including
the portfolio of investments, of Biltmore Special Values Fund (one of the
portfolios comprising The Biltmore Funds) as of November 30, 1993, and the
related statement of operations, statement of changes in net assets and
financial highlights (see page 2 of this prospectus) for the period from May 10,
1993 (date of initial public investment) to November 30, 1993. These financial
statements and financial highlights are the responsibility of the Fund's
management. Our responsibility is to express an opinion on these financial
statements and financial highlights based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements and financial highlights are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. Our
procedures included confirmation of securities owned as of November 30, 1993, by
correspondence with the custodian and brokers. An audit also includes assessing
the accounting principles used and significant estimates made by management, as
well as evaluating the overall financial statement presentation. We believe that
our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of
Biltmore Special Values Fund of The Biltmore Funds at November 30, 1993, and the
results of its operations, changes in its net assets and financial highlights
for the period from May 10, 1993 to November 30, 1993, in conformity with
generally accepted accounting principles.
ERNST
& YOUNG
Pittsburgh, Pennsylvania
January 14, 1994
ADDRESSES
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
Biltmore Special Values Fund Federated Investors Tower
Pittsburgh, Pennsylvania 15222-3779
- -----------------------------------------------------------------------------------------------------------------------
Distributor
Federated Securities Corp. Federated Investors Tower
Pittsburgh, Pennsylvania 15222-3779
- -----------------------------------------------------------------------------------------------------------------------
Investment Adviser
Wachovia Investment 301 North Main Street
Management Group Winston-Salem, North Carolina 27150
- -----------------------------------------------------------------------------------------------------------------------
Custodian
Wachovia Bank of Wachovia Trust Operations
North Carolina, N.A. 301 North Main Street
Winston-Salem, North Carolina 27150
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Transfer Agent, Dividend Disbursing Agent,
and Portfolio Accounting Services
Federated Services Company Federated Investors Tower
Pittsburgh, Pennsylvania 15222-3779
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Counsel to The Biltmore Funds
Kirkpatrick & Lockhart 1800 M Street, N.W.
Washington, D.C. 20036-5891
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Counsel to the Independent Trustees
Piper & Marbury 1200 Nineteenth Street, N.W.
Washington, D.C. 20036-2430
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Independent Auditors
Ernst & Young One Oxford Centre
Pittsburgh, Pennsylania 15219
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</TABLE>
3012918A (1/94)
BILTMORE SPECIAL VALUES FUND
(A PORTFOLIO OF THE BILTMORE FUNDS)
STATEMENT OF ADDITIONAL INFORMATION
This Statement of Additional Information should be read with the
prospectus of Biltmore Special Values Fund (the "Fund") of The
Biltmore Funds (the "Trust"), dated January 31, 1994 (Revised June 1,
1994). This Statement is not a prospectus itself. To receive a copy of
the prospectus, Trust customers of the Wachovia Banks (as defined in
the prospectus) may write the Fund or call their Wachovia Bank
Officer. Customers of Wachovia Brokerage Service may write the Fund or
call 1-800-462-7538.
FEDERATED INVESTORS TOWER
PITTSBURGH, PENNSYLVANIA 15222-3779
Statement dated January 31, 1994
(Revised June 1, 1994)
[LOGO] FEDERATED SECURITIES CORP.
---------------------------------------------------------
Distributor
A subsidiary of FEDERATED INVESTORS
TABLE OF CONTENTS
- --------------------------------------------------------------------------------
GENERAL INFORMATION ABOUT THE FUND 1
- ---------------------------------------------------------------
INVESTMENT OBJECTIVE AND POLICIES 1
- ---------------------------------------------------------------
Types of Investments 1
Obligations of Foreign Issuers 3
High Yield Securities 3
Demand Master Notes 3
Repurchase Agreements 3
Reverse Repurchase Agreements 4
When-Issued and Delayed Delivery Transactions 4
Temporary Investments 4
Lending of Portfolio Securities 5
Investment Limitations 5
THE BILTMORE FUNDS MANAGEMENT 7
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Officers and Trustees 7
Fund Ownership 8
Trustee Liability 8
INVESTMENT ADVISORY SERVICES 9
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Adviser to the Fund 9
Advisory Fees 9
ADMINISTRATIVE SERVICES 9
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BROKERAGE TRANSACTIONS 9
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Portfolio Turnover 10
PURCHASING FUND SHARES 10
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Conversion to Federal Funds 10
DETERMINING NET ASSET VALUE 10
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DETERMINING MARKET VALUE OF SECURITIES 10
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REDEEMING FUND SHARES 11
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Redemption in Kind 11
TAX STATUS 11
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The Fund's Tax Status 11
Shareholders' Tax Status 11
Capital Gains 11
TOTAL RETURN 11
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YIELD 11
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PERFORMANCE COMPARISONS 12
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APPENDIX 13
- ---------------------------------------------------------------
GENERAL INFORMATION ABOUT THE FUND
- --------------------------------------------------------------------------------
The Fund is a portfolio in The Biltmore Funds (the "Trust"). The Trust was
established as a Massachusetts business trust under a Declaration of Trust dated
November 19, 1991.
INVESTMENT OBJECTIVE AND POLICIES
- --------------------------------------------------------------------------------
The Fund's investment objective is to produce growth of principal. The
investment objective cannot be changed without the approval of shareholders.
Unless otherwise indicated, the investment policies described below may be
changed by the Board of Trustees (the "Trustees") without shareholder approval.
Shareholders will be notified before any material change in these policies
becomes effective.
TYPES OF INVESTMENTS
The Fund invests primarily in a professionally-managed and diversified portfolio
of equity securities of companies that have a market capitalization of up to $1
billion. The Fund's investment adviser attempts to select companies with
potential for above-average capital appreciation commensurate with increased
risk. Although the Fund may invest in other securities of these companies, in
money market instruments, and in U.S. government obligations in such proportions
as prevailing market conditions warrant in the judgment of the Fund's investment
adviser, it is the Fund's policy under normal market conditions to invest at
least 65% of its total assets in equity securities. For purposes of managing the
Fund's portfolio, the Fund's investment adviser will treat master limited
partnerships and certain other publicly-traded equity interests as common
stocks.
Set forth below are other securities in which the Fund may invest from time to
time:
FUTURES AND OPTIONS TRANSACTIONS
As a means of reducing fluctuations in the net asset value of shares of
the Fund, the Fund may attempt to hedge all or a portion of its portfolio
by buying and selling financial futures contracts, buying put options on
portfolio securities and listed put options on futures contracts, and
writing call options on futures contracts. The Fund may also write
covered call options on portfolio securities to attempt to increase its
current income.
The Fund will maintain its positions in securities, options and
segregated cash subject to puts and calls until the options are
exercised, closed, or have expired. An option position on financial
futures contracts may be closed out over-the-counter or on a
nationally-recognized exchange which provides a secondary market for
options of the same series.
In addition to purchasing put options and writing call options as
described in the prospectus, the Fund may purchase and write
over-the-counter options on portfolio securities in negotiated
transactions with the buyers or writers of the options when options on
the portfolio securities held by the Fund are not traded on an exchange.
The Fund purchases and writes options only with investment dealers and
other financial institutions (such as commercial banks or savings and
loan associations) deemed creditworthy by the Fund's 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.
The Fund may also write call options and purchase put options on
financial futures and stock index futures contracts as a hedge to attempt
to protect securities in its portfolio against decreases in value.
FINANCIAL FUTURES CONTRACTS
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.
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.
PUT OPTIONS ON FINANCIAL FUTURES CONTRACTS
The Fund may purchase listed put options on financial futures contracts.
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, the
Fund will normally close out its option by selling an identical option.
If the hedge is successful, the proceeds received by the 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, the 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 the 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
In addition to purchasing put options on futures, the Fund may write
listed call options on futures contracts to hedge its portfolio. When the
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 stock prices fall, causing the
prices of futures to go down, 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 fixed income or
indexed portfolio which is occurring as interest rates rise.
Prior to the expiration of a call written by the 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
decrease in value of the hedged securities.
The 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 securities 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.
"MARGIN" IN FUTURES TRANSACTIONS
Unlike the purchase or sale of a security, the 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, if legally
permitted). 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
the 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 the 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 the 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.
The Fund is also required to deposit and maintain margin when it writes
call options on futures contracts.
The Fund will comply with the following restrictions when purchasing and
selling futures contracts. First, the 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 the Fund's total assets,
after taking into account the unrealized profits and losses on those
contracts it has entered into. Second, the Fund will not enter into these
contracts for speculative purposes. Third, since the 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, the Fund will disclose to all
prospective investors the limitations on its futures and option
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 Fund will submit to the CFTC
special calls for information, the Fund will not register as a
commodities pool operator.
The ability of the Trustees to determine the liquidity of certain restricted
securities is permitted under a Securities and Exchange Commission staff
position set forth in the adopting release for Rule 144A under the Securities
Act of 1933 (the "Rule"). The Rule is a non-exclusive, safe-harbor for certain
secondary market transactions involving securities subject to restrictions on
resale under federal securities laws. The Rule provides an exemption from
registration for resales of otherwise restricted securities to qualified
institutional buyers. The Rule was expected to further enhance the liquidity of
the secondary market for securities eligible for resale under the Rule. The Fund
believes that the staff of the Securities and Exchange Commission has left the
question of determining the liquidity of all restricted securities (eligible for
resale under the Rule) to the Trust's Board. The Board considers the following
criteria in determining the liquidity of certain restricted securities:
.the frequency of trades and quotes for the security;
.the number of dealers willing to purchase or sell the security and the number
of other potential buyers;
.dealer undertakings to make a market in the security; and
.the nature of the security and the nature of the marketplace trades.
OBLIGATIONS OF FOREIGN ISSUERS
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 or 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 the
Fund's assets and income may be affected by changes in exchange rates and
regulations.
HIGH YIELD SECURITIES
The lowest-rated securities in which the Fund may invest are rated B by S&P or
Moody's, or are not rated but are determined by the Fund's investment adviser to
be of comparable quality. Securities rated B are judged to have speculative
elements and are high yield, high risk bonds (i.e., junk bonds), typically
subject to greater market fluctuations and greater risk of loss of income and
principal due to an issuer's default. To a greater extent than investment grade
bonds, lower-rated bonds and speculative grade securities tend to reflect
short-term corporate, economic and market developments, as well as investor
perceptions of the issuer's credit quality. In addition, lower-rated bonds and
speculative grade securities may be more difficult to dispose of or to value
than high rated, lower-yielding bonds.
The Fund's investment adviser attempts to reduce the risks described above
through diversification of the portfolio and by credit analysis of each issuer,
as well as by monitoring broad economic trends and corporate and legislative
developments.
DEMAND MASTER NOTES
The Fund 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 the 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 the 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.
REPURCHASE AGREEMENTS
The Fund requires its 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 the
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 Fund believes that, under the regular procedures
normally in effect for custody of the 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. The Fund will
only enter into
repurchase agreements with banks and other recognized financial institutions,
such as broker/dealers, which are deemed by the Fund's investment adviser to be
creditworthy pursuant to guidelines established by the Trustees.
REVERSE REPURCHASE AGREEMENTS
The Fund may also enter into reverse repurchase agreements. These transactions
are similar to borrowing cash. In a reverse repurchase agreement, the 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 the 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 the Fund will be
able to avoid selling portfolio instruments at a disadvantageous time.
When effecting reverse repurchase agreements, liquid assets of the Fund, in a
dollar amount sufficient to make payment for the obligations to be purchased,
are segregated at the trade date. These assets are marked to market daily and
are maintained until the transaction has been settled.
WHEN-ISSUED AND DELAYED DELIVERY TRANSACTIONS
The Fund engages in when-issued and delayed delivery transactions only for the
purpose of acquiring portfolio securities consistent with the Fund's investment
objective and policies, and not for investment leverage.
These transactions are made to secure what is considered to be an advantageous
price and yield for the Fund. 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.
No fees or other expenses, other than normal transaction costs, are incurred.
However, liquid assets of the Fund sufficient to make payment for the securities
to be purchased are segregated on the Fund's records at the trade date. These
securities are marked to market daily and are maintained until the transaction
is settled. As a matter of policy, the Fund does not intend to engage in
when-issued and delayed delivery transactions to an extent that would cause the
segregation of an amount in excess of 20% of the total value of its assets.
TEMPORARY INVESTMENTS
The Fund may also invest in temporary investments from time to time for
defensive purposes.
U.S. GOVERNMENT OBLIGATIONS
The types of U.S. government obligations in which the Fund may invest
generally include direct obligations of the U.S. Treasury (such as U.S.
Treasury bills, notes, and bonds) and obligations issued or guaranteed by
U.S. government agencies or instrumentalities. These securities are
backed by:
the full faith and credit of the U.S. Treasury;
the issuer's right to borrow 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 agencies or instrumentalities; or
the credit of the agency or instrumentality issuing the obligations.
Examples of agencies and instrumentalities which are permissible
investments which may not always receive financial support from the U.S.
government are:
Federal Farm Credit Banks;
Federal Home Loan Banks;
Federal National Mortgage Association;
Student Loan Marketing Association; and
Federal Home Loan Mortgage Corporation.
MONEY MARKET INSTRUMENTS
The Fund may invest in the following money market instruments:
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 insured in full by the Bank
Insurance Fund, or by the Savings Association Insurance Fund, both of
which are administered by the Federal Deposit Insurance Corporation; and
commercial paper rated A-1 or better by Standard and Poor's Corporation,
Prime-1 by Moody's Investors Service, Inc., or F-1 by Fitch Investors
Services, or, if unrated, of comparable quality as determined by the
Fund's investment adviser.
LENDING OF PORTFOLIO SECURITIES
The collateral received when the 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. The 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 Fund does 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.
INVESTMENT LIMITATIONS
SELLING SHORT AND BUYING ON MARGIN
The 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
transactions.
The deposit or payment by the 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 Fund will not issue senior securities except that the Fund may borrow
money and engage in reverse repurchase agreements in amounts up to
one-third of the value of its net assets, including the amounts borrowed.
The 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
the Fund to meet redemption requests when the liquidation of portfolio
securities is deemed to be inconvenient or disadvantageous. The Fund will
not purchase any securities while borrowings in excess of 5% of the value
of the Fund's total assets are outstanding.
PLEDGING ASSETS
The 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.
INVESTING IN REAL ESTATE
The Fund will not buy or sell real estate, including limited partnership
interests, although it 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.
INVESTING IN COMMODITIES
The Fund will not purchase or sell commodities, commodity contracts, or
commodity futures contracts. However, the 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.
UNDERWRITING
The 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.
DIVERSIFICATION OF INVESTMENTS
With respect to securities comprising 75% of the value of its total
assets, the 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 the Fund's total assets would be invested in
the securities of that issuer. (For purposes of this limitation, the Fund
considers instruments issued by a U.S. branch of a domestic bank having
capital, surplus, and undivided profits in excess of $100,000,000 at the
time of investment to be "cash items.") Also, the Fund will not acquire
more than 10% of the voting securities of any one issuer.
CONCENTRATION OF INVESTMENTS
The Fund will not invest 25% or more of the value of its total assets in
any one industry, except that the 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.
LENDING CASH OR SECURITIES
The 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 Fund from purchasing or
holding U.S. government obligations, money market instruments, demand
master notes, bonds, debentures, notes, certificates of indebtedness, or
other debt securities, entering into repurchase agreements, or engaging
in other transactions where permitted by the Fund's investment objective,
policies, and limitations.
The 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 Fund will limit its 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 its total assets in any one
investment company, and will invest no more than 10% of its total assets
in investment companies in general. The Fund will purchase securities of
closed-end investment companies only in open market transactions
involving customary brokers commissions. However, these limitations are
not applicable if the Fund's securities are acquired in a merger,
consolidation, reorganization, or acquisition of assets. While it is the
Fund's policy to waive its investment advisory fees on Fund assets
invested in securities of other open-end investment companies, it should
be noted that investment companies incur certain expenses, such as
custodian and transfer agent fees, and therefore, any investment by the
Fund in shares of another investment company would be subject to such
duplicate expenses. The Fund will invest in other investment companies
primarily for the purpose of investing its short-term cash on a temporary
basis. The Fund has a present intention of investing no more than 5% of
its total assets in investment companies during the current fiscal year.
INVESTING IN RESTRICTED SECURITIES
The Fund will not invest more than 5% of its net 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 Fund will not invest more than 15% of its net assets in illiquid
securities, including repurchase agreements providing for settlement in
more than seven days after notice, over-the-counter options, certain
securities not determined under guidelines established by the Trustees to
be liquid, and non-negotiable fixed income time deposits with maturities
over seven days.
INVESTING IN MINERALS
The Fund will not purchase interests in oil, gas, or other mineral
exploration or development programs or leases, except that the Fund may
purchase the securities of issuers which invest in or sponsor such
programs.
INVESTING IN NEW ISSUERS
The Fund will not invest more than 5% of the value of its total assets in
portfolio instruments of unseasoned issuers, including their
predecessors, that have been in operation for less than three years.
INVESTING IN ISSUERS WHOSE SECURITIES ARE OWNED BY OFFICERS AND TRUSTEES OF
THE TRUST
The Fund will not purchase or retain the securities of any issuer if the
officers and Trustees of the Trust or the Fund's investment adviser,
owning individually more than -1/2 of 1% of the issuer's securities,
together own more than 5% of the issuer's securities.
INVESTING IN PUT OPTIONS
The Fund will not purchase put options on securities unless the
securities are held in the 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.
PURCHASING SECURITIES TO EXERCISE CONTROL
The Fund will not purchase securities of a company for purposes of
exercising control or management.
INVESTING IN WARRANTS
The Fund will not invest more than 5% of its net assets in warrants,
including those acquired in units with or attached to other securities.
To comply with certain state restrictions, the Fund will limit its
investment in such warrants not listed on the New York or American Stock
Exchange to 2% of its net assets. (If state restrictions change, this
latter restriction may be revised without notice to shareholders.) For
purposes of this investment restriction, warrants acquired by the Fund in
units with or attached to securities may be deemed to be without value.
WRITING COVERED CALL OPTIONS
The Fund will not write call options on securities unless the securities
are held in the Fund's portfolio or unless the Fund is entitled to them
in deliverable form without further payment or after segregating cash in
the amount of any further payment.
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.
The Fund does not intend to borrow money in excess of 5% of the value of its
total assets during the current fiscal year.
THE BILTMORE FUNDS MANAGEMENT
- --------------------------------------------------------------------------------
OFFICERS AND TRUSTEES
Officers and Trustees of the Trust are listed with their principal occupations
and present positions. Each of the Trustees and officers listed below hold an
identical position with The Biltmore Municipal Funds, another investment
company. Except as listed below, none of the Trustees or officers are affiliated
with Wachovia Bank of North Carolina, N.A., Federated Investors, Federated
Securities Corp., Federated Services Company or Federated Administrative
Services.
<TABLE>
<CAPTION>
POSITIONS WITH
NAME THE TRUST PRINCIPAL OCCUPATIONS DURING PAST FIVE YEARS
<S> <C> <C>
James A. Hanley Trustee Retired; Vice President and Treasurer, Abbott Laboratories (health care
products) until 1992.
Malcolm T. Hopkins Trustee Private investor and consultant; Director, The Columbia Gas System, Inc.
(integrated natural gas production, transmission and distribution);
Director, MAPCO, Inc. (diversified energy); Director, Metropolitan
Series Funds, Inc. (investment company); Director, Kinder-Care Learning
Centers, Inc. (child care); and Director, Wangner Systems Corporation
(manufacturer of fabrics for paper production).
Samuel E. Hudgins Trustee Principal, Lally, Percival & Company Inc.; Director, Atlantic American
Corporation (insurance holding company); Director, Bankers Fidelity Life
Insurance Company; Director and Vice Chairman, Leath Furniture, Inc.
(retail furniture); President, Atlantic American Corporation until 1988;
Director, Vice Chairman and Chief Executive Officer, Rhodes, Inc.
(retail furniture) until 1988; Chairman and Director, Atlantic American
Life Insurance Co., Georgia Casualty & Surety Company, and Bankers
Fidelity Life Insurance until 1988.
J. Berkley Ingram, Jr. Trustee Real estate investor and partner; Director, VF Corporation (apparel
company).
D. Dean Kaylor Trustee Retired; Executive Vice President and Chief Financial Officer, NBD Bank,
N.A. and NBD Bancorp, Inc. (bank and bank-
holding company) until 1990.
John W. McGonigle President and Vice President, Secretary, General Counsel, and Trustee, Federated
Treasurer Investors; Vice President, Secretary, and Trustee, Federated Advisers,
Federated Management, and Federated Research; Trustee, Federated
Services Company; Executive Vice President, Secretary, and Trustee,
Federated Administrative Services; Executive Vice President and
Director, Federated Securities Corp.
Ronald M. Petnuch Vice President and Vice President, Federated Administrative Services; formerly, Associate
Assistant Treasurer Corporate Counsel, Federated Investors; Vice President and Assistant
Treasurer for certain investment companies for which Federated
Securities Corp. is the principal distributor.
Joseph M. Huber Secretary Corporate Counsel, Federated Investors.
</TABLE>
The address of the Trustees and officers of the Trust is Federated Investors
Tower, Pittsburgh, Pennsylvania 15222-3779.
FUND OWNERSHIP
Officers and Trustees own less than 1% of the Fund's outstanding shares.
As of December 31, 1993, the following shareholders of record owned 5% or more
of the outstanding shares of the Fund: Wachovia Bank of North Carolina, N.A.,
for the account of Wachovia Corporation Retirement Income Plan
(1-1-41), Winston-Salem, North Carolina, owned approximately 724,392.67 shares
(59.72%); Wachovia Bank of North Carolina, N.A., for the account of Employees
BDM Inter. Inc., Winston-Salem, North Carolina, owned approximately 130,926.61
shares (10.79%), and Wachovia Bank of North Carolina, N.A., for the account of
Del Monte Tropical Fruit Incentive Savings & Security, Winston-Salem, North
Carolina, owned approximately 148,835.41 shares (12.27%).
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
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ADVISER TO THE FUND
The Fund's investment adviser is Wachovia Investment Management Group (the
"Adviser"). The Adviser is a business unit of Wachovia Bank of North Carolina,
N.A., which is a wholly-owned subsidiary of Wachovia Corporation of North
Carolina, a wholly-owned subsidiary of Wachovia Corporation.
The Adviser shall not be liable to the Trust, the Fund or any shareholder of the
Fund 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 contract with the Trust.
ADVISORY FEES
For its advisory services, the Adviser receives an annual investment advisory
fee as described in the prospectus.
For the period from May 10, 1993 (date of initial public investment) through
November 30, 1993, the Adviser earned $54,274, of which $14,352 was voluntarily
waived.
STATE EXPENSE LIMITATIONS
The Adviser has undertaken to comply with the expense limitations
established by certain states for investment companies whose shares are
registered for sale in those states. If the Fund's normal operating
expenses (including the investment advisory fee, but not including
brokerage commissions, interest, taxes, and extraordinary expenses)
exceed 2-1/2% per year of the first $30 million of average net assets, 2%
per year of the next $70 million of average net assets, and 1-1/2% per
year of the remaining average net assets, the Adviser will waive its fee
or reimburse the Fund for its expenses over the limitation.
If the Fund's monthly projected operating expenses exceed this
limitation, the investment advisory fee paid will be reduced by the
amount of the excess, subject to an annual adjustment. If the expense
limitation is exceeded, the amount to be reimbursed by the Adviser will
be limited, in any single fiscal year, by the amount of the investment
advisory fee.
ADMINISTRATIVE SERVICES
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Federated Administrative Services ("FAS"), a subsidiary of Federated Investors,
provides administrative personnel and services to the Fund for a fee as
described in the prospectus. For the period from May 10, 1993 (date of initial
public investment) through November 30, 1993, FAS earned $75,000, of which
$66,674 was voluntarily waived.
BROKERAGE TRANSACTIONS
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The Adviser may select brokers and dealers who offer brokerage and research
services. These services may be furnished directly to the Fund or to the Adviser
and may include:
.advice as to the advisability of investing in securities;
.security analysis and reports;
.economic studies;
.industry studies;
.receipt of quotations for portfolio evaluations; and
.similar services.
The Adviser and its affiliates exercise reasonable business judgment in
selecting brokers who offer brokerage and research services to execute
securities 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.
Research services provided by brokers and dealers may be used by the Adviser in
advising the 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 expenses. The Fund has no
obligation to deal with any broker or group of brokers in the execution of
portfolio transactions.
Some of the Adviser's other clients have investment objectives and programs
similar to that of the Fund. Occasionally, the Adviser may make recommendations
to other clients which result in their purchasing or selling securities
simultaneously with the Fund. Consequently, the demand for securities being
purchased or the supply of securities being sold may increase, and this could
have an adverse effect on the price of those securities. It is the Adviser's
policy not to favor one client over another in making recommendations or in
placing orders. If two or more of the Adviser's clients are purchasing a given
security on the same day from the same broker or dealer, the Adviser may average
the price of the transactions and allocate the average among the clients
participating in the transaction.
For the period from May 10, 1993 (date of initial public investment) to November
30, 1993, the Fund paid $26,369 in commissions on brokerage transactions.
PORTFOLIO TURNOVER
The Fund will not attempt to set or meet a portfolio turnover rate since any
turnover would be incidental to transactions undertaken in an attempt to achieve
the Fund's investment objective. Securities in its portfolio will be sold
whenever the 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. The Adviser does not anticipate that the Fund's annual
portfolio turnover rate will exceed 100% under normal market conditions. A
portfolio turnover rate of 100% would occur, for example, if all the securities
in the Fund's portfolio were replaced once in a period of one year. Transactions
for the Fund's portfolio will be based only upon investment considerations and
will not be limited by any other considerations when the Adviser deems it
appropriate to make changes in the Fund's portfolio.
For the period from May 10, 1993 (date of initial public investment) through
November 30, 1993, the Fund's portfolio turnover rate was 68%. The higher
portfolio turnover rate for the period was a result of the fact that the first
fiscal year was the initial start-up period for the Fund and, therefore, the
portfolio turnover would be expected to be substantially greater than on a fund
with a longer operating history. Although there were increased taxes because
these transactions generated additional income, there were no additional
brokerage commissions because these transactions were done on a net basis.
However, the Fund paid mark-ups on the securities which represented the spread
between bid and asked prices.
PURCHASING FUND SHARES
- --------------------------------------------------------------------------------
Shares of the Fund are sold at net asset value on days on which the New York
Stock Exchange and the Federal Reserve Wire System are open for business. The
procedure for purchasing shares of the Fund is explained in the prospectus under
"Investing in the Fund."
CONVERSION TO FEDERAL FUNDS
It is the 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. The Wachovia Banks act as the
shareholders' agent in depositing checks and converting them to federal funds.
DETERMINING NET ASSET VALUE
- --------------------------------------------------------------------------------
Net asset value generally changes each day. The days on which net asset value is
calculated by the Fund are described in the prospectus.
DETERMINING MARKET VALUE OF SECURITIES
- --------------------------------------------------------------------------------
The market value of the Fund's portfolio securities are determined as follows:
.for equity securities, according to the last sale price on a national
securities exchange, if available;
.in the absence of recorded sales for listed equity securities, according to the
mean between the last closing bid and asked prices;
.for unlisted equity securities, the latest bid prices;
.for bonds and other fixed income securities, as determined by an independent
pricing service;
.for short-term obligations, according to the mean between bid and asked prices
as furnished by an independent pricing service; or
.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
- --------------------------------------------------------------------------------
The Fund redeems shares at the next computed net asset value after the Fund
receives the redemption request. Redemption procedures are explained in the
prospectus under "Redeeming Shares."
REDEMPTION IN KIND
Although the Fund intends to redeem shares in cash, it reserves the right under
certain circumstances to pay the redemption price in whole or in part by a
distribution of securities from the Fund's portfolio. To the extent available,
such securities will be readily marketable.
Redemption in kind will be made in conformity with applicable Securities and
Exchange Commission rules, taking such securities at the same value employed in
determining net asset value and selecting the securities in a manner the
Trustees determine to be fair and equitable.
Redemption in kind is not as liquid as a cash redemption. If redemption is made
in kind, shareholders receiving their securities and selling them before their
maturity could receive less than the redemption value of their securities and
could incur transaction costs.
The Fund has elected to be governed by Rule 18f-1 under the Investment Company
Act of 1940, which obligates the 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.
TAX STATUS
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THE FUND'S TAX STATUS
The 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, the Fund must, among other
requirements:
.derive at least 90% of its gross income from dividends, interest, and gains
from the sale of securities;
.derive less than 30% of its gross income from the sale of securities held less
than three months;
.invest in securities within certain statutory limits; and
.distribute to its shareholders at least 90% of its net income earned during the
year.
SHAREHOLDERS' TAX STATUS
Shareholders 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 the 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.
CAPITAL GAINS
Long-term capital gains distributed to shareholders will be treated as long-term
capital gains regardless of how long shareholders have held shares.
TOTAL RETURN
- --------------------------------------------------------------------------------
The Fund's cumulative total return from May 10, 1993 (date of initial public
investment) to November 30, 1993 was 2.40%. Cumulative total return reflects the
Fund's total performance over a specific period of time. This total return
assumes and is reduced by the payment of the maximum sales load.
The average annual total return for the Fund 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.
YIELD
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The Fund's yield for the thirty-day period ended November 30, 1993 was 0.19%.
The yield for the Fund is determined by dividing the net investment income per
share (as defined by the Securities and Exchange Commission) earned by the Fund
over a thirty-day period by the maximum offering price per share of the Fund on
the last day of the period. This value is then annualized using semi-annual
compounding. This means that the amount of income generated during the
thirty-day period is assumed to be generated each month
over a 12-month period and is reinvested every six months. The yield does not
necessarily reflect income actually earned by the Fund because of certain
adjustments required by the Securities and Exchange Commission and, therefore,
may not correlate to the dividends or other distributions paid to shareholders.
To the extent that financial institutions and broker/dealers charge fees in
connection with services provided in conjunction with an investment in the Fund,
the performance will be reduced for those shareholders paying those fees.
PERFORMANCE COMPARISONS
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The Fund's performance depends upon such variables as:
.stock market fluctuation;
.portfolio quality;
.average portfolio maturity;
.type of instruments in which the portfolio is invested;
.changes in interest rates and market value of portfolio securities;
.changes in the Fund's expenses;
.the relative amount of Fund cash flow; and
.various other factors.
The Fund's performance fluctuates on a daily basis largely because net earnings
and net asset value per share fluctuate daily. Both net earnings and net asset
value per share are factors in the computation of yield and total return.
Investors may use financial publications and/or indices to obtain a more
complete view of the Fund's performance. When comparing performance, investors
should consider all relevant factors such as the composition of any index used,
prevailing market conditions, portfolio compositions of other funds, and methods
used to value portfolio securities and compute offering price. The financial
publications and/or indices which the Fund uses in advertising may include:
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.
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.
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.
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's Index figures.
MORNINGSTAR, INC., an independent rating service, is the publisher of the
bi-weekly Mutual Fund Values. Mutual Fund Values rates more than 1,000
NASDQ-listed mutual funds of all types, according to their risk-adjusted
returns. The maximum rating is five stars, and ratings are effective for two
weeks.
Advertisements and other sales literature for the Fund may quote total returns
which are calculated on non-standardized base periods. These total returns also
represent the historic change in the value of an investment in the Fund based on
quarterly reinvestment of dividends over a specified period of time.
Advertisements may quote performance information which does not reflect the
effect of the sales load.
APPENDIX
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STANDARD & POOR'S CORPORATION ("S&P") CORPORATE BOND RATING DEFINITIONS
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--Debt rated BB or B 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 lower degree of speculation. While
such debt will likely have some quality and protective characteristics, these
are outweighed by large uncertainties of major risk exposures to adverse
conditions.
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 (+) or
minus (-) to the above rating classifications to show relative standing within
the classifications.
MOODY'S INVESTORS SERVICE, INC. ("MOODY'S") CORPORATE BOND RATING DEFINITIONS
Aaa--Bonds which are rated Aaa are judged to be of the best quality. They carry
the smallest degree of investment risk and are generally referred to as "gilt
edge." Interest payments are protected by a large or by an exceptionally stable
margin and principal is secure. While the various protective elements are likely
to change, such changes as can be visualized are most unlikely to impair the
fundamentally strong position of such issues.
Aa--Bonds which are rated Aa are judged to be of high quality by all standards.
Together with the Aaa group they comprise what are generally known as high grade
bonds. They are rated lower than the best bonds because margins of protection
may not be as large as in Aaa securities or fluctuation of protective elements
may be of greater amplitude or there may be other elements present which make
the long term risks appear somewhat larger than in Aaa securities.
A--Bonds which are rated A possess many favorable investment attributes and are
to be considered as upper medium grade obligations. Factors giving security to
principal and interest are considered adequate but elements may be present which
suggest a susceptibility to impairment sometime in the future. Baa--Bonds which
are rated Baa are considered as medium grade obligations, i.e., they are neither
highly protected nor poorly secured. Interest payments and principal security
appear adequate for the present but certain protective elements may be lacking
or may be characteristically unreliable over any great length of time. Such
bonds lack outstanding investment characteristics and in fact have speculative
characteristics as well.
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.
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.
FITCH INVESTORS SERVICE, INC. LONG-TERM DEBT RATINGS
AAA--Bonds considered to be investment grade and of the highest credit quality.
The obligor has an exceptionally strong ability to pay interest and repay
principal, which is unlikely to be affected by reasonably foreseeable events.
AA--Bonds considered to be investment grade and of very high credit quality. The
obligor's ability to pay interest and repay principal is very strong, although
not quite as strong as bonds rated AAA. Because bonds rated in the
AAA and AA categories are not significantly vulnerable to foreseeable future
developments, short-term debt of these issuers is generally rated F-1+.
A--Bonds considered to be investment grade and of high credit quality. The
obligor's ability to pay interest and repay principal is considered to be
strong, but may be more vulnerable to adverse changes in economic conditions and
circumstances than bonds with higher ratings.
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.
NR--NR indicates that Fitch does not rate the specific issue.
STANDARD & POOR'S CORPORATION COMMERCIAL PAPER RATING DEFINITIONS
A-1--This designation indicates that the degree of safety regarding timely
payment is strong. Those issues determined to have extremely strong safety
characteristics are denoted with a plus (+) sign.
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".
MOODY'S INVESTORS SERVICE, INC. COMMERCIAL PAPER RATING DEFINITIONS
P-1--Issuers (or supporting institutions) rated Prime-1 (P-1) have a superior
capacity for repayment of senior short-term promissory obligations. P-1
repayment capacity will often be evidenced by many of the following
characteristics: leading market positions in well-established industries; high
rates of return on funds employed; conservative capitalization structure with
moderate reliance on debt and ample asset protection; broad margins in earnings
coverage of fixed financial charges and high internal cash generation; or
well-established access to a range of financial markets and assured sources of
alternate liquidity.
P-2--Issuers (or supporting institutions) rated Prime-2 (P-2) have a strong
capacity for repayment of senior short-term debt obligations. This will normally
be evidenced by many of the characteristics cited above, but to a lesser degree.
Earnings trends and coverage ratios, while sound, may be more subject to
variation. Capitalization characteristics, while still appropriate, may be more
affected by external conditions. Ample alternate liquidity is maintained.
FITCH INVESTORS SERVICE, INC. COMMERCIAL PAPER RATINGS
FITCH-1--(Highest Grade) Commercial paper assigned this rating is regarded as
having the strongest degree of assurance for timely payment.
FITCH-2--(Very Good Grade) Issuers assigned this rating reflect an assurance of
timely payment only slightly less in degree than the strongest issues.
3012918B (6/94)
