BILTMORE QUANTITATIVE EQUITY FUND
(A PORTFOLIO OF THE BILTMORE FUNDS)
- --------------------------------------------------------------------------------
SEMI-ANNUAL REPORT AND SUPPLEMENT TO PROSPECTUS DATED JANUARY 18, 1994
A. Please delete the "Summary of Fund Expenses" table on page 1 of the
Prospectus and replace it with the following table:
SUMMARY OF FUND EXPENSES
- --------------------------------------------------------------------------------
<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
Contingent Deferred Sales Charge (as a percentage of original purchase price or redemption proceeds, as
applicable)............................................................................................... None
Redemption Fees (as a percentage of amount redeemed, if applicable)......................................... None
Exchange Fee................................................................................................ None
ANNUAL FUND OPERATING EXPENSES*
(As a percentage of projected average net assets)
Management Fee (after waiver) (1)........................................................................... 0.60%
12b-1 Fees.................................................................................................. None
Other Expenses (after waiver) (2)........................................................................... 0.32%
Shareholder Servicing Fees (3)............................................................... 0.00%
Total Fund Operating Expenses (after waiver) (4)................................................... 0.92%
</TABLE>
(1) The estimated management fee has been reduced to reflect the anticipated
voluntary waiver by the investment adviser. The adviser can terminate this
voluntary waiver at any time at its sole discretion. The maximum management
fee is 0.70%.
(2) Other Expenses are estimated to be 0.34%, absent the anticipated voluntary
waiver 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) Total Fund Operating Expenses are estimated to be at 1.04%, absent the
anticipated voluntary waivers by the investment adviser and administrator.
* Since the Fund does not have an operating history, the percentages indicated
as Annual Fund Operating Expenses are based on the Fund's projected fees and
estimated expenses for the fiscal year ending November 30, 1994. The table
should not be considered a representation of past or future expenses. Actual
expenses may be greater or less than those shown in this table.
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................................................................................ $54 $73
</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. THIS
EXAMPLE IS BASED ON ESTIMATED DATA FOR THE FUND'S FISCAL YEAR ENDING NOVEMBER
30, 1994.
B. Please insert the following Financial Highlights table as page 2 of the
Prospectus following the "Summary of Fund Expenses" table and before the
section entitled "General Information." In addition, please add the
heading "Financial Highlights" to the Table of Contents on page I after
the heading "Summary of Fund Expenses."
BILTMORE QUANTITATIVE EQUITY FUND
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
(FOR A SHARE OUTSTANDING THROUGHOUT THE PERIOD)
<TABLE>
<CAPTION>
PERIOD ENDED
MAY 31, 1994*
<S> <C>
- ----------------------------------------------------------------------------------------------- -----------------
NET ASSET VALUE, BEGINNING OF PERIOD $ 10.00
- -----------------------------------------------------------------------------------------------
INCOME FROM INVESTMENT OPERATIONS
- -----------------------------------------------------------------------------------------------
Net investment income 0.03
- -----------------------------------------------------------------------------------------------
Net realized and unrealized gain (loss) on investments (0.21)
- ----------------------------------------------------------------------------------------------- -----------------
Total from investment operations (0.18)
- -----------------------------------------------------------------------------------------------
LESS DISTRIBUTIONS
- -----------------------------------------------------------------------------------------------
Dividends to shareholders from net investment income 0.00
- ----------------------------------------------------------------------------------------------- -----------------
NET ASSET VALUE, END OF PERIOD $ 9.82
- ----------------------------------------------------------------------------------------------- -----------------
TOTAL RETURN** (1.80%)
- -----------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS
- -----------------------------------------------------------------------------------------------
Expenses 0.92%(b)
- -----------------------------------------------------------------------------------------------
Net investment income 1.61%(b)
- -----------------------------------------------------------------------------------------------
Expense waiver/reimbursement (a) 0.10%(b)
- -----------------------------------------------------------------------------------------------
SUPPLEMENTAL DATA
- -----------------------------------------------------------------------------------------------
Net assets, end of period (000 omitted) $90,622
- -----------------------------------------------------------------------------------------------
Portfolio turnover rate 23%
- -----------------------------------------------------------------------------------------------
</TABLE>
* Reflects operations for the period from March 28, 1994 (date of initial
public investment) to May 31, 1994 (unaudited).
** Based on net asset value which does not reflect the sales load or contingent
deferred sales charge, if applicable.
(a) This voluntary expense decrease is reflected in both the expense and net
investment income ratios shown above (Note 4).
(b) Computed on an annualized basis.
(See Notes which are an integral part of the Financial Statements)
C. Please add the following as a final paragraph under the section entitled
"Portfolio Turnover" on page 7 of the Prospectus:
"From March 28, 1994 (date of initial public investment) to May 31, 1994, the
Fund's portfolio turnover rate was 23%."
D. Please replace the reference to "The South Carolina National Bank" which
appears on page 8 of the Prospectus, in the "Adviser's Background"
subsection, with "Wachovia Bank of South Carolina, N.A."
E. Please replace the section entitled "Administrative Services" which
appears on pages 9 and 10 of the Prospectus and replace it with the
following:
"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
services at an annual rate, computed and payable daily, as specified below:
<TABLE>
<CAPTION>
AVERAGE AGGREGATE DAILY NET
MAXIMUM ASSETS OF THE BILTMORE FUNDS
ADMINISTRATIVE FEE AND THE BILTMORE MUNICIPAL FUNDS
<C> <S>
0.150 of 1% on the first $250 million
0.125 of 1% on the next $250 million
0.100 of 1% on the next $250 million
0.075 of 1% on assets in excess of $750 million
</TABLE>
The administrative fee received during any fiscal year for the Fund and each of
the other portfolios of The Biltmore Funds shall aggregate at least $75,000.
Federated Administrative Services may choose voluntarily to waive or reimburse a
portion of its fee at any time."
F. Please add the following as the third sentence of the first paragraph of
the subsection entitled "Voting Rights" on page 18 of the Prospectus:
"As of July 15, 1994 the Wachovia Banks and their various affiliates and
subsidiaries, acting in various capacities for numerous accounts, were the owner
of record of certain shares of the Fund, and therefore may be deemed to control
the Fund and be able to affect the outcome of certain matters presented for a
vote of shareholders."
G. Please insert the following financial statements at the end of the
Prospectus beginning on page 21. In addition, please add the heading
"Financial Statements" to the Table of Contents on page I of the
Prospectus immediately before "Addresses"
BILTMORE QUANTITATIVE EQUITY FUND
PORTFOLIO OF INVESTMENTS
MAY 31, 1994
(UNAUDITED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES VALUE
<C> <S> <C>
- ------------- --------------------------------------------------------------------------------- ---------------
COMMON STOCKS--95.9%
- ------------------------------------------------------------------------------------------------
CAPITAL GOODS--4.5%
---------------------------------------------------------------------------------
22,939 Cummins Engine, Inc. $ 983,510
---------------------------------------------------------------------------------
8,800 Deere & Co. 613,800
---------------------------------------------------------------------------------
49,842 General Electric Co. 2,473,409
--------------------------------------------------------------------------------- ---------------
Total 4,070,719
--------------------------------------------------------------------------------- ---------------
CONSUMER DURABLES--5.0%
---------------------------------------------------------------------------------
4,700 Briggs & Stratton Corp. 354,850
---------------------------------------------------------------------------------
15,764 Centex Corp. 384,248
---------------------------------------------------------------------------------
37,004 Chrysler Corp. 1,836,324
---------------------------------------------------------------------------------
14,632 Echlin, Inc. 396,893
---------------------------------------------------------------------------------
11,113 Ford Motor Co. 641,776
---------------------------------------------------------------------------------
5,286 Goodyear Tire and Rubber Co. 204,832
---------------------------------------------------------------------------------
13,000 Leggett & Platt, Inc. 487,500
---------------------------------------------------------------------------------
13,000 Maytag Corp. 242,125
--------------------------------------------------------------------------------- ---------------
Total 4,548,548
--------------------------------------------------------------------------------- ---------------
CONSUMER NON-DURABLES--26.5%
---------------------------------------------------------------------------------
10,370 Abbott Laboratories 309,804
---------------------------------------------------------------------------------
12,083 American Cyanamid Co. 629,826
---------------------------------------------------------------------------------
53,466 American Stores Co. 1,336,650
---------------------------------------------------------------------------------
9,629 *Amgen, Inc. 448,350
---------------------------------------------------------------------------------
6,702 Anheuser-Busch Cos., Inc. 364,421
---------------------------------------------------------------------------------
10,554 Becton, Dickinson & Co. 402,371
---------------------------------------------------------------------------------
42,384 Bergen Brunswig Corp. Class A 752,316
---------------------------------------------------------------------------------
</TABLE>
BILTMORE QUANTITATIVE EQUITY FUND
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES VALUE
<C> <S> <C>
- ------------- --------------------------------------------------------------------------------- ---------------
COMMON STOCKS--CONTINUED
- ------------------------------------------------------------------------------------------------
CONSUMER NON-DURABLES--CONTINUED
---------------------------------------------------------------------------------
50,000 Circuit City Stores, Inc. $ 968,750
---------------------------------------------------------------------------------
6,136 Colgate-Palmolive Co. 351,286
---------------------------------------------------------------------------------
15,589 CPC International, Inc. 756,067
---------------------------------------------------------------------------------
25,292 Gap, Inc. 1,097,040
---------------------------------------------------------------------------------
15,000 Gerber Products Co. 759,375
---------------------------------------------------------------------------------
14,500 Glaxo Holdings PLC 235,625
---------------------------------------------------------------------------------
59,801 IBP Inc. 1,532,401
---------------------------------------------------------------------------------
19,257 Johnson & Johnson 852,122
---------------------------------------------------------------------------------
32,756 Lilly (Eli) & Co. 1,879,375
---------------------------------------------------------------------------------
7,000 Mattel, Inc. 184,625
---------------------------------------------------------------------------------
40,500 Mercantile Stores, Inc. 1,417,500
---------------------------------------------------------------------------------
8,000 Nordstrom, Inc. 353,000
---------------------------------------------------------------------------------
34,340 Penney (J.C.) Inc. 1,755,633
---------------------------------------------------------------------------------
43,140 Pepsico, Inc. 1,553,040
---------------------------------------------------------------------------------
28,319 Philip Morris Cos., Inc. 1,394,711
---------------------------------------------------------------------------------
14,986 Premark International, Inc. 1,064,006
---------------------------------------------------------------------------------
13,300 Procter & Gamble Co. 749,787
---------------------------------------------------------------------------------
17,935 Schering-Plough Corp. 1,170,259
---------------------------------------------------------------------------------
5,758 Unilever N.V. 604,590
---------------------------------------------------------------------------------
9,629 V.F. Corp. 473,025
---------------------------------------------------------------------------------
14,000 Winn Dixie Stores, Inc. 633,500
--------------------------------------------------------------------------------- ---------------
Total 24,029,455
--------------------------------------------------------------------------------- ---------------
CONSUMER SERVICE--4.2%
---------------------------------------------------------------------------------
1,000 Capital Cities/ABC, Inc. 739,750
---------------------------------------------------------------------------------
3,021 CBS, Inc. 788,481
---------------------------------------------------------------------------------
8,873 McKesson Corp. 735,350
---------------------------------------------------------------------------------
51,912 Morrison Restaurants, Inc. 1,168,020
---------------------------------------------------------------------------------
</TABLE>
BILTMORE QUANTITATIVE EQUITY FUND
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES VALUE
<C> <S> <C>
- ------------- --------------------------------------------------------------------------------- ---------------
COMMON STOCKS--CONTINUED
- ------------------------------------------------------------------------------------------------
CONSUMER SERVICE--CONTINUED
---------------------------------------------------------------------------------
21,806 National Medical Enterprises, Inc. $ 357,073
--------------------------------------------------------------------------------- ---------------
Total 3,788,674
--------------------------------------------------------------------------------- ---------------
ENERGY--8.4%
---------------------------------------------------------------------------------
12,460 Amoco Corp. 733,583
---------------------------------------------------------------------------------
16,000 Chevron Corp. 1,392,000
---------------------------------------------------------------------------------
25,800 Coastal Corp. 728,850
---------------------------------------------------------------------------------
13,121 Equitable Resources, Inc. 451,034
---------------------------------------------------------------------------------
21,145 Exxon Corp. 1,289,845
---------------------------------------------------------------------------------
16,897 MAPCO, Inc. 1,056,063
---------------------------------------------------------------------------------
14,608 Mobil Corp. 1,183,248
---------------------------------------------------------------------------------
27,942 Sun, Inc. 813,811
--------------------------------------------------------------------------------- ---------------
Total 7,648,434
--------------------------------------------------------------------------------- ---------------
FINANCE--16.2%
---------------------------------------------------------------------------------
24,921 AFLAC, Inc. 834,853
---------------------------------------------------------------------------------
29,000 Chase Manhattan Corp. 1,094,750
---------------------------------------------------------------------------------
49,559 Comdisco, Inc. 1,028,349
---------------------------------------------------------------------------------
38,892 DQE 1,234,821
---------------------------------------------------------------------------------
12,272 GATX Corp. 490,880
---------------------------------------------------------------------------------
33,865 General Public Utilities Corp. 969,386
---------------------------------------------------------------------------------
49,747 Huntington Bancshares Inc. 1,312,077
---------------------------------------------------------------------------------
24,756 KeyCorp 804,570
---------------------------------------------------------------------------------
24,826 Merrill Lynch & Co., Inc. 968,214
---------------------------------------------------------------------------------
22,044 Morgan Stanley Group, Inc. 1,317,129
---------------------------------------------------------------------------------
10,478 PHH Corp. 385,066
---------------------------------------------------------------------------------
27,942 Signet Banking Corp. 1,166,578
---------------------------------------------------------------------------------
51,258 SouthTrust Corp. 1,082,825
---------------------------------------------------------------------------------
17,800 Transamerica Corp. 950,075
---------------------------------------------------------------------------------
</TABLE>
BILTMORE QUANTITATIVE EQUITY FUND
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES VALUE
<C> <S> <C>
- ------------- --------------------------------------------------------------------------------- ---------------
COMMON STOCKS--CONTINUED
- ------------------------------------------------------------------------------------------------
FINANCE--CONTINUED
---------------------------------------------------------------------------------
29,476 USLife Corp. $ 1,075,874
--------------------------------------------------------------------------------- ---------------
Total 14,715,447
--------------------------------------------------------------------------------- ---------------
MATERIALS & SERVICES--8.7%
---------------------------------------------------------------------------------
8,300 Armstrong World Industries, Inc. 404,625
---------------------------------------------------------------------------------
10,000 Ball Corp. 287,500
---------------------------------------------------------------------------------
27,281 Banta Corp. 913,913
---------------------------------------------------------------------------------
23,977 Ennis Business Forms, Inc. 332,681
---------------------------------------------------------------------------------
12,649 Grace (W.R.) & Co. 528,096
---------------------------------------------------------------------------------
11,044 Hercules, Inc. 1,163,762
---------------------------------------------------------------------------------
28,000 Kaydon Corp. 603,750
---------------------------------------------------------------------------------
7,835 Kimberly Clark Corp. 442,677
---------------------------------------------------------------------------------
25,723 Louisiana Pacific Corp. 871,367
---------------------------------------------------------------------------------
10,478 Monsanto Co. 856,577
---------------------------------------------------------------------------------
36,500 Pope & Talbot, Inc. 862,313
---------------------------------------------------------------------------------
28,036 Praxair, Inc. 571,233
--------------------------------------------------------------------------------- ---------------
Total 7,838,494
--------------------------------------------------------------------------------- ---------------
TECHNOLOGY--9.1%
---------------------------------------------------------------------------------
16,800 *Advanced Micro Devices, Inc. 453,600
---------------------------------------------------------------------------------
11,455 *Compaq Computer Corp. 1,354,554
---------------------------------------------------------------------------------
18,478 Computer Associates International, Inc. 769,147
---------------------------------------------------------------------------------
6,891 Intel Corp. 430,687
---------------------------------------------------------------------------------
11,115 Lockheed Corp. 709,971
---------------------------------------------------------------------------------
23,788 Martin Marietta Corp. 1,034,778
---------------------------------------------------------------------------------
38,467 Micron Technology Inc. 1,293,453
---------------------------------------------------------------------------------
58,700 *Quantum Corp. 961,212
---------------------------------------------------------------------------------
19,738 Raytheon Co. 1,228,691
--------------------------------------------------------------------------------- ---------------
Total 8,236,093
--------------------------------------------------------------------------------- ---------------
</TABLE>
BILTMORE QUANTITATIVE EQUITY FUND
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT
OR SHARES VALUE
<C> <S> <C>
- ------------- --------------------------------------------------------------------------------- ---------------
COMMON STOCKS--CONTINUED
- ------------------------------------------------------------------------------------------------
TRANSPORTATION--1.4%
---------------------------------------------------------------------------------
6,500 Burlington Northern Inc. $ 362,375
---------------------------------------------------------------------------------
4,059 *Federal Express Corp. 310,513
---------------------------------------------------------------------------------
12,500 Kansas City Southern Industries Inc. 565,625
--------------------------------------------------------------------------------- ---------------
Total 1,238,513
--------------------------------------------------------------------------------- ---------------
UTILITIES--11.9%
---------------------------------------------------------------------------------
47,671 Ameritech Corp. 1,865,128
---------------------------------------------------------------------------------
28,000 BellSouth Corp. 1,666,000
---------------------------------------------------------------------------------
11,705 Duke Power Co. 421,380
---------------------------------------------------------------------------------
8,835 New England Electric System 311,434
---------------------------------------------------------------------------------
14,254 Scana Corp. 625,394
---------------------------------------------------------------------------------
31,057 Southern Co. 574,554
---------------------------------------------------------------------------------
37,193 Southwestern Bell Corp. 1,529,562
---------------------------------------------------------------------------------
68,004 Sprint Corp. 2,584,152
---------------------------------------------------------------------------------
43,706 Williams Cos., Inc. 1,229,231
--------------------------------------------------------------------------------- ---------------
Total 10,806,835
--------------------------------------------------------------------------------- ---------------
TOTAL COMMON STOCKS (IDENTIFIED COST $87,803,150) 86,921,212
--------------------------------------------------------------------------------- ---------------
**REPURCHASE AGREEMENT--3.8%
- ------------------------------------------------------------------------------------------------
$ 3,451,667 PaineWebber, Inc., 4.2%, dated 5/31/94, due 6/01/94
(at amortized cost)(Note 2B) 3,451,667
--------------------------------------------------------------------------------- ---------------
TOTAL INVESTMENTS (IDENTIFIED COST $91,254,817) $ 90,372,879\
--------------------------------------------------------------------------------- ---------------
</TABLE>
* Non-income producing.
** The repurchase agreement is fully collateralized by U.S. Treasury obligations
based on market prices at the date of the portfolio.
\ The cost of investments for federal tax purposes amounts to $91,254,817. The
net unrealized depreciation of investments on a federal tax basis amounts to
$881,938, which is comprised of $2,895,209 appreciation and $3,777,147
depreciation at May 31, 1994.
Note: The categories of investments are shown as a percentage of net assets
($90,621,690) at
May 31, 1994.
(See Notes which are an integral part of the Financial Statements)
BILTMORE QUANTITATIVE EQUITY FUND
STATEMENT OF ASSETS AND LIABILITIES
MAY 31, 1994
(UNAUDITED)
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
ASSETS:
- -------------------------------------------------------------------------------------------------
Investments in securities, at value (Notes 2A and 2B)
(identified and tax cost, $91,254,817) $ 90,372,879
- -------------------------------------------------------------------------------------------------
Dividends receivable 259,706
- -------------------------------------------------------------------------------------------------
Receivable for Fund shares sold 20,000
- -------------------------------------------------------------------------------------------------
Interest receivable 403
- ------------------------------------------------------------------------------------------------- ---------------
Total assets 90,652,988
- -------------------------------------------------------------------------------------------------
LIABILITIES:
- --------------------------------------------------------------------------------------
Accrued expenses $ 31,298
- -------------------------------------------------------------------------------------- ---------
Total liabilities 31,298
- ------------------------------------------------------------------------------------------------- ---------------
NET ASSETS for 9,230,163 shares of beneficial interest outstanding $ 90,621,690
- ------------------------------------------------------------------------------------------------- ---------------
NET ASSETS CONSIST OF:
- -------------------------------------------------------------------------------------------------
Paid-in capital $ 92,323,815
- -------------------------------------------------------------------------------------------------
Net unrealized appreciation (depreciation) of investments (881,938)
- -------------------------------------------------------------------------------------------------
Accumulated undistributed net realized gain (loss) on investments (1,077,181)
- -------------------------------------------------------------------------------------------------
Undistributed net investment income 256,994
- ------------------------------------------------------------------------------------------------- ---------------
Total Net Assets $ 90,621,690
- ------------------------------------------------------------------------------------------------- ---------------
NET ASSET VALUE AND REDEMPTION PROCEEDS PER SHARE:
($90,621,690 / 9,230,163 shares of beneficial interest outstanding) $9.82
- ------------------------------------------------------------------------------------------------- ---------------
OFFERING PRICE PER SHARE: (100/95.5 OF $9.82)* $10.28
- ------------------------------------------------------------------------------------------------- ---------------
</TABLE>
* See "What Shares Cost" in the prospectus.
(See Notes which are an integral part of the Financial Statements)
BILTMORE QUANTITATIVE EQUITY FUND
STATEMENT OF OPERATIONS
PERIOD ENDED MAY 31, 1994*
(UNAUDITED)
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
INVESTMENT INCOME:
- ----------------------------------------------------------------------------------------------------
Interest income $ 23,903
- ----------------------------------------------------------------------------------------------------
Dividend income 379,512
- ---------------------------------------------------------------------------------------------------- ------------
Total income (Note 2C) 403,415
- ----------------------------------------------------------------------------------------------------
EXPENSES:
- ----------------------------------------------------------------------------------------
Investment advisory fee (Note 4) $ 111,407
- ----------------------------------------------------------------------------------------
Trustees' fees 1,163
- ----------------------------------------------------------------------------------------
Administrative personnel and services fees (Note 4) 16,115
- ----------------------------------------------------------------------------------------
Custodian fees (Note 4) 3,183
- ----------------------------------------------------------------------------------------
Transfer and dividend disbursing agent fees and expenses (Note 4) 5,204
- ----------------------------------------------------------------------------------------
Legal fees 2,596
- ----------------------------------------------------------------------------------------
Printing and postage 4,673
- ----------------------------------------------------------------------------------------
Portfolio accounting fees (Note 4) 13,553
- ----------------------------------------------------------------------------------------
Insurance premiums 1,636
- ----------------------------------------------------------------------------------------
Miscellaneous 2,806
- ---------------------------------------------------------------------------------------- ----------
Total expenses 162,336
- ----------------------------------------------------------------------------------------
Deduct--
- ----------------------------------------------------------------------------------------
Waiver of investment advisory fee (Note 4) $ 15,915
- ----------------------------------------------------------------------------------------
Net expenses 146,421
- ---------------------------------------------------------------------------------------------------- ------------
Net investment income 256,994
- ---------------------------------------------------------------------------------------------------- ------------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS:
- ----------------------------------------------------------------------------------------------------
Net realized gain (loss) on investment transactions (identified cost basis) (1,077,181)
- ----------------------------------------------------------------------------------------------------
Net change in unrealized appreciation (depreciation) of investments (881,938)
- ---------------------------------------------------------------------------------------------------- ------------
Net realized and unrealized gain (loss) on investments (1,959,119)
- ---------------------------------------------------------------------------------------------------- ------------
Change in net assets resulting from operations $ (1,702,125)
- ---------------------------------------------------------------------------------------------------- ------------
</TABLE>
*For the period from March 28, 1994 (date of initial public investment) to May
31, 1994.
(See Notes which are an integral part of the Financial Statements)
BILTMORE QUANTITATIVE EQUITY FUND
STATEMENT OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PERIOD ENDED
MAY 31, 1994*
(UNAUDITED)
<S> <C>
INCREASE (DECREASE) IN NET ASSETS:
- -----------------------------------------------------------------------------------------------
OPERATIONS--
- -----------------------------------------------------------------------------------------------
Net investment income $ 256,994
- -----------------------------------------------------------------------------------------------
Net realized gain (loss) on investment transactions ($1,077,181 net loss as computed for
federal income tax purposes) (1,077,181)
- -----------------------------------------------------------------------------------------------
Change in unrealized appreciation (depreciation) of investments (881,938)
- ----------------------------------------------------------------------------------------------- -----------------
Change in net assets resulting from operations (1,702,125)
- ----------------------------------------------------------------------------------------------- -----------------
DISTRIBUTIONS TO SHAREHOLDERS (NOTE 2C)--
- -----------------------------------------------------------------------------------------------
Dividends to shareholders from net investment income --
- ----------------------------------------------------------------------------------------------- -----------------
FUND SHARE (PRINCIPAL) TRANSACTIONS (NOTE 3)--
- -----------------------------------------------------------------------------------------------
Proceeds from sale of shares 97,171,384
- -----------------------------------------------------------------------------------------------
Net asset value of shares issued to shareholders in payment of dividends declared --
- -----------------------------------------------------------------------------------------------
Cost of shares redeemed (4,847,569)
- ----------------------------------------------------------------------------------------------- -----------------
Change in net assets from Fund share transactions 92,323,815
- ----------------------------------------------------------------------------------------------- -----------------
Change in net assets 90,621,690
- -----------------------------------------------------------------------------------------------
NET ASSETS:
- -----------------------------------------------------------------------------------------------
Beginning of period --
- ----------------------------------------------------------------------------------------------- -----------------
End of period (including undistributed net investment income of $256,994) $ 90,621,690
- ----------------------------------------------------------------------------------------------- -----------------
</TABLE>
* For the period from March 28, 1994 (date of initial public investment) to May
31, 1994.
(See Notes which are an integral part of the Financial Statements)
BILTMORE QUANTITATIVE EQUITY FUND
NOTES TO FINANCIAL STATEMENTS
MAY 31, 1994
(UNAUDITED)
- --------------------------------------------------------------------------------
(1) ORGANIZATION
The Biltmore Funds (the "Trust") is registered under the Investment Company Act
of 1940, as amended, (the "Act"), as an open-end management investment company.
The Trust consists of eleven diversified portfolios. The financial statements
included herein present only those of the Biltmore Quantitative Equity Fund (the
"Fund"). The financial statements of the other portfolios 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. These
policies are in conformity with generally accepted accounting principles (GAAP).
A. INVESTMENT VALUATIONS--Listed equity securities are valued at the last sale
price reported on national securities exchanges. Unlisted securities,
short-term obligations and private placement securities are generally
valued at the price provided by an independent pricing service. Short-term
securities with remaining maturities of sixty days or less at the time of
purchase may be stated at amortized cost, which approximates value.
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 collateral to ensure the value at
least equals the principal amount of the repurchase agreement, including
accrued interest.
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 Board of Trustees ("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. INVESTMENT INCOME, EXPENSES AND DISTRIBUTIONS--Dividend income and
distributions to shareholders are recorded on the ex-dividend date.
Interest income and expenses are accrued daily. Bond premium and discount
if applicable, are amortized as required by the Internal Revenue Code, as
amended (the "Code").
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 substantially all of its tax-exempt income.
Accordingly, no provisions for federal tax are necessary.
E. WHEN-ISSUED AND DELAYED DELIVERY TRANSACTIONS--The Fund may engage in
when-issued or delayed delivery transactions. The Fund records when-issued
securities on the trade date and maintains 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--The costs incurred by the Fund with respect to
registration of its shares in its first fiscal year, excluding the initial
expense of registering the shares, have been deferred and are being
amortized using the straight-line method over a period of five years from
the Fund's commencement date.
G. OTHER--Investment transactions are accounted for on the trade date.
(3) 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
MAY 31, 1994*
<S> <C>
- ----------------------------------------------------------------------------------------------- -----------------
Shares sold 9,726,000
- -----------------------------------------------------------------------------------------------
Shares issued to shareholders in payment of dividends declared --
- -----------------------------------------------------------------------------------------------
Shares redeemed (495,837)
- ----------------------------------------------------------------------------------------------- -----------------
Net change resulting from Fund share transactions 9,230,163
- ----------------------------------------------------------------------------------------------- -----------------
</TABLE>
* For the period from March 28, 1994 (date of initial public investment) to May
31, 1994.
(4) INVESTMENT ADVISORY FEE AND OTHER TRANSACTIONS WITH AFFILIATES
INVESTMENT ADVISORY FEE--Wachovia Investment Management Group, the Fund's
investment adviser (the "Adviser"), receives for its services an annual
investment advisory fee equal to .70 of 1% of the Fund's average daily net
assets. The Adviser may voluntarily choose to waive a portion of its fee. The
Adviser can modify or terminate this voluntary waiver at any time at its sole
discretion.
ADMINISTRATIVE FEE--Federated Administrative Services ("FAS") provides the Fund
with certain administrative personnel and services. The FAS fee is based on the
level of average aggregate net assets of the Trust and The Biltmore Municipal
Funds for the period. FAS may voluntarily choose to waive a portion of its fee
and reimburse certain operating expenses of the Fund. FAS can modify or
terminate this voluntary waiver and reimbursement at any time at its sole
discretion.
TRANSFER AND DIVIDEND DISBURSING AGENT, ACCOUNTING AND CUSTODY FEES--Federated
Services Company ("FServ") serves as transfer and dividend disbursing agent for
the Fund. The FServ fee is based on the size, type and number of accounts and
transactions made by shareholders.
FServ also maintains the Fund's accounting records. The fee is based on the
level of the Fund's average net assets for the period, plus out-of-pocket
expenses.
Wachovia Bank of North Carolina, N.A. is the Fund's custodian. The fee is based
on the level of the Fund's average net assets for the period, plus out-of pocket
expenses.
ORGANIZATIONAL EXPENSES--Organizational expenses incurred by the Fund will be
borne initially by FAS and are estimated at $29,500. The Fund has agreed to
reimburse FAS for the organizational expenses during the five year period
following January 18, 1994 (date the Fund first became effective). For the
period ended May 31, 1994, the Fund paid $833, pursuant to this agreement.
Certain of the Officers of the Trust are Officers and Trustees of FAS and FServ.
(5) INVESTMENT TRANSACTIONS
Purchases and sales of investments, excluding short-term securities, for the
period ended May 31, 1994 were as follows:
<TABLE>
<S> <C>
- -------------------------------------------------------------------------------------------------
PURCHASES $ 109,263,168
- ------------------------------------------------------------------------------------------------- ---------------
SALES $ 20,382,837
- ------------------------------------------------------------------------------------------------- ---------------
</TABLE>
BILTMORE QUANTITATIVE EQUITY FUND
(A PORTFOLIO OF THE BILTMORE FUNDS)
PROSPECTUS
The shares of Biltmore Quantitative Equity 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 provide growth of principal and
income. The Fund pursues this objective by investing in a professionally-managed
and diversified portfolio consisting primarily of large capitalization common
stocks.
THE INVESTMENT COMPANY SHARES OFFERED BY THIS PROSPECTUS 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 POSSIBLE LOSS OF PRINCIPAL.
This prospectus contains the information you should read and know before you
invest in the Fund. Keep this prospectus for future reference.
The Fund has also filed a Statement of Additional Information dated January 18,
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 18, 1994
TABLE OF CONTENTS
- --------------------------------------------------------------------------------
SUMMARY OF FUND EXPENSES 1
- ------------------------------------------------------
GENERAL INFORMATION 2
- ------------------------------------------------------
INVESTMENT INFORMATION 2
- ------------------------------------------------------
Investment Objective 2
Investment Policies 2
Investment Process 2
Acceptable Investments 3
Corporate Obligations 4
Securities of Foreign Issuers 4
Stock Index Futures and Options 5
Put and Call Options 5
Restricted and Illiquid Securities 6
Temporary Investments 6
Repurchase Agreements 6
When-Issued and Delayed
Delivery Transactions 6
Lending of Portfolio Securities 6
Portfolio Turnover 7
Investment Limitations 7
THE BILTMORE FUNDS INFORMATION 7
- ------------------------------------------------------
Management of the Trust 7
Board of Trustees 7
Investment Adviser 7
Advisory Fees 7
Adviser's Background 8
Sub-Adviser 8
Distribution of Shares 9
Administrative Arrangements 9
Shareholder Servicing Arrangements 9
Administration of the Fund 9
Administrative Services 9
Custodian 10
Transfer Agent, Dividend Disbursing
Agent, and Portfolio Accounting
Services 10
Legal Counsel 10
Independent Auditors 10
Brokerage Transactions 10
Expenses of the Fund 10
NET ASSET VALUE 11
- ------------------------------------------------------
INVESTING IN THE FUND 11
- ------------------------------------------------------
Share Purchases 11
Through Wachovia Brokerage Service 11
By Mail 11
By Wire 12
Through the Trust Divisions of the
Wachovia Banks 12
Minimum Investment Required 12
What Shares Cost 12
Purchases at Net Asset Value 13
Sales Charge Reallowance 13
Reducing the Sales Charge 13
Quantity Discounts and Accumulated
Purchases 13
Letter of Intent 14
Reinvestment Privilege 14
Concurrent Purchases 14
Systematic Investment Program 14
Exchanging Securities for Fund Shares 15
Certificates and Confirmations 15
Dividends 15
Capital Gains 15
Exchange Privilege 15
Exchange by Telephone 16
REDEEMING SHARES 17
- ------------------------------------------------------
By Telephone 17
By Mail 17
Signatures 17
Systematic Withdrawal Program 18
Accounts with Low Balances 18
SHAREHOLDER INFORMATION 18
- ------------------------------------------------------
Voting Rights 18
Massachusetts Business Trusts 19
EFFECT OF BANKING LAWS 19
- ------------------------------------------------------
TAX INFORMATION 20
- ------------------------------------------------------
Federal Income Tax 20
PERFORMANCE INFORMATION 20
- ------------------------------------------------------
ADDRESSES 21
- ------------------------------------------------------
SUMMARY OF FUND EXPENSES
- --------------------------------------------------------------------------------
<TABLE>
<S> <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 projected average net assets)
Management Fee (after waiver) (1)....................................................................... 0.60%
12b-1 Fees.............................................................................................. None
Other Expenses (after waiver) (2)....................................................................... 0.32%
Shareholder Servicing Fees (3)...................................................................... 0.00%
Total Fund Operating Expenses (after waiver) (4)............................................... 0.92%
</TABLE>
(1) The estimated management fee has been reduced to reflect the anticipated
voluntary waiver by the investment adviser. The adviser can terminate this
voluntary waiver at any time at its sole discretion. The maximum management
fee is 0.70%.
(2) Other Expenses are estimated to be 0.34%, absent the anticipated voluntary
waiver 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) Total Fund Operating Expenses are estimated to be at 1.04%, absent the
anticipated voluntary waivers by the investment adviser and administrator.
* Since the Fund does not have an operating history, the percentages indicated
as Annual Fund Operating Expenses are based on the Fund's projected fees and
estimated expenses for the fiscal year ending November 30, 1994. The table
should not be considered a representation of past or future expenses. Actual
expenses may be greater or less than those shown in this table.
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................................................................................ $54 $73
</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. THIS
EXAMPLE IS BASED ON ESTIMATED DATA FOR THE FUND'S FISCAL YEAR ENDING NOVEMBER
30, 1994.
GENERAL INFORMATION
- --------------------------------------------------------------------------------
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 Quantitative Equity Fund. The shares in any 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 of 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 at net
asset value plus an applicable sales charge 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 Short-Term Fixed Income Fund,
Biltmore Special Values 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) (hereinafter referred to
collectively as, the "Funds").
INVESTMENT INFORMATION
- --------------------------------------------------------------------------------
INVESTMENT OBJECTIVE
The investment objective of the Fund is to provide growth of principal and
income. 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 in a
professionally-managed and diversified portfolio consisting primarily of large
capitalization common stocks. The average market capitalization of the stocks in
the Fund's universe will be in excess of $1 billion. These securities will
primarily be composed of issues of domestic companies. Under normal market
conditions, the Fund intends to invest at least 65% of its total assets in
equity securities.
INVESTMENT PROCESS. To select stocks for the Fund, the Fund's sub-adviser
initially identifies a broad universe of approximately 900 common stocks.The
sub-adviser utilizes four criteria when determining
what common stocks will be included in the Fund's universe: each stock must be
highly capitalized, each stock must be traded on the New York or American Stock
Exchanges or in the over-the-counter markets, each stock must be among the most
liquid and highly traded stocks on its respective exchange, and each stock must
be actively followed by a minimum of three industry analysts.
The Fund's sub-adviser then screens the stocks in the universe, using a
quantitative computer valuation model, to evaluate the relative attractiveness
of each stock. The sub-adviser's model focuses on two measurement factors: the
relative value of the stocks (including their present and historical price-to-
earnings and market price-to-book value ratios, and the present value of each
stock's projected dividend income) and the stock's growth prospects and earnings
momentum (including changes, over time, in analysts' earning forecasts, and
positive or negative surprises in reported earnings). The Fund's sub-adviser
will vary the importance placed on each factor, depending on market trends.
Using the valuation model described above, the Fund's investment adviser then
ranks each stock in the universe by decile. The stocks are classified by
industry group, based on industry categories and weightings found in the
Standard & Poor's 500 Composite Stock Price Index (the "Index"). In managing the
Fund, the adviser continuously monitors the rankings of the stocks in the
universe and employs an active selling discipline, replacing less attractive
stocks (as determined by the valuation model) with more attractive stocks to
maintain a high average rank for the portfolio. In maintaining the
diversification of the portfolio, the adviser gives consideration to the
industry weightings found in the Index.
Although the Fund intends to hold a broadly diversified portfolio of common
stocks that, in the aggregate, exhibit investment chacteristics similar to the
stocks found in the Index, the Fund will not limit its investments solely to
stocks represented in the Index. By investing in those common stocks that are
included in the universe described above (a large number of which are not
included in the Index), the Fund will seek to provide a higher rate of total
return than the Index. There can be no assurance that the Fund's investment
performance will match or exceed that of the Index.
The Index is an unmanaged, statistical measure of stock market performance. As
such, it does not reflect the actual cost of investing in common stocks. By
contrast, the Fund is actively managed and therefore incurs the normal costs of
a mutual fund, including brokerage and execution costs, advisory fees, and
administrative and custodial costs and expenses. Standard & Poor's Corporation
("S&P") selects the common stocks to be included in the Index solely on a
statistical basis. Inclusion of a particular security in the Index in no way
implies an opinion by S&P as to the stock's appropriateness as an investment.
The Fund is not sponsored, endorsed, sold or promoted by, or affiliated with,
S&P.
ACCEPTABLE INVESTMENTS. Although the Fund normally seeks to remain
substantially fully invested in the common stocks in the universe identified by
the Fund's investment adviser, the Fund may also invest in:
other common or preferred stocks of U.S. companies which are either
listed on the New York or American Stock Exchanges or traded in the
over-the-counter markets and are considered by the Fund's investment
adviser to have an established market;
convertible securities;
investments in American Depositary Receipts ("ADRs") of foreign companies
traded on the New York or American Stock Exchanges or in the
over-the-counter markets. The Fund may not invest more than 20% of its
assets in ADRs. In addition, the Fund may invest up to 10% of its assets
in other securities of foreign issuers ("Non-ADRs"). (See "Securities of
Foreign Issuers.");
domestic issues of corporate debt obligations rated Aa or better by
Moody's Investors Service, Inc. ("Moody's") or AA by S&P. (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.);
restricted and illiquid securities;
securities of other investment companies;
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 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. These obligations will be rated
at the time of purchase in the top two rating categories, or, if unrated,
will be of comparable quality as determined by the Fund's investment
adviser. 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 shares 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.
SECURITIES OF FOREIGN ISSUERS. The Fund may invest in the securities of
foreign issuers. There may be certain risks associated with investing in
foreign securities. These include risks of adverse political and economic
developments (including possible governmental seizure or nationalization of
assets), the possible imposition of exchange controls or other governmental
restrictions, less uniformity in accounting and reporting requirements, and
the possibility that there will be less information on such securities and
their issuers available to the public. In addition, there are restrictions
on foreign investments in other jurisdictions and there tends to be
difficulty in obtaining judgments from abroad and affecting repatriation of
capital invested abroad. Delays could occur in settlement of foreign
transactions, which could adversely affect shareholder equity. Foreign
securities may be subject to foreign taxes, which reduce yield, and may be
less marketable than comparable United States securities. 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. 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 Fund's 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.
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 the Fund's
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 ("BIF"), or by
the Savings Association Insurance Fund ("SAIF"), 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 or Prime-1 by Moody's, 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.
PORTFOLIO TURNOVER. Although the Fund does not intend to invest for the purpose
of seeking short-term profits, securities in its portfolio will be sold whenever
the Fund's investment adviser believes it is appropriate to do so in light of
the Fund's investment objective, without regard to the length of time a
particular security may have been held. The Fund's investment adviser does not
anticipate that the Fund's annual portfolio turnover rate will exceed 200% under
normal market conditions. High portolio turnover (i.e. over 100%) may involve
correspondingly greater brokerage commissions and other transaction costs, which
would be directly borne by the Fund. In addition, high portfolio turnover may
result in increased short-term capital gains which, when distributed to
shareholders, are treated as ordinary income. Nevertheless, transactions for the
Fund's portfolio will be based only upon investment considerations and will not
be limited by any other considerations when the Fund's investment adviser deems
it appropriate to make changes in the Fund's portfolio. The portfolio turnover
rate of the Fund may vary significantly from year to year, as a result of the
presence or absence of defensive investment positions taken by the Fund's
investment adviser.
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
- --------------------------------------------------------------------------------
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 the 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 Fund's Adviser receives an annual investment advisory
fee equal to 0.70 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 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., 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 Bank of North Carolina, N.A. has served as
investment adviser to The Biltmore Funds since February 24, 1992. As part
of their regular banking operations, the Wachovia Banks may make loans to
public companies. Thus, it may be possible, from time to time, for the Fund
to hold or acquire the securities of issuers which are also lending clients
of the Wachovia Banks. The lending relationship will not be a factor in the
selection of securities.
The Fund's portfolio manager is Cherry Stribling. Mr. Stribling is a Vice
President of Wachovia Bank of North Carolina, N.A., and, as a Portfolio
Investment Manager, managed the Wachovia Stock Fund, a bank collective
investment fund with an investment objective similar to the Fund's. Mr.
Stribling also manages individual and institutional accounts with the same
portfolio management style as the Fund. Mr. Stribling has managed the Fund
since its inception.
SUB-ADVISER. Pursuant to the terms of an investment sub-advisory agreement
between the Adviser and Twin Capital Management, Inc. ("Twin Capital" or the
"Sub-Adviser"), Twin Capital furnishes certain investment advisory services to
the Adviser, including investment research, the quantitative analysis described
in the "Investment Process" section of this prospectus, statistical and other
factual information, and recommendations, based on Twin Capital's analysis, and
assists the Adviser in identifying securities for potential purchase and/or sale
on behalf of the Fund's portfolio. For the services provided and the expenses
incurred by the Sub-Adviser pursuant to the sub-advisory agreement, Twin Capital
is entitled to receive an annual fee of $55,000, payable by the Adviser, in
quarterly installments. Twin Capital may elect to waive some or all of its fee.
In no event shall the Fund be responsible for any fees due to the Sub-Adviser
for its services to the Adviser. Twin Capital, which is located at 3244
Washington Road, McMurray, Pennsylvania, 15317-3153, provides investment counsel
to both individuals and institutions, including banks, thrift institutions, and
pension and profit-sharing plans. As of December 20, 1993, Twin Capital
furnished services, substantially similar to the services it provides to the
Adviser, to other accounts with assets in excess of $1.4 billion. Twin Capital
has not previously acted as an investment adviser to an investment company. The
Sub-Adviser is controlled by Geoffrey Gerber, its President.
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
certain 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
services at an annual rate as specified below:
<TABLE>
<CAPTION>
MAXIMUM AVERAGE AGGREGATE DAILY
ADMINISTRATIVE FEE NET ASSETS OF THE TRUST
<C> <S>
0.150 of 1% of the first $250 million
0.125 of 1% of 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 each Fund in the Trust.
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 in the Trust and payable monthly
as follows:
<TABLE>
<CAPTION>
MAXIMUM AVERAGE AGGREGATE DAILY
CUSTODIAN FEE NET ASSETS OF THE FUND
<C> <S>
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 COUNSEL. Legal counsel for the Fund is 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 communicated to 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 subsidiary of Wachovia Corporation.
BY MAIL. To purchase shares of the Fund by mail, send a check made payable to
Biltmore Quantitative Equity 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 Quantitative Equity 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 communicated to 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 OF A PERCENTAGE OF
AMOUNT OF TRANSACTION PUBLIC OFFERING PRICE NET AMOUNT 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 trusts, 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 broker/dealer will
normally receive up to 90% of the applicable sales charge. Any portion of the
sales charge which is not paid to a broker/dealer will be retained by the
Distributor. However, the Distributor, at its sole discretion, may uniformly
offer to pay all broker/dealers selling shares of the Fund, all or a portion of
the sales charge it normally retains. If accepted by the broker/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 broker/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
13
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 in writing 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 the 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 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 upon 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.
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, dividends are automatically reinvested 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 portfolios comprising 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 without a sales charge (if a sales
charge was previously paid). 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 must receive 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 or Wachovia Brokerage Service, as appropriate.
Shares of the Participating Funds with a sales charge may be exchanged at net
asset value for shares of other Participating 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 the 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.
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.
Telephone redemption instructions may be recorded. 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 provided that the Transfer Agent has received payment for
shares from the shareholder.
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 BIF;
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 SAIF; 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 of the
Funds in the Trust have equal voting rights, except that in matters affecting 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's 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.
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
- --------------------------------------------------------------------------------
FEDERAL INCOME TAX
The Fund will pay no federal income tax because it expects 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 required to pay 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 detailed 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.
ADDRESSES
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
Biltmore Quantitative Equity 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
- ---------------------------------------------------------------------------------------------------------------------
Transfer Agent, Dividend Disbursing Agent, and
Portfolio Accounting Services
Federated Services Company Federated Investors Tower
Pittsburgh, Pennsylvania 15222-3779
- ---------------------------------------------------------------------------------------------------------------------
Counsel to The Biltmore Funds
Kirkpatrick & Lockhart 1800 M Street, N.W.
Washington, D.C. 20036-5891
- ---------------------------------------------------------------------------------------------------------------------
Counsel to the Independent Trustees
Piper & Marbury 1200 Nineteenth Street, N.W.
Washington, D.C. 20036-2430
- ---------------------------------------------------------------------------------------------------------------------
Independent Auditors
Ernst & Young One Oxford Centre
Pittsburgh, Pennsylvania 15219
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
BILTMORE QUANTITATIVE EQUITY FUND
(A Portfolio of The Biltmore Funds)
- --------------------------------------------------------------------------------
SUPPLEMENT TO STATEMENT OF ADDITIONAL INFORMATION DATED JANUARY 18, 1994
A. Please add the following as a second paragraph to the section
entitled "Fund Ownership" on page 8 of the Statement of Additional
Information:
"As of July 15, 1994, the following shareholders of record owned 5%
or more of the outstanding shares of the Fund: Wachovia Bank of
North Carolina, Winston-Salem, North Carolina, on behalf of
Retirement Income Plan of Wachovia owned approximately 4,063,214
shares (42.91%); Wachovia Bank of South Carolina, N.A.,
Winston-Salem, North Carolina, as Trustee for Mayfair Mills Profit
Sharing Plan, owned approximately 795,897 shares (8.41%); Wachovia
Bank of South Carolina, N.A., Winston-Salem, North Carolina, as
Trustee for Retirement Program Plan of Employees of Kemet
Electronics Corporation, owned approximately 580,000 shares (6.13%);
and Wachovia Bank of South Carolina, N.A., Winston-Salem, North
Carolina, as Trustee for the Clinton Retirement Income Program
Trust, owned approximately 477,692 shares (5.04%)."
B. Please insert the following as the last paragraph in the sub-section
entitled "Advisory and Sub Advisory Fees" under the main section
entitled "Investment Advisory Services" on page 9 of the Statement
of Additional Information:
"From the date of initial public investment, March 28, 1994 through
May 31, 1994, the Adviser earned $111,407, of which $15,915 were
voluntarily waived."
C. Please insert the following information as the second sentence under
the section entitled "Administrative Services" on page 9 of the
Statement of Additional Information:
"From the date of initial public investment, March 28, 1994, to May
31, 1994, the Fund incurred costs for administrative services of
$16,115."
D. Please add the following information as the final paragraph under
the section entitled "Brokerage Transactions" on pages 9 and 10 of
the Statement of Additional Information:
"From the date of initial public investment, March 28, 1994 to May
31, 1994, $893,736 was paid in brokerage commissions."
E. Please insert the following information as a final paragraph under
the section entitled "Total Return" on page 11 of the Statement of
Additional Information:
"The Fund's average annual return for the period between March 25,
1994 (start of performance) and May 31, 1994 was (6.21%)."
F. Please insert the following information as a final paragraph under
the section entitled "Yield" on page 11 of the Statement of
Additional Information:
"The Fund's yield for the thirty-day period ended May 31, 1994 was
1.74%."
May 31, 1994
[LOGO] FEDERATED SECURITIES CORP.
-------------------------------------------------------------------------
Distributor
G00459-01 (7/94)
BILTMORE QUANTITATIVE EQUITY FUND
(A PORTFOLIO OF THE BILTMORE FUNDS)
STATEMENT OF ADDITIONAL INFORMATION
This Statement of Additional Information should be read with the
prospectus of Biltmore Quantitative Equity Fund (the "Fund") of The
Biltmore Funds (the "Trust"), dated January 18, 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 18, 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
Restricted and Illiquid Securities 3
Obligations of Foreign Issuers 3
Demand Master Notes 3
Convertible Securities 3
Zero Coupon Convertible Securities 4
Repurchase Agreements 4
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
- ---------------------------------------------------------------
Officers and Trustees 7
Fund Ownership 8
Trustee Liability 8
INVESTMENT ADVISORY SERVICES 9
- ---------------------------------------------------------------
Adviser to the Fund and Sub-Adviser 9
Advisory and Sub-Advisory Fees 9
ADMINISTRATIVE SERVICES 9
- ---------------------------------------------------------------
BROKERAGE TRANSACTIONS 9
- ---------------------------------------------------------------
PURCHASING FUND SHARES 10
- ---------------------------------------------------------------
Conversion to Federal Funds 10
DETERMINING NET ASSET VALUE 10
- ---------------------------------------------------------------
DETERMINING MARKET VALUE OF SECURITIES 10
- ---------------------------------------------------------------
REDEEMING FUND SHARES 11
- ---------------------------------------------------------------
Redemption in Kind 11
TAX STATUS 11
- ---------------------------------------------------------------
The Fund's Tax Status 11
Shareholders' Tax Status 11
Capital Gains 11
TOTAL RETURN 11
- ---------------------------------------------------------------
YIELD 11
- ---------------------------------------------------------------
PERFORMANCE COMPARISONS 12
- ---------------------------------------------------------------
STANDARD & POOR'S CORPORATION 12
- ---------------------------------------------------------------
APPENDIX 14
- ---------------------------------------------------------------
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 provide growth of principal and income.
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" or the "Board") without
shareholder approval. Shareholders will be notified before any material change
in these policies becomes effective.
TYPES OF INVESTMENTS
As more fully described in the prospectus, the Fund invests in a
professionally-managed and diversified portfolio consisting primarily of large
capitalization common stocks. The Fund's investment adviser seeks to identify
undervalued stocks with improving prospects by utilizing a computer valuation
model to capture both growth and value opportunities. 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.
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.
RESTRICTED AND ILLIQUID SECURITIES
The ability of the Trustees to determine the liquidity of certain restricted
securities is permitted under a Securities and Exchange Commission staff
position set forth in the adopting release for Rule 144A (the "Rule") under the
Securities Act of 1933. The Rule is a non-exclusive, safe-harbor for certain
secondary market transactions involving securities subject to restrictions on
resale under federal securities laws. The Rule provides an exemption from
registration for resales of otherwise restricted securities to qualified
institutional buyers. The Rule was expected to further enhance the liquidity of
the secondary market for securities eligible for resale under the Rule. The Fund
believes that the staff of the Securities and Exchange Commission has left the
question of determining the liquidity of all restricted securities to the 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 foreign issuers may include debt obligations of supranational
entities, which include international organizations designed or supported by
governmental entities to promote economic reconstruction or development, and
international banking institutions and related government agencies. Examples of
these include, but are not limited to, the International Bank for Reconstruction
and Development (World Bank), European Investment Bank and InterAmerican
Development Bank.
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.
CONVERTIBLE SECURITIES
Convertible bonds and convertible preferred stocks are fixed income securities
that generally retain the investment characteristics of fixed income securities
until they have been converted but also react to movements in the underlying
equity securities. The holder is entitled to receive the fixed income of a bond
or the dividend preference of a preferred stock until the holder elects to
exercise the conversion privilege. Usable bonds are corporate bonds that can be
used in whole or in part, customarily at full face value, in lieu of cash to
purchase the issuer's common stock. When owned as part of a unit along with
warrants, which are options to buy the common stock, they function as
convertible bonds, except that the warrants generally will expire before the
bond's maturity. Convertible securities are senior to equity securities and,
therefore, have a claim to assets of the corporation prior to the holders of
common stock in the case of liquidation. However, convertible securities are
generally subordinated to similar nonconvertible securities of the same company.
The interest income and dividends from convertible bonds and preferred stocks
provide a stable stream of income with generally higher yields than common
stocks, but lower than nonconvertible securities of similar quality.
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
the Fund's investment adviser's opinion, the investment characteristics of the
underlying common shares will assist the Fund in achieving its investment
objective. Otherwise, the Fund will hold or trade the convertible securities. In
selecting convertible securities for 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.
ZERO COUPON CONVERTIBLE SECURITIES
Zero coupon convertible securities are debt securities which are issued at a
discount to their face amount and do not entitle the holder to any periodic
payments of interest prior to maturity. Rather, interest earned on zero coupon
convertible securities accretes at a stated yield until the security reaches its
face amount at maturity. Zero coupon convertible securities are convertible into
a specific number of shares of the issuer's common stock. In addition, zero
coupon convertible securities usually have put features that provide the holder
with the opportunity to put the bonds back to the issuer at a stated price
before maturity. Generally, the prices of zero coupon convertible securities may
be more sensitive to market interest rate fluctuations than conventional
convertible securities.
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 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 more than 20% of the total value of its assets.
TEMPORARY INVESTMENTS
From time to time, during periods of other than normal market conditions, the
Fund may also invest in temporary investments 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.
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.
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 total 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 or 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 any 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 or if the Fund would own more than 10% of
the outstanding voting 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.")
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.
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 investment 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 securities are acquired in a merger, consolidation,
reorganization, or acquisition of assets. While it is the policy of the
Fund to waive 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 total assets in securities
subject to restrictions on resale under the Securities Act of 1933,
except for certain restricted securities which meet the criteria for
liquidity as established by the Trustees.
INVESTING IN ILLIQUID SECURITIES
The 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 to be liquid under guidelines established by
the Trustees, 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 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
Exchanges 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
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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 holds 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 Vice President, Federated Administrative Services; formerly, Associate
and Assistant Corporate Counsel, Federated Investors; Vice
Treasurer 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.
TRUSTEE LIABILITY
The Trust's Declaration of Trust provides that the Trustees are not liable for
errors of judgment or mistakes of fact or law. However, they are not protected
against any liability to which they would otherwise be subject by reason of
willful misfeasance, bad faith, gross negligence, or reckless disregard of the
duties involved in the conduct of their office.
INVESTMENT ADVISORY SERVICES
- --------------------------------------------------------------------------------
ADVISER TO THE FUND AND SUB-ADVISER
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.
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.
Because of the internal controls maintained by the Wachovia Banks to restrict
the flow of non-public information, Fund investment decisions are typically made
without any knowledge of the Wachovia Banks' lending relationships with an
issuer.
Twin Capital Management, Inc. (the "Sub-Adviser" or "Twin Capital") serves as
the sub-adviser under the terms of an investment sub-advisory agreement between
the Adviser and the Sub-Adviser. Twin Capital, incorporated as a Pennsylvania
corporation in 1989, is a registered investment adviser under the Investment
Advisers Act of 1940.
ADVISORY AND SUB-ADVISORY FEES
For its advisory services, the Adviser receives an annual investment advisory
fee as described in the prospectus. For its services as Sub-Adviser, Twin
Capital receives an annual sub-advisory fee, payable solely by the Adviser, as
described in the prospectus.
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
- --------------------------------------------------------------------------------
Federated Administrative Services, a subsidiary of Federated Investors, provides
administrative personnel and services to the Fund for a fee as described in the
prospectus.
BROKERAGE TRANSACTIONS
- --------------------------------------------------------------------------------
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.
PURCHASING FUND SHARES
- --------------------------------------------------------------------------------
Shares of the Fund are sold at net asset value plus an applicable sales charge
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 (as defined
in the prospectus) 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 is 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 short-term obligations
with maturities of less than 60 days, at amortized cost; 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
- --------------------------------------------------------------------------------
THE FUND'S TAX STATUS
The Fund will pay no federal income tax because it expects 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 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
- --------------------------------------------------------------------------------
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
- --------------------------------------------------------------------------------
The Fund's performance depends upon such variables as:
stock market fluctuations;
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 net asset value. The financial
publications and/or indices which the Fund uses in advertising may include:
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 "INDEX"), is
a composite index of common stocks in industry, transportation, and financial
and public utility companies. In addition, the Index assumes reinvestment of
all dividends paid by stocks listed on the Index. Taxes due on any of these
distributions are not included, nor are brokerage or other fees calculated in
the 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
NASDAQ-listed mutual funds of all types, according to their risk-adjusted
returns. The maximum rating is five stars, and ratings are effective for two
weeks.
Advertisements and other sales literature for the Fund may quote total returns
which are calculated on non-standardized base periods. These total returns also
represent the historic change in the value of an investment in the Fund based on
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.
STANDARD & POOR'S CORPORATION
- --------------------------------------------------------------------------------
Standard & Poor's Corporation ("S&P") makes no representation or warranty,
express or implied, to the owners of the Fund or any member of the public
regarding the advisability of investing in securities generally or in the Fund
particularly or the ability of the Index to track general stock market
performance. S&P's only relationship to Federated Securities Corp., the Fund's
distributor (the "Licensee") is the licensing of certain trademarks and trade
names of S&P and of the Index which is determined, composed and calculated by
S&P without regard to the Licensee or the Fund. S&P has no obligation to take
the needs of the Licensee or the owners of the Fund into consideration in
determining, composing or calculating the Index. S&P is not responsible for and
has not participated in the determination of, the timing of, prices at, or
quantities of the Fund to be issued or in the determination or calculation of
the equation by which the Fund is to be converted into cash. S&P has no
obligation or liability in connection with the administration, marketing or
trading of the Fund.
S&P does not guarantee the accuracy and/or the completeness of the Index or any
data included therein. S&P makes no warranty, express or implied, as to results
to be obtained by the Licensee, owners of the Fund, or any
other person or entity from the use of the Index or any data included therein in
connection with the rights licensed hereunder or for any other use. S&P makes no
express or implied warranties, and expressly disclaims all warranties of
merchantability or fitness for a particular purpose or use with respect to the
Index or any data included therein. Without limiting any of the foregoing, in no
event shall S&P have any liability for any special, punitive, indirect or
consequential damages (including lost profits), even if notified of the
possibility of such damages.
APPENDIX
- --------------------------------------------------------------------------------
STANDARD & POOR'S CORPORATION CORPORATE BOND RATINGS
AAA--Debt rated AAA has the highest rating assigned by S&P. Capacity to pay
interest and repay principal is extremely strong.
AA--Debt rated AA has a very strong capacity to pay interest and repay principal
and differs from the higher rated issues only in small degree.
A--Debt rated A has a strong capacity to pay interest and repay principal
although it is somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions than debt in higher rated categories.
BBB--Debt rated BBB is regarded as having an adequate capacity to pay interest
and repay principal. Whereas it normally exhibits adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay interest and repay principal for
debt in this category than in higher rated categories.
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. CORPORATE BOND RATINGS
Aaa--Bonds which are rated Aaa are judged to be of the best quality. They carry
the smallest degree of investment risk and are generally referred to as "gilt
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 some time in the future.
Baa--Bonds which are rated Baa are considered as medium grade obligations, i.e.,
they are neither highly protected nor poorly secured. Interest payments and
principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.
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 RATINGS
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 RATINGS
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.
3012914B (1/94)
