The Wachovia Funds
The Wachovia Municipal Funds
Class A Shares
All Portfolios
Class Y Shares
All Portfolios
Class B Shares
Wachovia Equity Fund
Wachovia Quantitative Equity Fund
Wachovia Balanced Fund
Wachovia Fixed Income Fund
Statement of Additional Information
This Statement of Additional Information should be read with the prospectuses of
The Wachovia Funds and The Wachovia Municipal Funds (individually referred to as
a "Trust," and collectively as the "Trusts"), dated March 7, 1998 (Revised March
25, 1998). This Statement is not a prospectus itself. To receive a copy of the
prospectuses, call the Funds toll-free at 1-800-994-4414.
5800 Corporate Drive
Pittsburgh, Pennsylvania 15237-7010
Statement dated March 7, 1998
(Revised March 25, 1998)
FEDERATED INVESTORS
Federated Investors Tower
Pittsburgh, PA 15222-3779
Federated Securities Corp. is the distributor of the Funds
and is a subsidiary of Federated Investors.
3012917B(3/98)
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Table of Contents
General Information 1
Brokerage Transactions 32
Investment Objectives, Policies, and
Limitations Other Services 33
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of the Funds 2 Administration 33
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When-Issued and Delayed Delivery Custodian 33
2 Transfer Agent 34
Transactions Legal Services 34
Lending of Portfolio Securities Independent Auditors 34
2
Repurchase Agreements 2 Distribution Plan (Class B Shares
Reverse Repurchase Agreements3 Only) and
Money Market Instruments 3 Shareholder Services Plan (Class A
Futures and Options Transactions Shares and Class B Shares Only) 34
3
Restricted and Illiquid Purchasing Fund Shares 35
Securities 7 Conversion to Federal Funds 35
Convertible Securities 8 Exchanging Securities for Fund
Zero Coupon Convertible Shares 35
Securities 8
Obligations of Foreign Issuers Determining Net Asset Value 36
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8
Warrants 9 Determining Market Value of Securities
Corporate Debt Securities 9 36
Mortgage-Backed Securities 9
Privately Issued Redeeming Fund Shares 36
Mortgage-Related Redemption in Kind 36
Securities 10
Resets of Interest Rates 10 Massachusetts Business Trusts 37
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Caps and Floors 10
Demand Master Notes 10 Tax Status 37
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Variable Rate Demand Notes 11 The Funds' Tax Status 37
Demand Features 11 Shareholders' Tax Status 37
U.S. Government Obligations 11 Capital Gains 38
Variable Rate U.S. Government
Securities 12 Total Return 38
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Ratings 12
High Yeild Securities 12 Yield 40
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Duration 12
Investment Philosophy of the Tax-Equivalent Yield 40
Emerging
Markets Fund 12 Performance Comparisons 44
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Foreign Currency Transactions13
Municipal Securities 15 Financial Statements 48
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Municipal Bond Insurance 16
Concentration of Investments18 Standard & Poor's Corporation 48
State Investment Risks 18
Portfolio Turnover 21 Appendix 49
Investment Limitations 22
The Wachovia Funds and The Wachovia
Municipal Funds Management 28
Officers and Trustees 28
Fund Ownership 29
Trustees Compensation 30
Trustee Liability 31
Investment Advisory Services 31
Adviser to the Funds 31
Advisory and Sub-Advisory Fees
31
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56
General Information
The Wachovia Funds (formerly, The Biltmore Funds) was established as a
Massachusetts business trust under a Declaration of Trust dated November 19,
1991. The Wachovia Municipal Funds (formerly, The Biltmore Municipal Funds) was
established as a Massachusetts business trust under a Declaration of Trust dated
August 15, 1990. Prior to June 3, 1993, The Wachovia Municipal Funds was known
as "The Passageway Funds." Unless otherwise indicated, the investment policies
described below may be changed by the Boards of Trustees ("Trustees" or the
"Board") without shareholder approval. Shareholders will be notified before any
material change in these policies becomes effective. Capitalized terms not
otherwise defined in this Statement of Additional Information (the "Statement")
shall have the same meaning assigned in the prospectuses. The following Funds
(individually referred to as a "Fund," and collectively as the "Funds") are
portfolios of the Trusts:
Shares of Wachovia Equity Fund ("Equity Fund") (formerly, Biltmore Equity
Fund) are currently offered in three classes: Class A Shares, Class B Shares,
and Class Y Shares.
Shares of Wachovia Quantitative Equity Fund ("Quantitative Equity Fund")
(formerly, Biltmore Quantitative Equity Fund) are currently offered in three
classes: Class A Shares, Class B Shares, and Class Y Shares.
Shares of Wachovia Growth & Income Fund ("Growth & Income Fund") are
currently offered in two classes: Class A Shares and Class Y Shares.
Shares of Wachovia Equity Index Fund ("Equity Index Fund") (formerly,
Biltmore Equity Index Fund) are currently offered in two classes: Class A Shares
and Class Y Shares.
Shares of Wachovia Special Values Fund ("Special Values Fund") (formerly,
Biltmore Special Values Fund) are currently offered in two classes: Class A
Shares and Class Y Shares.
Shares of Wachovia Emerging Markets Fund ("Emerging Markets Fund")
(formerly, Biltmore Emerging Markets Fund) are currently offered in two classes:
Class A Shares and Class Y Shares.
Shares of Wachovia Balanced Fund ("Balanced Fund") (formerly, Biltmore
Balanced Fund) are currently offered in three classes: Class A Shares, Class B
Shares, and Class Y Shares.
Shares of Wachovia Fixed Income Fund ("Fixed Income Fund") (formerly,
Biltmore Fixed Income Fund) are currently offered in three classes: Class A
Shares, Class B Shares, and Class Y Shares.
Shares of Wachovia Intermediate Fixed Income Fund ("Intermediate Fixed
Income Fund") are currently offered in two classes: Class A
Shares and Class Y Shares.
Shares of Wachovia Short-Term Fixed Income Fund ("Short-Term Fixed Income
Fund") (formerly, Biltmore Short-Term Fixed Income Fund) are currently offered
in two classes: Class A Shares and Class Y Shares.
Shares of Wachovia Georgia Municipal Bond Fund ("Georgia Municipal Bond
Fund") (formerly, Biltmore Georgia Municipal Bond Fund) are currently offered in
two classes: Class A Shares and Class Y Shares.
Shares of Wachovia North Carolina Municipal Bond Fund ("North Carolina
Municipal Bond Fund") (formerly, Biltmore North Carolina Municipal Bond Fund)
are currently offered in two classes: Class A Shares and Class Y Shares.
Shares of Wachovia South Carolina Municipal Bond Fund ("South Carolina
Municipal Bond Fund") (formerly, Biltmore South Carolina Municipal Bond Fund)
are currently offered in two classes: Class A Shares and Class Y Shares.
Shares of Wachovia Virginia Municipal Bond Fund ("Virginia Municipal Bond
Fund") are currently offered in two classes: Class A Shares and Class Y Shares.
Prior to July 22, 1996, each Fund, other than the Growth & Income Fund,
the Intermediate Fixed Income Fund and Virginia Municipal Bond Fund, offered a
single class of shares, which is currently designated as Class A Shares.
The Growth & Income Fund, the Intermediate Fixed Income Fund and the
Virginia Municipal Bond Fund are newly-organized portfolios that were formed to
continue the operations of the MarketWatch Equity Fund (the "Prior Equity
Fund"), the MarketWatch Intermediate Fixed Income Fund (the "Prior Income Fund")
and the MarketWatch Virginia Municipal Bond Fund (the "Prior Virginia Fund")
series, respectively. As of this date, the Prior Equity Fund, the Prior Income
Fund and the Prior Virginia Fund are series of another investment company.
Subject to shareholder approval, it is anticipated that pursuant to a Plan of
Reorganization, the Prior Equity Fund will transfer all of its assets to the
Growth & Income Fund in exchange for shares of the Growth & Income Fund.
Similarly, pursuant to a Plan of Reorganization, it is anticipated that the
Prior Income Fund will transfer all of its assets to the Intermediate Fixed
Income Fund in exchange for shares of the Intermediate Fixed Income Fund. Also,
pursuant to a Plan of Reorganization, it is anticipated that the Prior Virginia
Fund will transfer all of its assets to the Virginia Municipal Bond Fund in
exchange for shares of the Virginia Municipal Bond Fund. (These transfers of
assets and assumptions of liabilities are collectively the "Reorganization.").
It is anticipated that on March 27, 1998, the effective date of the
Reorganization, shares of the Growth & Income Fund, the Intermediate Fixed
Income Fund and the Virginia Municipal Bond Fund will be distributed on a pro
rata basis to the Prior Equity Fund's, the Prior Income Fund's and the Prior
Virginia Fund's shareholders, respectively.
Investment Objectives, Policies, and Limitations of the Funds
The prospectuses discuss the objective of each Fund and the policies that
each Fund employs to achieve its objective. The following discussion supplements
the description of each Fund's investment policies.
Each Fund's respective investment objective cannot be changed without the
approval of shareholders.
When-Issued and Delayed Delivery Transactions
These transactions are made to secure what is considered to be an
advantageous price or yield for the Funds. No fees or other expenses, other than
normal transaction costs, are incurred. However, liquid assets of the Funds
sufficient to make payment for the securities to be purchased are segregated on
the Funds' records at the trade date. These assets are marked to market daily
and are maintained until the transaction has been settled. The Funds do not
intend to engage in when-issued and delayed delivery transactions to an extent
that would cause the segregation of more than 20% of the total value of a Fund's
assets.
Lending of Portfolio Securities
The collateral received when a Fund lends portfolio securities must be
valued daily and, should the market value of the loaned securities increase, the
borrower must furnish additional collateral to the Fund. During the time
portfolio securities are on loan, the borrower pays the Fund any dividends or
interest paid on such securities. Loans are subject to termination at the option
of the Fund or the borrower. A Fund may pay reasonable administrative and
custodial fees in connection with a loan and may pay a negotiated portion of the
interest earned on the cash or equivalent collateral to the borrower or placing
broker. The Funds do not have the right to vote securities on loan. In
circumstances where the Fund does not, the Fund would terminate the loan and
regain the right to vote if that were considered important with respect to the
investment.
Repurchase Agreements
The Funds require the custodian to take possession of the securities
subject to repurchase agreements and these securities are marked to market
daily. To the extent that the original seller does not repurchase the securities
from a Fund, the Fund could receive less than the repurchase price on any sale
of such securities. In the event that such a defaulting seller filed for
bankruptcy or became insolvent, disposition of such securities by the Fund might
be delayed pending court action. The Funds believe that, under the regular
procedures normally in effect for custody of a Fund's portfolio securities
subject to repurchase agreements, a court of competent jurisdiction would rule
in favor of the Fund and allow retention or disposition of such securities. A
Fund will only enter into repurchase agreements with banks and other recognized
financial institutions, such as broker/dealers, which are deemed by the Funds'
investment adviser to be creditworthy pursuant to guidelines established by the
Trustees.
Reverse Repurchase Agreements
The Funds may enter into reverse repurchase agreements under certain
circumstances. This transaction is similar to borrowing cash. In a reverse
repurchase agreement, a Fund transfers possession of a portfolio instrument to
another person, such as a financial institution, broker, or dealer, in return
for a percentage of the instrument's market value in cash, and agrees that on a
stipulated date in the future the Fund will repurchase the portfolio instrument
by remitting the original consideration plus interest at an agreed upon rate.
The use of reverse repurchase agreements may enable a Fund to avoid selling
portfolio instruments at a time when a sale may be deemed to be disadvantageous,
but the ability to enter into reverse repurchase agreements does not ensure that
a Fund will be able to avoid selling portfolio instruments at a disadvantageous
time.
When effecting reverse repurchase agreements, liquid assets of a Fund, in
a dollar amount sufficient to make payment for the obligations to be purchased,
are segregated at the trade date. These securities are marked to market daily
and maintained until the transaction is settled.
Money Market Instruments
The Funds may invest in money market instruments such as:
o instruments of domestic and foreign banks and savings and loans if they
have capital, surplus, and undivided profits of over $100,000,000, or if
the principal amount of the instrument is federally insured;
o commercial paper rated, at the time of purchase, A-1 or better by Standard
& Poor's ("S&P") or Prime-1 or better by Moody's Investors Service, Inc.
("Moody's") or, if unrated, are of comparable quality as determined by the
Funds' investment adviser;
o time and savings deposits whose accounts are insured by the Bank Insurance
Fund ("BIF"), which is administered by the Federal Deposit Insurance
Corporation ("FDIC"), or in institutions whose accounts are insured by the
Savings Association Insurance Fund ("SAIF"), which is also administered by
the FDIC, including certificates of deposit issued by and other time
deposits in foreign branches of BIF-insured banks; or
o bankers' acceptances.
Wachovia Funds (except the Equity Index Fund) and the Wachovia Municipal
Funds may invest in money market instruments as temporary investments, from time
to time, for defensive purposes.
Futures and Options Transactions
The Funds (except the Wachovia Municipal Funds) may engage in futures and
options transactions. As a means of reducing fluctuations in the net asset value
of shares of a Fund, a Fund may attempt to hedge its portfolio by buying and
selling financial futures contracts, buying put options on portfolio securities
and put options on financial futures contracts for portfolio securities, or
writing call options on futures contracts. A Fund also may write covered call
options on portfolio securities to attempt to increase its current income.
A Fund will maintain its position in securities, options and segregated
cash subject to puts and calls until the options are exercised, closed, or have
expired. An option position may be closed out over-the-counter or on a
nationally-recognized exchange which provides a secondary market for options of
the same series.
Futures Contracts
The Funds (except the Wachovia Municipal Funds) may purchase and
sell financial futures contracts to hedge against the effects of
changes in the value of portfolio securities due to anticipated
changes in interest rates and market conditions without necessarily
buying or selling the securities.
A futures contract is a firm commitment by two parties: the seller,
who agrees to make delivery of the specific type of security called
for in the contract ("going short"), and the buyer, who agrees to
take delivery of the security ("going long") at a certain time in
the future.
For example, in the fixed income securities market, prices generally
move inversely to interest rates. A rise in rates means a drop in
price. Conversely, a drop in rates typically means a rise in price.
In order to hedge its holdings of fixed income securities against a
rise in market interest rates, a Fund could enter into contracts to
deliver securities at a predetermined price (i.e., "go short") to
protect itself against the possibility that the prices of its fixed
income securities may decline during the Fund's anticipated holding
period. A Fund would "go long" (agree to purchase securities in the
future at a predetermined price) to hedge against a decline in
market interest rates.
"Margin" in Futures Transactions
The Funds (except the Wachovia Municipal Funds) may engage in
"margin" in futures transactions. Unlike the purchase or sale of a
security, a Fund does not pay or receive money upon the purchase or
sale of a futures contract. Rather, the Fund is required to deposit
an amount of "initial margin" in cash or U.S. Treasury bills with
its custodian or the broker. The nature of initial margin in futures
transactions is different from that of margin in securities
transactions in that initial margin in futures transactions does not
involve the borrowing of funds by a Fund to finance the
transactions. Initial margin is in the nature of a performance bond
or good faith deposit on the contract which is returned to the Fund
upon termination of the futures contract, assuming all contractual
obligations have been satisfied.
A futures contract held by a Fund is valued daily at the official
settlement price of the exchange on which it is traded. Each day the
Fund pays or receives cash, called "variation margin," equal to the
daily change in value of the futures contract. This process is known
as "marking to market." Variation margin does not represent a
borrowing or loan by a Fund, but is instead settlement between the
Fund and the broker of the amount one would owe the other if the
futures contract expired. In computing its daily net asset value,
the Fund will mark to market its open futures positions.
A Fund is also required to deposit and maintain margin when it
writes call options on futures contracts.
The Funds will comply with the following restrictions when
purchasing and selling futures contracts. First, a Fund will trade
futures and options thereon only for bona fide hedging purposes or
for other purposes so long as the aggregate initial margins and
premiums required in connection with non-hedging positions do not
exceed 5% of the Fund's net assets (after taking into account
unrealized profits and losses on any such position). Second, since a
Fund does not constitute a commodity pool, it will not market itself
as such, nor serve as a vehicle for trading in the commodities
futures or commodity options markets. Connected with this, each Fund
will disclose to all prospective investors the limitations on its
futures and options transactions, and make clear that these
transactions are entered into only for bona fide hedging purposes,
or other permissible purposes pursuant to regulations promulgated by
the Commodity Futures Trading Commission ("CFTC"). Finally, because
the Funds will submit to the CFTC special calls for information, the
Funds will not register as commodities pool operators.
Purchasing Put Options on Portfolio Securities
The Funds (except the Wachovia Municipal Funds) may purchase put
options on portfolio securities to protect against price movements
in particular securities in their portfolios. A put option gives a
Fund, in return for a premium, the right to sell the underlying
security to the writer (seller) at a specified price during the term
of the option. A Fund may purchase these put options as long as they
are listed on a recognized options exchange and the underlying
stocks are held in its portfolio.
Writing Covered Call Options on Portfolio Securities
The Funds (except the Wachovia Municipal Funds) may also write call
options on securities either held in their portfolios or which they
have the right to obtain without payment of further consideration or
for which they have segregated cash in the amount of any additional
consideration. As the writer of a call option, a Fund has the
obligation, upon exercise of the option during the option period, to
deliver the underlying security upon payment of the exercise price.
The call options which a Fund writes and sells must be listed on a
recognized options exchange. Writing of call options by a Fund is
intended to generate income for the Fund and thereby protect against
price movements in particular securities in the Fund's portfolio.
Put Options on Financial Futures Contracts
The Equity Fund, Quantitative Equity Fund, Growth & Income Fund,
Special Values Fund, Emerging Markets Fund, Balanced Fund, Fixed
Income Fund, Intermediate Fixed Income Fund and Short-Term Fixed
Income Fund may engage in put options on financial futures
contracts. A Fund may purchase listed put options on financial
futures contracts. A Fund would use these options solely to protect
portfolio securities against decreases in value resulting from
market factors such as an anticipated increase in rates.
Unlike entering directly into a futures contract, which requires the
purchaser to buy a financial instrument on a set date at a specified
price, the purchase of a put option on a futures contract entitles
(but does not obligate) its purchaser to decide on or before a
future date whether to assume a short position at the specified
price.
Generally, if the hedged portfolio securities decrease in value
during the term of an option, the related futures contracts will
also decrease in value and the option will increase in value. In
such an event, a Fund will normally close out its option by selling
an identical option. If the hedge is successful, the proceeds
received by a Fund upon the sale of the second option will be large
enough to offset both the premium paid by the Fund for the original
option plus the decrease in value of the hedged securities.
Alternatively, a Fund may exercise its put option to close out the
position. To do so, it would simultaneously enter into a futures
contract of the type underlying the option (for a price less than
the strike price of the option) and exercise the option. The Fund
would then deliver the futures contract in return for payment of the
strike price. If a Fund neither closes out nor exercises an option,
the option will expire on the date provided in the option contract,
and only the premium paid for the contract will be lost.
Call Options on Financial Futures Contracts
The Equity Fund, Quantitative Equity Fund, Growth & Income Fund,
Special Values Fund, Emerging Markets Fund, Balanced Fund, Fixed
Income Fund, Intermediate Fixed Income Fund and Short-Term Fixed
Income Fund may engage in call options on financial futures
contracts. In addition to purchasing put options on futures, a Fund
may write listed call options on financial futures contracts or
over-the-counter call options on future contracts to hedge its
portfolio against an increase in market interest rates. When a Fund
writes a call option on a futures contract, it is undertaking the
obligation of assuming a short futures position (selling a futures
contract) at the fixed strike price at any time during the life of
the option if the option is exercised. As market interest rates
rise, causing the prices of futures to decrease, the Fund's
obligation under a call option on a future (to sell a futures
contract) costs less to fulfill, causing the value of the Fund's
call option position to increase.
In other words, as the underlying futures price goes down below the
strike price, the buyer of the option has no reason to exercise the
call, so that the Fund keeps the premium received for the option.
This premium can substantially offset the drop in value of the
Fund's portfolio securities.
Prior to the expiration of a call written by a Fund, or exercise of
it by the buyer, the Fund may close out the option by buying an
identical option. If the hedge is successful, the cost of the second
option will be less than the premium received by the Fund for the
initial option. The net premium income of the Fund will then
substantially offset the realized decrease in value of the hedged
securities.
A Fund will not maintain open positions in futures contracts it has
sold or call options it has written on futures contracts if, in the
aggregate, the value of the open positions (marked to market)
exceeds the current market value of its portfolio, plus or minus the
unrealized gain or loss on those open positions, adjusted for the
correlation of volatility between the hedged securities and the
futures contracts. If this limitation is exceeded at any time, the
Fund will take prompt action to close out a sufficient number of
open contracts to bring its open futures and options positions
within this limitation.
Over-the-Counter Options
The Equity Fund, Quantitative Equity Fund, Growth & Income Fund,
Special Values Fund, Emerging Markets Fund, Balanced Fund, Fixed
Income Fund, Intermediate Fixed Income Fund and Short-Term Fixed
Income Fund may purchase and write over-the-counter options on
portfolio securities in negotiated transactions with the buyers or
writers of the options for those options on portfolio securities
held by a Fund and not traded on an exchange. The Funds purchase and
write options only with investment dealers and other financial
institutions (such as commercial banks or savings and loan
associations) deemed creditworthy by the Funds' investment adviser.
Over-the-counter options are two party contracts with price and
terms negotiated between buyer and seller. In contrast,
exchange-traded options are third party contracts with standardized
strike prices and expiration dates and are purchased from a clearing
corporation. Exchange-traded options have a continuous liquid market
while over-the-counter options may not.
Stock Index Futures and Options
The Equity Fund, Quantitative Equity Fund, Equity Index Fund, Growth
& Income Fund, Special Values Fund, Emerging Markets Fund, and
Balanced Fund may utilize stock index futures contracts, options,
and options on futures contracts as discussed in the prospectuses.
A stock index futures contract is a bilateral agreement which
obligates the seller to deliver (and the purchaser to take delivery
of) an amount of cash equal to a specific dollar amount times the
difference between the value of a specific stock index at the close
of trading of the contract and the price at which the agreement is
originally made. There is no physical delivery of the stocks
constituting the index, and no price is paid upon entering into a
futures contract. In general, contracts are closed out prior to
their expiration.
A Fund may only: (1) buy listed put options on stock indices; (2)
buy listed put options on securities held in its portfolio; and (3)
sell listed call options either on securities held in its portfolio
or on securities which it has the right to obtain without payment of
further consideration (or has segregated cash in the amount of any
such additional consideration). A Fund will maintain its positions
in securities, option rights, and segregated cash subject to puts
and calls until the options are exercised, closed, or expired.
There are several risks accompanying the utilization of futures
contracts to effectively anticipate market movements. Because, by
definition, futures contracts look to projected price levels in the
future, and not to current levels of valuation, market circumstances
may result in there being a discrepancy between the price of the
stock index future and the movement in the corresponding stock
index. The absence of a perfect price correlation between the
futures contract and its underlying stock index could stem from
investors choosing to close futures contracts by offsetting
transactions rather than satisfying additional margin requirements.
This could result in a distortion of the relationship between the
index and the futures market. In addition, because the futures
market imposes less burdensome margin requirements than the
securities market, an increased amount of participation by
speculators in the futures market could result in price
fluctuations.
The effectiveness of purchasing stock index options will depend upon
the extent to which price movements in a Fund's portfolio correlate
with price movements of the stock index selected. Because the value
of an index option depends upon movements in the level of the index
rather than the price of a particular stock, whether a Fund will
realize a gain or loss from the purchase of options on an index
depends upon movements in the level of stock prices in the stock
market generally or, in the case of certain indices, in an industry
or market segment, rather than movements in the price of a
particular stock. Accordingly, successful use by a Fund of options
on stock indices will be subject to the ability of the Fund's
investment adviser to predict correctly movements in the direction
of the stock market generally or of a particular industry. This
requires different skills and techniques than predicting changes in
the price of individual stocks.
Risks
When a Fund uses futures and options on futures as hedging devices,
there is a risk that the prices of the securities subject to the
futures contracts may not correlate perfectly with the prices of the
securities in the Fund's portfolio. This may cause the futures
contract and any related options to react differently than the
portfolio securities to market changes. In addition, the Fund's
investment adviser could be incorrect in its expectations about the
direction or extent of market factors such as stock price movements.
In these events, the Fund may lose money on the futures contract or
option.
It is not certain that a secondary market for positions in futures
contracts or for options will exist at all times. Although the
Funds' investment adviser will consider liquidity before entering
into these transactions, there is no assurance that a liquid
secondary market on an exchange or otherwise will exist for any
particular futures contract or option at any particular time. A
Fund's ability to establish and close out futures and options
positions depends on this secondary market. The inability to close
out these positions could have an adverse effect on the Fund's
ability to effectively hedge its portfolio.
Futures Contracts on Foreign Government Debt Obligations
These transactions are subject to the risk of governmental actions
affecting the trading or prices of the contracts. The value of the
Funds' positions could also be adversely affected by (i) other
foreign political and economic factors, (ii) less available data
than in the U.S. on which to base trading decisions, (iii) delays in
the Funds' ability to act upon economic events occurring in foreign
markets during non-business hours in the U.S., (iv) the imposition
of exercise and settlement terms and procedures, and margin
requirements different from those in the U.S., and (v) lesser
trading volume.
Restricted and Illiquid Securities
The Funds may invest in restricted and illiquid securities. The ability of
the Trustees to determine the liquidity of certain restricted securities is
permitted under a Securities and Exchange Commission ("SEC" or the "Commission")
staff position set forth in the adopting release for Rule 144A (the "Rule")
under the Securities Act of 1933. The Rule is a non-exclusive safe-harbor for
certain secondary market transactions involving securities subject to
restrictions on resale under federal securities laws. The Rule provides an
exemption from registration for resales of otherwise restricted securities to
qualified institutional buyers. The Rule was expected to further enhance the
liquidity of the secondary market for securities eligible for resale under the
Rule. The Funds believe that the SEC staff has left the question of determining
the liquidity of all restricted securities (eligible for resale under the Rule)
to the Trusts' Board. The Board considers the following criteria in determining
the liquidity of certain restricted securities:
o the frequency of trades and quotes for the security;
o the number of dealers willing to purchase or sell the security and the
number of other potential buyers;
o dealer undertakings to make a market in the security; and
o the nature of the security and the nature of the marketplace trades.
Convertible Securities
The Funds (except the Wachovia Municipal Funds) may invest in convertible
securities. Convertible bonds and convertible preferred stocks are fixed income
securities that generally retain the investment characteristics of fixed income
securities until they have been converted but also react to movements in the
underlying equity securities. The holder is entitled to receive the fixed income
of a bond or the dividend preference of a preferred stock until the holder
elects to exercise the conversion privilege. Usable bonds are corporate bonds
that can be used in whole or in part, customarily at full face value, in lieu of
cash to purchase the issuer's common stock. When owned as part of a unit along
with warrants, which are options to buy the common stock, they function as
convertible bonds, except that the warrants generally will expire before the
bond's maturity. Convertible securities are senior to equity securities and,
therefore, have a claim to assets of the corporation prior to the holders of
common stock in the case of liquidation. However, convertible securities are
generally subordinated to similar nonconvertible securities of the same company.
The interest income and dividends from convertible bonds and preferred stocks
provide a stable stream of income with generally higher yields than common
stocks, but lower than nonconvertible securities of similar quality.
A Fund will exchange or convert the convertible securities held in its
portfolio into shares of the underlying common stock in instances in which, in
the Fund's investment adviser's opinion, the investment characteristics of the
underlying common shares will assist the Fund in achieving its investment
objective. Otherwise, the Fund will hold or trade the convertible securities. In
selecting convertible securities for a Fund, the Fund's investment adviser
evaluates the investment characteristics of the convertible security as a fixed
income instrument, and the investment potential of the underlying equity
security for capital appreciation. In evaluating these matters with respect to a
particular convertible security, a Fund's investment adviser considers numerous
factors, including the economic and political outlook, the value of the security
relative to other investment alternatives, trends in the determination of the
issuer's profits, and the issuer's management capability and practices.
Zero Coupon Convertible Securities
The Funds (except the Wachovia Municipal Funds) may invest in zero coupon
convertible securities. Zero coupon convertible securities are debt securities
which are issued at a discount to their face amount and do not entitle the
holder to any periodic payments of interest prior to maturity. Rather, interest
earned on zero coupon convertible securities accretes at a stated yield until
the security reaches its face amount at maturity. Zero coupon convertible
securities are convertible into a specific number of shares of the issuer's
common stock. In addition, zero coupon convertible securities usually have
features that provide the holder with the opportunity to put the bonds back to
the issuer at a stated price before maturity. Generally, the prices of zero
coupon convertible securities may be more sensitive to market interest rate
fluctuations than conventional convertible securities.
Obligations of Foreign Issuers
The Equity Fund, Quantitative Equity Fund, Growth & Income Fund, Special
Values Fund, Emerging Markets Fund, Balanced Fund, Fixed Income Fund,
Intermediate Fixed Income Fund and Short-Term Fixed Income Fund may invest in
obligations of foreign issuers. Obligations of foreign issuers may include debt
obligations of supranational entities, which include international organizations
designed or supported by governmental entities to promote economic
reconstruction or development, and international banking institutions and
related government agencies. Examples of these include, but are not limited to,
the International Bank for Reconstruction and Development (the "World Bank"),
European Investment Bank (the "EIB") and the InterAmerican Development Bank.
Obligations of a foreign issuer may present greater risks than investments
in U.S. securities, including higher transaction costs. In addition, investments
in foreign issuers may include additional risks associated with less market
liquidity and political instability. The possible imposition of withholding
taxes on interest income might adversely affect the payment of principal and
interest on obligations of foreign issuers. Foreign securities may be
denominated in foreign currencies. Therefore, the value in U.S. dollars of a
Fund's assets and income may be affected by changes in exchange rates and
regulations.
Warrants
The Funds (except the Wachovia Municipal Funds) may invest in warrants.
Warrants are basically options to purchase common stock at a specific price
(usually at a premium above the market value of the optioned common stock at
issuance) valid for a specific period of time. Warrants may have a life ranging
from less than a year to twenty years or may be perpetual. However, most
warrants have expiration dates after which they are worthless. In addition, if
the market price of the common stock does not exceed the warrant's exercise
price during the life of the warrant, the warrant will expire as worthless.
Warrants have no voting rights, pay no dividends, and have no rights with
respect to the assets of the corporation issuing them. The percentage increase
or decrease in the market price of the warrant may tend to be greater than the
percentage increase or decrease in the market price of the optioned common
stock.
Corporate Debt Securities
The Equity Fund, Quantitative Equity Fund, Growth & Income Fund, Special
Values Fund, Emerging Markets Fund, Balanced Fund, Fixed Income Fund,
Intermediate Fixed Income Fund and Short-Term Fixed Income Fund may invest in
corporate debt securities. Corporate debt securities may bear fixed, fixed and
contingent, or variable rates of interest. They may involve equity features such
as conversion or exchange rights, warrants for the acquisition of common stock
of the same or a different issuer, participations based on revenues, sales, or
profits, or the purchase of common stock in a unit transaction (where corporate
debt securities and common stock are offered as a unit).
Increasing rate securities, which currently do not make up a significant
share of the market in corporate debt securities, are generally offered at an
initial interest rate which is at or above prevailing market rates. Interest
rates are reset periodically (most commonly every 90 days) at different levels
on a predetermined scale. These levels of interest are ordinarily set at
progressively higher increments over time. Some increasing rate securities may,
by agreement, revert to fixed rate status. These securities may also contain
features which allow the issuer the option to convert the increasing rate of
interest to a fixed rate under such terms, conditions, limitations as are
described in each issuer's prospectus.
Mortgage-Backed Securities
The Emerging Markets Fund, Balanced Fund, Fixed Income Fund, Intermediate
Fixed Income Fund and Short-Term Fixed Income Fund may invest in mortgage-backed
securities. The mortgages underlying mortgage-backed securities often may be
prepaid without penalty or premium. Therefore, mortgage-backed securities are
generally subject to higher prepayment risks than most other types of debt
instruments. Prepayment risks on mortgage-backed securities tend to increase
during periods of declining mortgage interest rates, because many borrowers
refinance their mortgages to take advantage of the more favorable rates.
Depending upon market conditions, the yield that a Fund receives from the
reinvestment of such prepayments, or any scheduled principal payments, may be
lower than the yield on the original mortgage security. As a consequence,
mortgage-backed securities may be a less effective means of "locking in"
interest rates than other types of debt securities having the same stated
maturity and may also have less potential for capital appreciation. For certain
types of asset pools, such as collateralized mortgage obligations, prepayments
may be allocated to one tranche of securities ahead of other tranches in order
to reduce the risk of prepayments for the other tranches.
Prepayments may result in a capital loss to a Fund to the extent that the
prepaid mortgage securities were purchased at a market premium over their stated
principal amount. Conversely, the prepayment of mortgage-backed securities
purchased at a market discount from their stated principal amount will
accelerate the recognition of interest income by the Fund, which would be taxed
as ordinary income when distributed to the shareholders.
Privately Issued Mortgage-Related Securities
The Emerging Markets Fund, Balanced Fund, Fixed Income Fund, Intermediate
Fixed Income Fund and Short-Term Fixed Income Fund may invest in privately
issued mortgage-related securities. Privately issued mortgage-related securities
generally represent an ownership interest in federal agency mortgage
pass-through securities such as those issued by Government National Mortgage
Association. The terms and characteristics of the mortgage instruments may vary
among pass-through mortgage loan pools. The market for such mortgage-related
securities has expanded considerably since its inception. The size of the
primary issuance market and the active participation in the secondary market by
securities dealers and other investors makes government-related pools highly
liquid.
Resets of Interest Rates
The interest rates paid on adjustable rate mortgages ("ARMs"),
collateralized mortgage obligations ("CMOs"), and real estate mortgage
investment conduits ("REMICs") in which the Emerging Markets Fund, Balanced
Fund, Fixed Income Fund, Intermediate Fixed Income Fund and Short-Term Fixed
Income Fund invest generally are readjusted at intervals of one year or less to
an increment over some predetermined interest rate index. There are two main
categories of indices: those based on U.S. Treasury securities and those derived
from a calculated measure, such as a cost of funds index or a moving average of
mortgage rates. Commonly utilized indices include the one-year and five-year
constant maturity Treasury note rates, the three-month Treasury bill rate, the
180-day Treasury bill rate, rates on longer-term Treasury securities, the
National Median Cost of Funds, the one-month or three-month LIBOR, the prime
rate of a specific bank, or commercial paper rates. Some indices, such as the
one-year constant maturity Treasury note rate, closely mirror changes in market
interest rate levels.
Others tend to lag changes in market rate levels and tend to be somewhat less
volatile.
To the extent that the adjusted interest rate on the mortgage security
reflects current market rates, the market value of an adjustable rate mortgage
security will tend to be less sensitive to interest rate changes than a fixed
rate debt security of the same stated maturity. Hence, adjustable rate mortgage
securities which use indices that lag changes in market rates should experience
greater price volatility than adjustable rate mortgage securities that closely
mirror the market. Certain residual interest tranches of CMOs may have
adjustable interest rates that deviate significantly from prevailing market
rates, even after the interest rate is reset, and are subject to correspondingly
increased price volatility. In the event a Fund purchases such residual interest
mortgage securities, it will factor in the increased interest and price
volatility of such securities when determining its dollar-weighted average
duration.
Caps and Floors
The underlying mortgages which collateralize the ARMs, CMOs, and REMICs in
which the Emerging Markets Fund, Balanced Fund, Fixed Income Fund, Intermediate
Fixed Income Fund and Short-Term Fixed Income Fund invest will frequently have
caps and floors which limit the maximum amount by which the loan rate to the
residential borrower may change up or down: (1) per reset or adjustment
interval, and (2) over the life of the loan. Some residential mortgage loans
restrict periodic adjustments by limiting changes in the borrower's monthly
principal and interest payments rather than limiting interest rate changes.
These payment caps may result in negative amortization.
The value of mortgage securities in which a Fund invests may be affected
if market interest rates rise or fall faster and farther than the allowable caps
or floors on the underlying residential mortgage loans. Additionally, even
though the interest rates on the underlying residential mortgages are
adjustable, amortization and prepayments may occur, thereby causing the
effective maturities of the mortgage securities in which a Fund invests to be
shorter than the maturities stated in the underlying mortgages.
Demand Master Notes
The Funds may invest in variable amount demand master notes. Demand notes
are short-term borrowing arrangements between a corporation or government agency
and an institutional lender (such as a Fund) payable upon demand by either
party. The notice period for demand typically ranges from one to seven days, and
the party may demand full or partial payment. Many master notes give a Fund the
option of increasing or decreasing the principal amount of the master note on a
daily or weekly basis within certain limits. Demand master notes usually provide
for floating or variable rates of interest.
Variable Rate Demand Notes
The Funds may invest in variable rate demand notes. Variable rate demand
notes are long-term corporate debt instruments that have variable or floating
interest rates and provide a Fund with the right to tender the security for
repurchase at its stated principal amount plus accrued interest. Such securities
typically bear interest at a rate that is intended to cause the securities to
trade at par. The interest rate may float or be adjusted at regular intervals
(ranging from daily to annually), and is normally based on an interest rate
index or a published interest rate. Many variable rate demand notes allow a Fund
to demand the repurchase of the security on not more than seven days prior
notice. Other notes only permit a Fund to tender the security at the time of
each interest rate adjustment or at other fixed intervals.
Demand Features
The Funds may acquire securities that are subject to puts and standby
commitments ("demand features") which require the issuer of the demand feature
to purchase the securities at their principal amount (usually with accrued
interest) within a fixed period (usually seven days) following a demand by the
Funds. The demand feature may be issued by the issuer of the underlying
securities, a dealer in the securities or by another third party, and may not be
transferred separately from the underlying security. A Fund uses these
arrangements to provide the Fund with liquidity and not to protect against
changes in the market value of the underlying securities. The bankruptcy,
receivership or default by the issuer of the demand feature, or a default on the
underlying security or other event that terminates the demand feature before its
exercise, will adversely affect the liquidity of the underlying security. Demand
features that are exercisable even after a payment default on the underlying
security may be treated as a form of credit enhancement.
U.S. Government Obligations
The Funds may invest in U.S. government obligations. The types of U.S.
government obligations in which the Funds may invest generally include direct
obligations of the U.S. Treasury (such as U.S. Treasury bills, notes, and bonds)
and obligations issued or guaranteed by U.S. government agencies or
instrumentalities. These securities are backed by:
o the full faith and credit of the U.S. Treasury;
o the issuer's right to borrow from the U.S. Treasury;
o the discretionary authority of the U.S. government to purchase certain
obligations of agencies or instrumentalities; or
o the credit of the agency or instrumentality issuing the obligations.
Examples of agencies and instrumentalities which may not always receive
financial support from the U.S. government are:
o Farm Credit System, including the National Bank for Cooperatives and Banks
for Cooperatives;
o Federal Home Loan Banks;
o Federal Home Loan Mortgage Corporation;
o Fannie Mae;
o Government National Mortgage Association; and
o Student Loan Marketing Association.
The Funds may invest in U.S. government obligations as temporary investments,
from time to time, for defensive purposes.
Variable Rate U.S. Government Securities
The Funds may invest in variable rate U.S. government securities. In the
case of certain U.S. government securities purchased by a Fund that carry
variable interest rates, these rates will reduce the changes in the market value
of such securities from their original purchase prices.
Accordingly, the potential for capital appreciation or capital
depreciation should not be greater than the potential for capital appreciation
or capital depreciation of fixed interest rate U.S. government securities having
maturities equal to the interest rate adjustment dates of the variable rate U.S.
government securities.
The Funds may purchase variable rate U.S. government securities upon the
determination by the Trustees that the interest rate as adjusted will cause the
instrument to have a current market value that approximates its par value on the
adjustment date.
Ratings
The Fixed Income Fund, Intermediate Fixed Income Fund, Georgia Municipal
Bond Fund, North Carolina Municipal Bond Fund, South Carolina Municipal Bond
Fund, and Virginia Municipal Bond Fund may invest up to 5% of their respective
total assets in securities rated Baa by Moody's or BBB by S&P. These securities
have speculative characteristics. Changes in economic conditions or other
circumstances are more likely to lead to weakened capacity to make principal and
interest payments than higher rated bonds. Downgrades will be evaluated on a
case by case basis by the Funds' investment adviser. The Funds' investment
adviser will determine whether or not the security continues to be an acceptable
investment. If not, the security will be sold.
High Yield Securities
The Special Values Fund and Emerging Markets Fund may invest in high yield
securities. Generally, the lowest-rated securities in which a Fund may invest
are rated B by S&P or Moody's or are not rated but are determined by the Fund's
investment adviser to be of comparable quality. Securities rated B are judged to
have speculative elements and are high yield, high risk bonds (i.e., junk
bonds), typically subject to greater market fluctuations and greater risk of
loss of income and principal due to an issuer's default. To a greater extent
than investment-grade bonds, lower-rated bonds and speculative grade securities
tend to reflect short-term corporate, economic and market developments, as well
as investor perceptions of the issuer's credit quality. In addition, lower-rated
bonds and speculative grade securities may be more difficult to dispose of or to
value than high-rated, lower-yielding bonds. In circumstances where, in the
judgment of a Fund's investment adviser, the investment opportunities may
benefit the Fund, the Fund may invest in securities which are rated D by S&P.
Debt that is rated D is in default, and payment of interest and/or repayment of
principal on such debt is in arrears. A Fund's investment adviser attempts to
reduce the risks described above through diversification of the portfolio and by
credit analysis of each issuer, as well as by monitoring broad economic trends
and corporate and legislative developments.
Duration
Duration is a commonly used measure of the potential volatility in the
price of a bond, or other fixed income security, or in a portfolio of fixed
income securities, prior to maturity. Volatility is the magnitude of the change
in the price of a bond relative to a given change in the market date; and the
level of market yield of similar fixed income securities. Generally, bonds with
lower coupons or longer maturities will be more volatile than bonds with higher
coupon or shorter maturities. Duration combines these variables into a single
measure.
Duration is calculated by dividing the sum of the time-weighted values of
the cash flows of a bond or bonds, including interest and principal payments, by
the sum of the present values of the cash flows. When a Fund invests in mortgage
pass-through securities, its duration will be calculated in a manner which
requires assumptions to be made regarding future principal prepayments. A more
complete description of this calculation is available upon request from the
Funds.
Investment Philosophy of the Emerging Markets Fund
As described in the Fund's prospectuses under "Investment Policies" and
"Investment Process," the Fund's investment adviser manages the Fund's portfolio
to attempt to capture the return opportunities presented by securities of
issuers and companies located in emerging markets. In light of recent political
events (for example, the fall of Communism in Europe, the opening of China to
western investment, the move toward free-market capitalism in many developing
countries, etc.), conditions for investing in many emerging market economies
have become attractive. A number of emerging market capitalist economies present
striking market growth opportunities (stemming from the increasing number of
working-class and middle-class citizens in those nations who are now demanding
improved housing, infrastructure such as roads and utilities and a greater array
of consumer goods). In view of the fact that approximately 75% of the world's
population resides in emerging market countries, and many of these countries are
still in the early or initial stages of growth and development, it is
conceivable that many of these emerging market countries will exhibit economic
and earnings growth that exceeds similar measurements in what have been
traditionally characterized as the developed nations of Europe, Japan, and the
United States. While past performance is not a guarantee of future results, this
trend has been seen in recent years, as the stock markets of a number of
emerging market economies have outperformed the stock markets of more developed
countries. Investors should recognize that investments in emerging market
countries present a number of risks, which are discussed in the Fund's
prospectuses. Currently, the Fund may invest in the securities of issuers
located in the following countries: Argentina, Brazil, Chile, China, the Czech
Republic, Egypt, Greece, Hong Kong, Hungary, India, Indonesia, Luxembourg,
Malaysia, Mexico, Morocco, Peru, the Philippines, Poland, Portugal, Romania,
Russia, Slovak Republic, South Africa, South Korea, Taiwan, Thailand, Turkey,
and Venezuela. The Fund may also purchase depositary receipts of issuers located
in other emerging market countries.
Sovereign Debt Obligations
Sovereign debt instruments are issued or guaranteed by foreign governments
or their agencies, including debt of Latin American nations or other developing
countries. Sovereign debt may be in the form of conventional securities or other
types of debt instruments, such as loans or loan participations. Sovereign debt
of developing countries may involve a high degree of risk. Governmental entities
responsible for repayment of the debt may be unable or unwilling to repay
principal and interest when due, and may require renegotiation or rescheduling
of debt payments. In addition, prospects for repayment of principal and interest
may depend on political as well as economic factors. Debt obligations of
supranational entities include international organizations designed or supported
by governmental entities to promote economic reconstruction or development, and
international banking institutions and related government agencies. Examples of
these include, but are not limited to, the World Bank, the EIB and the
Inter-American Development Bank.
Foreign Currency Transactions
Currency Risks
The exchange rates between the U.S. dollar and foreign currencies are a
function of such factors as supply and demand in the currency exchange markets,
international balances of payments, governmental intervention, speculation and
other economic and political conditions. Although the Funds value their assets
daily in U.S. dollars, a Fund may not convert its holdings to U.S. dollars
daily. A Fund may incur conversion costs when it converts its holdings to
another currency. Foreign exchange dealers may realize a profit on the
difference between the price at which a Fund buys and sells currencies.
Foreign currency exchange transactions are conducted either on a spot
(i.e., cash) basis at the spot rate prevailing in the foreign currency exchange
market or through forward contracts to purchase or sell foreign currencies.
Forward Foreign Currency Exchange Contracts
The Emerging Markets Fund may enter into forward foreign currency exchange
contracts in order to protect against possible loss resulting from an adverse
change in the relationship between the U.S. dollar and a foreign currency
involved in an underlying transaction. However, forward foreign currency
exchange contracts may limit potential gains which could result from a positive
change in such currency relationships. The Fund's investment adviser believes
that it is important to have the flexibility to enter into forward currency
exchange contracts whenever it determines that it is in the Fund's best interest
to do so. The Fund will not speculate in foreign currency exchange.
The Fund will not enter into forward foreign currency exchange contracts
or maintain a net exposure in such contracts when it would be obligated to
deliver an amount of foreign currency in excess of the value of its portfolio
securities or other assets denominated in that currency or, in the case of a
"cross-hedge" denominated in a currency or currencies that the investment
adviser believes will tend to be closely correlated with that currency with
regard to price movements. Generally, the Fund will not enter into a forward
foreign currency exchange contract with a term longer that one year.
Foreign Currency Options
A foreign currency option provides the option buyer with the right to buy
or sell a stated amount of foreign currency at the exercise price on a specified
date or during the option period. The owner of a call option has the right, but
not the obligation, to buy the currency. Conversely, the owner of a put option
has the right, but not the obligation, to sell the currency.
When the option is exercised, the seller (i.e., writer) of the option is
obligated to fulfill the terms of the sold option. However, either the seller or
the buyer may, in the secondary market, close its position during the option
period at any time prior to expiration.
A call option on a foreign security generally rises in value if the
underlying currency appreciates in value, and a put option on a foreign currency
generally falls in value if the underlying currency depreciates in value.
Although purchasing a foreign currency option can protect the Fund against an
adverse movement in the value of a foreign currency, the option will not limit
the movement in the value of such currency. For example, if the Fund was holding
securities denominated in a foreign currency that was appreciating and had
purchased a foreign currency to put a hedge against a decline in the value of
the currency, the Fund would not have to exercise its put option. Likewise, if
the Fund were to enter into a contract to purchase a security denominated in
foreign currency and, in conjunction with that purchase, were to purchase a
foreign currency call option to hedge against a rise in value of the currency,
and if the value of the currency instead depreciated between the date of
purchase and the settlement date, the Fund would not have to exercise its call.
Instead, the Fund could acquire in the spot market the amount of foreign
currency needed for settlement.
Special Risks Associated with Foreign Currency Options
Buyers and sellers of foreign currency options are subject to the same
risks that apply to options generally. In addition, there are certain additional
risks associated with foreign currency options. The markets in foreign currency
options are relatively new, and the Emerging Markets Fund's ability to establish
and close out positions on such options is subject to the maintenance of a
liquid secondary market. Although the Fund will not purchase or write such
options unless and until, in the opinion of the Fund's investment adviser, the
market for them has developed sufficiently to ensure that the risks in
connection with such options are not greater than the risks in connection with
the underlying currency, there can be no assurance that a liquid secondary
market will exist for a particular option at any specific time.
In addition, options on foreign currencies are affected by all of those
factors that influence foreign exchange rates and investments generally.
The value of a foreign currency option depends upon the value of the
underlying currency relative to the U.S. dollar. As a result, the price of the
option position may vary with changes in the value of either or both currencies
and may have no relationship to the investment merits of a foreign security.
Because foreign currency transactions occurring in the interbank market involve
substantially larger amounts than those that may be involved in the use of
foreign currency options, investors may be disadvantaged by having to deal in an
odd market lot (generally consisting of transactions of less than $1 million)
for the underlying foreign currencies at prices that are less favorable than for
round lots.
There is no systematic reporting of last sale information for foreign
currencies or any regulatory requirement that quotations available through
dealers or other market sources be firm or revised on a timely basis. Available
quotation information is generally representative of very large transactions in
the interbank market and thus may not reflect relatively smaller transactions
(i.e., less than $1 million) where rates may be less favorable. The interbank
market in foreign currencies is a global, around-the-clock market. To the extent
that the U.S. option markets are closed while the markets for the underlying
currencies remain open, significant price and rate movements may take place in
the underlying markets that cannot be reflected in the options markets until
they reopen.
Foreign Currency Futures Transactions
By using foreign currency futures contracts and options on such contracts,
the Emerging Markets Fund may be able to achieve many of the same objectives as
it would through the use of forward foreign currency exchange contracts. The
Fund may be able to achieve these objectives possibly more effectively and at a
lower cost by using futures transactions instead of forward foreign currency
exchange contracts.
Special Risks Associated with Foreign Currency Futures Contracts and Related
Options
Buyers and sellers of foreign currency futures contracts are subject to
the same risks that apply to the use of futures generally. In addition, there
are risks associated with foreign currency futures contracts and their use as a
hedging device similar to those associated with options on futures currencies,
as described above.
Options on foreign currency futures contracts may involve certain
additional risks. Trading options on foreign currency futures contracts is
relatively new. The ability to establish and close out positions on such options
is subject to the maintenance of a liquid secondary market. To reduce this risk,
the Emerging Markets Fund will not purchase or write options on foreign currency
futures contracts unless and until, in the opinion of the Fund's investment
adviser, the market for such options has developed sufficiently that the risks
in connection with such options are not greater than the risks in connection
with transactions in the underlying foreign currency futures contracts. Compared
to the purchase or sale of foreign currency futures contracts, the purchase of
call or put options on futures contracts involves less potential risk to the
Fund because the maximum amount at risk is the premium paid for the option (plus
transaction costs). However, there may be circumstances when the purchase of a
call or put option on a futures contract would result in a loss, such as when
there is no movement in the price of the underlying currency or futures
contract.
Municipal Securities
The Georgia Municipal Bond Fund, North Carolina Municipal Bond Fund, South
Carolina Municipal Bond Fund and Virginia Municipal Bond Fund invest in
municipal securities. If a security loses its rating or has its rating reduced
after a Fund has purchased it, the Fund is not required to drop the security
from its portfolio, but may consider doing so. If ratings made by Moody's or S&P
change because of changes in those organizations or in their rating systems, the
Funds will try to use comparable ratings as standards in accordance with the
investment policies described in the prospectuses.
Participation Interests
The financial institutions from which the Funds purchase
participation interests frequently provide or secure from another
financial institution irrevocable letters of credit or guarantees
and give the Funds the right to demand payment of the principal
amounts of the participation interests plus accrued interest on
short notice (usually within seven days).
Variable Rate Municipal Securities
Variable interest rates generally reduce changes in the market value
of municipal securities from their original purchase prices.
Accordingly, as interest rates decrease or increase, the potential
for capital appreciation or depreciation is less for variable rate
municipal securities than for fixed income obligations.
Many municipal securities with variable interest rates purchased by
the Funds are subject to repayment of principal (usually within
seven days) on a Fund's demand. The terms of these variable rate
demand instruments require payment of principal and accrued interest
from the issuer of the municipal obligations, the issuer of the
participation interests, or a guarantor of either issuer.
Municipal Leases
The Funds may purchase municipal securities in the form of
participation interests which represent undivided proportional
interests in lease payments by a governmental or non-profit entity.
The lease payments and other rights under the lease provide for and
secure the payments on the certificates. Lease obligations may be
limited by municipal charter or the nature of the appropriation for
the lease. In particular, lease obligations may be subject to
periodic appropriation. If the entity does not appropriate funds for
future lease payments, the entity cannot be compelled to make such
payments. Furthermore, a lease may provide that the certificate
trustee cannot accelerate lease obligations upon default. The
trustee would only be able to enforce lease payments as they become
due. In the event of a default or failure of appropriation, it is
unlikely that the trustee would be able to obtain an acceptable
substitute source of payment or that the substitute source of
payment will generate tax-exempt income.
In determining the liquidity of municipal lease securities, a Fund's
investment adviser, under the authority delegated by the Trustees,
will base its determination on the following factors:
o whether the lease can be terminated by the lessee;
o the potential recovery, if any, from a sale of the leased
property upon termination of the lease;
o the lessee's general credit strength (e.g., its debt,
administrative, economic and financial characteristics and
prospects);
o the likelihood that the lessee will discontinue appropriating
funding for the leased property because the property is no
longer deemed essential to its operations (e.g., the potential
for an "event of non-appropriation"); and
o any credit enhancement or legal recourse provided upon an event
of non-appropriation or other termination of the lease.
Municipal Bond Insurance
The Funds may purchase two types of Policies issued by municipal bond
insurers. One type of Policy covers certain municipal securities only during the
period in which they are in a Fund's portfolio. In the event that a municipal
security covered by such a Policy is sold from a Fund, the insurer of the
relevant Policy will be liable only for those payments of interest and principal
which are due and owing at the time of sale.
The other type of Policy covers municipal securities not only while they
remain in a Fund's portfolio but also until their final maturity even if they
are sold out of the Fund's portfolio, so that the coverage may benefit all
subsequent holders of those municipal securities. A Fund will obtain insurance
which covers municipal securities until final maturity even after they are sold
out of the Fund's portfolio only if, in the judgment of the Fund's investment
adviser, the Fund would receive net proceeds from the sale of those securities,
after deducting the cost of such permanent insurance and related fees,
significantly in excess of the proceeds it would receive if such municipal
securities were sold without insurance. Payments received from municipal bond
issuers may not be tax-exempt income to shareholders of the Funds.
The premiums for the Policies are paid by a Fund and the yield on the
Fund's portfolio is reduced thereby. Premiums for the Policies are paid by a
Fund monthly, and are adjusted for purchases and sales of municipal securities
during the month. A Fund may purchase Policies from MBIA Corp. ("MBIA"), AMBAC
Indemnity Corporation ("AMBAC"), Financial Guaranty Insurance Company ("FGIC"),
or any other municipal bond insurer which is rated AAA by S&P or Aaa by Moody's.
Each Policy guarantees the payment of principal and interest on those municipal
securities it insures. The Policies will have the same general characteristics
and features. A municipal security will be eligible for coverage if it meets
certain requirements set forth in the Policy. In the event interest or principal
on an insured municipal security is not paid when due, the insurer covering the
security will be obligated under its Policy to make such payment not later than
30 days after it has been notified by a Fund that such non-payment has occurred.
MBIA, AMBAC, and FGIC will not have the right to withdraw coverage on securities
insured by their Policies so long as such securities remain in a Fund's
portfolio, nor may MBIA, AMBAC, or FGIC cancel their Policies for any reason
except failure to pay premiums when due.
MBIA, AMBAC, and FGIC will reserve the right at any time upon 90 days'
written notice to a Fund to refuse to insure any additional municipal securities
purchased by the Fund after the effective date of such notice. A Fund reserves
the right to terminate any of the Policies if it determines that the benefits to
the Fund of having its portfolio insured under such Policy are not justified by
the expense involved.
Additionally, the Funds reserve the right to enter into contracts with
insurance carriers other than MBIA, AMBAC, or FGIC if such carriers are rated
AAA by S&P or Aaa by Moody's.
Under the Policies, municipal bond insurers unconditionally guarantee to
the Georgia Municipal Bond Fund, North Carolina Municipal Bond Fund, South
Carolina Municipal Bond Fund, and Virginia Municipal Bond Fund the timely
payment of principal and interest on the insured municipal securities when and
as such payments shall become due but shall not be paid by the issuer, except
that in the event of any acceleration of the due date of the principal by reason
of mandatory or optional redemption (other than acceleration by reason of
mandatory sinking fund payments), default or otherwise, the payments guaranteed
will be made in such amounts and at such times as payments of principal would
have been due had there not been such acceleration. The municipal bond insurers
will be responsible for such payments less any amounts received by a Fund from
any trustee for the municipal bond issuers or from any other source. The
Policies do not guarantee payment on an accelerated basis, the payment of any
redemption premium, the value for the shares of a Fund, or payments of any
tender purchase price upon the tender of the municipal securities. The Policies
also do not insure against nonpayment of principal of or interest on the
securities resulting from the insolvency, negligence or any other act or
omission of the trustee or other paying agent for the securities. However, with
respect to small issue industrial development municipal bonds and pollution
control revenue municipal bonds covered by the Policies, the municipal bond
insurers guarantee the full and complete payments required to be made by or on
behalf of an issuer of such municipal securities if there occurs any change in
the tax-exempt status of interest on such municipal securities, including
principal, interest or premium payments, if any, as and when required to be made
by or on behalf of the issuer pursuant to the terms of such municipal
securities. A when-issued municipal security will be covered under the Policies
upon the settlement date of the issuer of such when-issued municipal securities.
In determining to insure municipal securities held by a Fund, each municipal
bond insurer has applied its own standard, which corresponds generally to the
standards it has established for determining the insurability of new issues of
municipal securities. This insurance is intended to reduce financial risk, but
the cost thereof and compliance with investment restrictions imposed under the
Policies will reduce the yield to shareholders of each Fund.
If a Policy terminates as to municipal securities sold by a Fund on the
date of sale, in which event municipal bond insurers will be liable only for
those payments of principal and interest that are then due and owing, the
provision for insurance will not enhance the marketability of securities held by
the Fund, whether or not the securities are in default or subject to significant
risk of default, unless the option to obtain permanent insurance is exercised.
On the other hand, since issuer-obtained insurance will remain in effect as long
as the insured municipal securities are outstanding, such insurance may enhance
the marketability of municipal securities covered thereby, but the exact effect,
if any, on marketability cannot be estimated. The Funds generally intend to
retain any securities that are in default or subject to significant risk of
default and to place a value on the insurance, which ordinarily will be the
difference between the market value of the defaulted security and the market
value of similar securities of minimum investment grade (i.e., rated "BBB" by
S&P or "Baa" by Moody's) that are not in default. To the extent that a Fund
holds defaulted securities, it may be limited in its ability to manage its
investment and to purchase other municipal securities. Except as described above
with respect to securities that are in default or subject to significant risk of
default, the Funds will not place any value on the insurance in valuing the
municipal securities that they hold.
Municipal bond insurance may be provided by one or more of the following
insurers or any other municipal bond insurer which is rated "Aaa" by Moody's or
"AAA" by S&P:
Municipal Bond Investors Assurance Corp.
Municipal Bond Investors Assurance Corp. ("MBIA") is a wholly-owned
subsidiary of MBIA, Inc. MBIA, domiciled in New York, is regulated
by the New York State Insurance Department and licensed to do
business in various states. The address of MBIA is 113 King Street,
Armonk, New York, 10504, and its telephone number is (914) 273-4545.
As of February 26, 1998, S&P has rated the claims-paying ability of
MBIA "AAA."
AMBAC Indemnity Corporation
AMBAC Indemnity Corporation ("AMBAC") is a Wisconsin-domiciled stock
insurance company, regulated by the Insurance Department of
Wisconsin, and licensed to do business in various states. AMBAC is a
wholly-owned subsidiary of AMBAC, Inc., a financial holding company
which is owned by the public. Copies of certain statutorily required
filings of AMBAC can be obtained from AMBAC. The address of AMBAC's
administrative offices is One State Street Plaza, 17th Floor, New
York, New York 10004, and its telephone number is (212) 668-0340. As
of February 26, 1998, S&P has rated the claims-paying ability of
AMBAC "AAA."
Financial Guaranty Insurance Company
Financial Guaranty Insurance Company ("Financial Guaranty") is a
wholly- owned subsidiary of FGIC Corporation, a Delaware holding
company. FGIC Corporation is wholly-owned by General Electric
Capital Corporation. Financial Guaranty is subject to regulation by
the New York State Insurance Department and is licensed to do
business in various states. The address of Financial Guaranty is 175
Water Street, New York, New York 10038, and its telephone number is
1-800-352-0001. As of February 26, 1998, S&P has rated the
claims-paying ability of Financial Guaranty "AAA."
Concentration of Investments
The Georgia Municipal Bond Fund, North Carolina Municipal Bond Fund, South
Carolina Municipal Bond Fund, and Virginia Municipal Bond Fund generally will
not invest more than 25% of its total assets in any one industry. Governmental
issuers of municipal securities are not considered part of any "industry."
However, municipal securities backed only by the assets and revenues of
nongovernmental users may, for this purpose, be deemed to be related to the
industry in which such nongovernmental users engage, and the 25% limitation
would apply to such obligations. It is nonetheless possible that the Funds may
invest more than 25% of their assets in a broader segment of the municipal
securities market, such as revenue obligations of hospitals and other health
care facilities, housing agency revenue obligations, or airport revenue
obligations. This would be the case only if a Fund's investment adviser
determines that the yields available from obligations in a particular segment of
the market justified the additional risks associated with a large investment in
such segment. Although such obligations could be supported by the credit of
governmental users or by the credit of nongovernmental users engaged in a number
of industries, economic, business, political and other developments generally
affecting the revenues of such users (for example, proposed legislation or
pending court decisions affecting the financing of such projects and market
factors affecting the demand for their services or products) may have a general
adverse effect on all municipal securities in such a market segment.
State Investment Risks
As a general matter, concentration by the Georgia Municipal Bond Fund, the
North Carolina Municipal Bond Fund, the South Carolina Municipal Bond Fund, and
the Virginia Municipal Bond Fund in securities issued by the State (or
Commonwealth, as applicable) identified in each Fund's name and each such
State's (or Commonwealth's) political subdivisions provides a greater level of
risk than a fund which is diversified across numerous states and municipal
entities. The ability of each State (or Commonwealth) or its municipalities to
meet its obligations will depend on the availability of tax and other revenues;
and economic, political, and demographic conditions within the State (or the
Commonwealth), its counties, and its municipalities.
Georgia Investment Risks
The State of Georgia's economy is based on manufacturing (textiles, food
products, paper products, electronic equipment and aircraft), trade and a
growing services sector. Atlanta, with a service-oriented economy, is a trade,
service and transportation center for the Southeast region of the United States
and is the focus of economic growth in the State. In most other cities in
Georgia, manufacturing predominates. The State economy was only mildly affected
by the early 1980's recession and grew rapidly for most of the decade, with
employment and personal income growth in excess of comparable national rates.
Despite continued population growth, personal income per capita has steadily
gained relative to the nation. The economy began to slow in 1989, with less
vigorous job growth evident and the State's relative per capita income position
slipping.
Throughout the 1980s the State's expanding economy fostered strong income
and sales tax growth. This enabled the State to record fairly strong fiscal
operations for fiscal years 1984-1989.
The State experienced an economic downturn in the early 1990's, as
operating deficits were recorded in fiscal years 1990-1992. However, in fiscal
years 1993 and 1994, the State ended with operating surpluses due to strong
revenue growth which will be used to augment reserves. The State's debt rating
was affirmed as "Aaa" by Moody's in July, 1994. Preparations for the 1996 Summer
Olympics helped propel Georgia's economy. Businesses and local governments
created a total of 400,000 jobs over the period of 1991-1994 and the
unemployment rate dropped during the period to just 4.9%.
The Georgia Municipal Bond Fund's investment adviser believes that the
information presented above describes some of the more significant matters
relating to the Georgia Municipal Bond Fund. The sources of the information are
the official statements of issuers located in Georgia, other publicly available
documents, and oral statements from various State agencies. The Georgia
Municipal Bond Fund's investment adviser has not independently verified any of
the information contained in the official statements, other publicly available
documents, or oral statements from various State agencies.
North Carolina Investment Risks
The State of North Carolina's credit strength is derived from a
diversified economy, relatively low unemployment rates, strong financial
management, and a low debt burden. In recent years, the State's economy has
become less dependent on agriculture (primarily tobacco) and manufacturing
(textiles and furniture) and has experienced increased activity in financial
services, research, high technology manufacturing, and tourism. North Carolina
did not escape the effects of the economic slowdown; however, the State is now
experiencing an increase in economic development. North Carolina ranks among the
top ten states in terms of economic growth, as measured by job and personal
income growth. Long-term personal income trends indicate gains; however, wealth
levels still continue to lag the national average. State unemployment rates
consistently fall below the national average. For November 1995, North Carolina
reported an unemployment rate of 4.2%, versus the national average of 5.6%.
North Carolina is a very conservative debt issuer and has maintained debt
levels that are low due to constitutional debt limitations. Conservative
policies also dominate the State's financial operations. The State's
administration continually demonstrates its ability and willingness to adjust
financial planning and budgeting to preserve financial balance. The State's
finances, which enjoyed surpluses and adequate reserves throughout the 1980's,
began reflecting the economic downtown in fiscal 1990. To close the shortfalls
that emerged because of weakening revenues, the State increased its sales and
corporate tax rates and implemented expenditure reductions and restrictions.
Actions by the State resulted in a budget surplus for fiscal 1992, 1993 and
1994. Available unreserved balances and budget stabilization reserves are
projected to be $359 million for 1995. The financials of many North Carolina
municipalities are also strong, and over 25% of all "Aaa" rated tax-exempt bonds
issued by local municipalities throughout the United States are issued by cities
and towns located in the State.
The North Carolina Municipal Bond Fund's investment adviser believes that
the information summarized above describes some of the more significant matters
relating to the North Carolina Municipal Bond Fund. The sources of the
information are the official statements of issuers located in North Carolina,
other publicly available documents, and oral statements from various State
agencies. The North Carolina Municipal Bond Fund's investment adviser has not
independently verified any of the information contained in the official
statements, other publicly available documents, or oral statements from various
State agencies.
South Carolina Investment Risks
The State of South Carolina has an economy that has been dominated from
the early 1920s through the present by the textile industry, with more than one
of every three manufacturing jobs directly or indirectly related to the textile
industry. However, since 1950, the economic bases of the State have become more
diversified, as the trade and service sectors and durable goods manufacturing
industries have developed. Currently, Moody's rates South Carolina's general
obligation bonds "Aaa" and S&P rates such bonds "AA+." There can be no assurance
that the economic conditions on which those ratings are based will continue or
that particular bond issues may not be adversely affected by changes in economic
or political conditions.
The South Carolina State Constitution (the "Constitution") mandates a
balanced budget. If a deficit occurs, the General Assembly must account for it
in the succeeding fiscal year. In addition, if a deficit appears likely, the
State Budget and Control Board (the "State Board") may reduce appropriations
during the current fiscal year as necessary to prevent the deficit. The
Constitution limits annual increases in State employees' wages to the average
growth rate of the economy of the State and annual increases in the number of
State employees to the average growth of the State's population.
The Constitution requires a General Reserve Fund ("General Fund") that
equals three percent of General Fund revenue for the latest fiscal year. When
deficits have occurred, the State has funded them out of the General Fund. The
Constitution also requires a Capital Reserve Fund ("Capital Fund") equal to two
percent of General Fund revenue. Before March 1st of each year, the Capital Fund
must be used to offset mid-year budget reductions before mandating cuts in
operating appropriations. After March 1st, the Capital Fund may be appropriated
by a special vote of the General Assembly to finance previously authorized
capital improvement bond projects, to retire bond principal or pay interest on
bonds previously issued, and to pay for capital improvements or other
nonrecurring purposes. Monies in the Capital Fund not appropriated or any
appropriation for a particular project or item that has been reduced due to
application of the monies to a year-end deficit must go back to the General
Fund.
The shutdown of the Charleston Naval Base exacted a heavy toll in North
Charleston. In addition, contractors at the Savannah River Site nuclear complex
laid off more than 4,000 workers. However, plant expansions and openings by
companies such as BMW, Michelin, AMP, and Fuji Photo have helped to mitigate
these negative economic developments.
As discussed above, the South Carolina Municipal Bond Fund's concentration
in securities issued by the State or its subdivisions provides a greater level
of risk than an investment company which is diversified across a larger
geographical area. For example, the passage of the North American Free Trade
Agreement could result in increased competition for the State's textile industry
due to the availability of less-expensive foreign labor.
Presently, South Carolina subjects bonds issued by other states to its
income tax. If this tax was declared unconstitutional, the value of bonds in the
South Carolina Municipal Bond Fund could decline a small but measurable amount.
Also, the South Carolina Municipal Bond could become slightly less attractive to
potential future investors.
The South Carolina Municipal Bond Fund's investment adviser believes that
the information summarized above describes some of the more significant matters
relating to the South Carolina Municipal Bond Fund. The sources of the
information are the official statements of issuers located in South Carolina,
other publicly available documents, and oral statements from various State
agencies. The South Carolina Municipal Bond Fund's investment adviser has not
independently verified any of the information contained in the official
statements, other publicly available documents, or oral statements from various
State agencies.
Virginia Investment Risks
The rate of economic growth in the Commonwealth of Virginia has slowed in
the 1990's compared to the late 1980's. From 1986 to 1995, the Commonwealth's
5.0% rate of growth in per capita personal income was approximately equal to the
national rate of growth. In 1995, Virginia's growth rate was 4.9% compared to
5.0% for the nation. Per capita income in Virginia has been consistently above
national levels over the past decade and, in 1995, was $23,597 compared with the
national average of $22,788.
The services sector in Virginia generates the largest number of jobs,
followed by wholesale and retail trade, government employment, and
manufacturing. Employment in the services sector increased by 19.1% from 1991 to
1995, making it the fastest growing sector in the Commonwealth. Because of
Virginia's proximity to Washington, D.C. and the concentration of military
installations in the Hampton Roads area of the Commonwealth (the largest such
concentration in the United States), the United States federal government has a
greater economic impact on Virginia relative to its size than on any of the
other states except Alaska and Hawaii.
According to statistics published by the U.S. Department of Labor, the
Commonwealth of Virginia typically has one of the lowest unemployment rates in
the nation. This is generally attributed to the balance among the various
sections represented in the economy. During 1995, an average of 4.5% of
Virginians were unemployed as compared with the national average of 5.6%. The
population of the state has continued to grow over the last decade at a rate
that is higher than the national average. During the last decade, the rate of
increase in such population growth reached a high of 2.1% annually in 1987 and,
in 1995, was approximately 1.4%.
Virginia is one of twenty states with a right-to-work law and is generally
regarded as having a favorable business climate marked by few strikes or work
stoppages. Virginia is also one of the least unionized among the industrial
states. The percentage of non-agricultural employees who belong to unions in the
Commonwealth of Virginia has been approximately half the national average.
Currently, NRSROs assign their highest rating to general obligation bonds
issued by the Commonwealth of Virginia, reflecting in part, its sound fiscal
management, diversified economic base and low debt ratios. There can be no
assurance that the economic conditions on which these ratings are based will
continue or that particular bond issues may not be adversely affected by changes
in economic or political conditions. Furthermore, the Virginia Municipal Bond
Fund also invests in securities issued by the political authorities of the
Commonwealth of Virginia, all of which are separately rated (if rated at all) by
NRSROs.
The Virginia Municipal Bond Fund's investment adviser believes that the
information summarized above describes some of the more significant matters
relating to the Virginia Municipal Bond Fund. The sources of the information are
the official statements of issuers located in Virginia, other publicly available
documents, and oral statements from various Commonwealth agencies. The Virginia
Municipal Bond Fund's investment adviser has not independently verified any of
the information contained in the official statements, other publicly available
documents, or oral statements from various Commonwealth agencies.
Portfolio Turnover
No Fund will attempt to set or meet a portfolio turnover rate since any
turnover would be incidental to transactions undertaken in an attempt to achieve
a Fund's investment objective. Securities in each portfolio will be sold
whenever a Fund's investment adviser believes it is appropriate to do so in
light of the Fund's investment objective, without regard to the length of time a
particular security may have been held. A higher rate of portfolio turnover
involves correspondingly greater transaction expenses which must be borne
directly by a Fund and, thus, indirectly by its shareholders. In addition, a
high rate of portfolio turnover may result in the realization of larger amounts
of capital gains which, when distributed to a Fund's shareholders, are taxable
to them. Nevertheless, transactions for a Fund's portfolio will be based only
upon investment considerations and will not be limited by any other
considerations when an investment adviser deems it appropriate to make changes
in the Fund's portfolio.
During the fiscal years ended November 30, 1997 and 1996, the Equity
Fund's portfolio turnover rates were 124% and 64%, respectively.
During the fiscal years ended November 30, 1997 and 1996, the Quantitative
Equity Fund's portfolio turnover rates were 74% and 44%, respectively.
During the fiscal years ended November 30, 1997 and 1996, the Equity Index
Fund's portfolio turnover rates were 4% and 12%, respectively.
During the fiscal years ended November 30, 1997 and 1996, the Special
Values Fund's portfolio turnover rates were 46% and 38%, respectively.
During the fiscal years ended November 30, 1997 and 1996, the Emerging
Markets Fund's portfolio turnover rates were 60% and 30%, respectively.
During the fiscal years ended November 30, 1997 and 1996, the Balanced
Fund's portfolio turnover rates were 143% and 99%, respectively.
During the fiscal years ended November 30, 1997 and 1996, the Fixed Income
Fund's portfolio turnover rates were 174% and 181%, respectively.
During the fiscal years ended November 30, 1997 and 1996, the Short-Term
Fixed Income Fund's portfolio turnover rates were 215% and 145%, respectively.
During the fiscal years ended November 30, 1997 and 1996, the Georgia
Municipal Bond Fund's portfolio turnover rates were 25% and 14%, respectively.
During the fiscal years ended November 30, 1997 and 1996, the North
Carolina Municipal Bond Fund's portfolio turnover rates were 17% and 7%,
respectively.
During the fiscal years ended November 30, 1997 and 1996, the South
Carolina Municipal Bond Fund's portfolio turnover rates were 12% and 20%,
respectively.
Investment Limitations
Selling Short and Buying On Margin
The Equity Fund, Quantitative Equity Fund, Growth & Income Fund,
Equity Index Fund, Special Values Fund, Emerging Markets Fund, and
Balanced Fund will not sell any securities short or purchase any
securities on margin, other than in connection with buying stock
index futures contracts, put options on stock index futures, put
options on financial futures and portfolio securities, and writing
covered call options, but may obtain such short-term credits as are
necessary for the clearance of purchases and sales of portfolio
securities.
The Short-Term Fixed Income Fund will not sell any securities short
or purchase any securities on margin, other than in connection with
put options on financial futures, put options on portfolio
securities, and writing covered call options, but may obtain such
short-term credits as may be necessary for clearance of purchases
and sales of securities.
The Fixed Income Fund, Intermediate Fixed Income Fund, Georgia
Municipal Bond Fund, North Carolina Municipal Bond Fund, South
Carolina Municipal Bond Fund, and Virginia Municipal Bond Fund will
not sell any securities short or purchase any securities on margin
but may obtain such short-term credits as may be necessary for
clearance of purchases and sales of securities.
The deposit or payment by a Fund of initial or variation margin in
connection with financial futures contracts or related options
transactions is not considered the purchase of a security on margin.
Issuing Senior Securities and Borrowing Money
The Equity Fund and Special Values Fund will not issue senior
securities, except that it may borrow money directly or through
reverse repurchase agreements in amounts up to one-third of the
value of its net assets, including the amounts borrowed.
The Growth & Income Fund, Quantitative Equity Fund and Emerging
Markets Fund will not issue senior securities, except that a Fund
may borrow money directly or through reverse repurchase agreements
in amounts up to one-third of the value of its total assets,
including the amounts borrowed.
The Equity Index Fund, Balanced Fund, Fixed Income Fund,
Intermediate Fixed Income Fund and Short-Term Fixed Income Fund will
not issue senior securities, except as permitted by its investment
objective and policies, and except that a Fund may borrow money and
engage in reverse repurchase agreements in amounts up to one-third
of the value of its total assets, including the amounts borrowed.
The Georgia Municipal Bond Fund, North Carolina Municipal Bond Fund,
South Carolina Municipal Bond Fund, and Virginia Municipal Bond Fund
will not issue senior securities, except that a Fund may borrow
money in amounts up to one-third of the value of its total assets,
including the amounts borrowed.
The Funds (except for the Growth & Income Fund, the Intermediate
Fixed Income Fund and the Virginia Municipal Bond Fund) will not
borrow money or engage in reverse repurchase agreements for
investment leverage, but rather as a temporary, extraordinary, or
emergency measure to facilitate management of the portfolio by
enabling a Fund to meet redemption requests when the liquidation of
portfolio securities is deemed to be inconvenient or
disadvantageous. A Fund will not purchase any securities while
borrowings in excess of 5% of the value of its total assets are
outstanding.
Pledging Assets
The Equity Fund, Growth & Income Fund, Quantitative Equity Fund, and
Special Values Fund will not mortgage, pledge, or hypothecate any
assets except to secure permitted borrowings. In those cases, the
Fund may mortgage, pledge, or hypothecate assets to secure such
borrowings having a market value not exceeding the lesser of the
dollar amounts borrowed or 15% of the value of total assets at the
time of the borrowing. For purposes of this limitation, the
following are not deemed to be pledges: margin deposits for the
purchase and sale of futures contracts and related options, and
segregation or collateral arrangements made in connection with
options activities or the purchase of securities on a when-issued
basis.
The Equity Index Fund, Balanced Fund, Fixed Income Fund,
Intermediate Fixed Income Fund and Short-Term Fixed Income Fund will
not mortgage, pledge, or hypothecate any assets except to secure
permitted borrowings. In those cases, the Fund may mortgage, pledge
or hypothecate assets to secure such borrowings having a market
value not exceeding the lesser of the dollar amounts borrowed or 15%
of the value of total assets at the time of the borrowing. For
purposes of this limitation, the following are not deemed to be
pledges: margin deposits for the purchase and sale of futures
contracts and related options, and segregation or collateral
arrangements made in connection with options activities or the
purchase of securities on a when-issued basis.
The Emerging Markets Fund will not mortgage, pledge, or hypothecate
any assets except to secure permitted borrowings. For purposes of
this limitation, the following will not be deemed to be pledges of
the Fund's assets: (a) the deposit of assets in escrow in connection
with the writing of covered put or call options and the purchase of
securities on a when-issued basis; and (b) collateral arrangements
with respect to (i) the purchase and sale of stock options (and
options on stock indices) and (ii) initial or variation margin for
futures contracts.
The Georgia Municipal Bond Fund, North Carolina Municipal Bond Fund,
South Carolina Municipal Bond Fund, and Virginia Municipal Bond Fund
will not mortgage, pledge, or hypothecate any assets except to
secure permitted borrowings. In those cases, South Carolina
Municipal Bond Fund may mortgage, pledge, or hypothecate assets
having a market value not exceeding 10% of the value of its total
assets at the time of the pledge.
Investing in Real Estate
The Funds (except the Georgia Municipal Bond Fund, North Carolina
Municipal Bond Fund, South Carolina Municipal Bond Fund, and
Virginia Municipal Bond Fund) will not buy or sell real estate,
including limited partnership interests, although a Fund may invest
in the securities of companies whose business involves the purchase
or sale of real estate or in securities which are secured by real
estate or interests in real estate.
The Georgia Municipal Bond Fund, North Carolina Municipal Bond Fund,
South Carolina Municipal Bond Fund, and Virginia Municipal Bond Fund
will not buy or sell real estate, although a Fund may invest in
municipal bonds secured by real estate or interests in real estate.
Investing in Commodities
The Equity Fund, Quantitative Equity Fund, Growth & Income Fund,
Equity Index Fund, Special Values Fund, and Emerging Markets Fund
will not purchase or sell commodities, commodity contracts, or
commodity futures contracts. However, a Fund may purchase put
options on stock index futures, put options on financial futures,
stock index futures contracts, and put options on portfolio
securities, and may write covered call options.
The Fixed Income Fund and the Intermediate Fixed Income Fund will
not purchase or sell commodities, commodity contracts, or commodity
futures contracts except to the extent that a Fund may engage in
transactions involving futures contracts and related options.
The Balanced Fund and Short-Term Fixed Income Fund will not purchase
or sell commodities, commodity contracts, or commodity futures
contracts except that a Fund may purchase and sell futures contracts
and related options.
The Georgia Municipal Bond Fund, North Carolina Municipal Bond Fund,
South Carolina Municipal Bond Fund, and Virginia Municipal Bond Fund
will not buy or sell commodities, commodity contracts, or
commodities futures contracts.
Underwriting
The Equity Fund, Special Values Fund, Balanced Fund, Fixed Income
Fund, Intermediate Fixed Income Fund and Short-Term Fixed Income
Fund will not underwrite any issue of securities, except as it may
be deemed to be an underwriter under the Securities Act of 1933 in
connection with the sale of restricted securities which the Fund may
purchase pursuant to its investment objective, policies, and
limitations.
The Quantitative Equity Fund, Growth & Income Fund, Equity Index
Fund, Emerging Markets Fund, Georgia Municipal Bond Fund, North
Carolina Municipal Bond Fund, South Carolina Municipal Bond Fund,
and Virginia Municipal Bond Fund will not underwrite any issue of
securities, except as each Fund may be deemed to be an underwriter
under the Securities Act of 1933 in connection with the sale of
securities which the Fund may purchase pursuant to its investment
objective, policies, and limitations.
Diversification of Investments
With respect to securities comprising 75% of the value of its total
assets, the Funds (except Georgia Municipal Bond Fund, North
Carolina Municipal Bond Fund, South Carolina Municipal Bond Fund,
and Virginia Municipal Bond Fund) will not purchase securities
issued by any one issuer (other than cash, cash items or securities
issued or guaranteed by the government of the United States or its
agencies or instrumentalities and repurchase agreements
collateralized by such securities) if, as a result, more than 5% of
the value of each Fund's total assets would be invested in the
securities of that issuer. Also, a Fund will not acquire more than
10% of the outstanding voting securities of any one issuer.
Concentration of Investments
The Funds (except Emerging Markets Fund, Georgia Municipal Bond
Fund, North Carolina Municipal Bond Fund, South Carolina Municipal
Bond Fund and Virginia Municipal Bond Fund) will not invest 25% or
more of the value of their total assets in any one industry, except
that a Fund may invest 25% or more of the value of its total assets
in securities issued or guaranteed by the U.S. government, its
agencies or instrumentalities, and repurchase agreements
collateralized by such securities.
The Emerging Markets Fund will not invest 25% or more of the value
of its total assets in any one industry. However, the Fund may
invest 25% or more of the value of its assets in cash or cash items,
securities issued or guaranteed by the U.S. government, its agencies
or instrumentalities, or instruments secured by these money market
instruments, such as repurchase agreements.
The Georgia Municipal Bond Fund, North Carolina Municipal Bond Fund,
and Virginia Municipal Bond Fund will not purchase securities if, as
a result of such purchase, 25% or more of the value of its total
assets would be invested in industrial development bonds or other
securities, the interest upon which is paid from revenues of similar
type projects. A Fund may invest 25% or more of the value of its
total assets in cash, cash items, or securities issued or guaranteed
by the government of the United States or its agencies, or
instrumentalities and repurchase agreement collateralized by such
U.S. government securities.
The South Carolina Municipal Bond Fund will not purchase securities
if, as a result of such purchase, 25% or more of the value of its
total assets would be invested in any one industry, or in industrial
development bonds or other securities, the interest upon which is
paid from revenues of similar types of projects . The Fund may
invest as temporary investments more than 25% of the value of its
assets in cash or cash items, securities issued or guaranteed by the
U.S. government, its agencies, or instrumentalities, or instruments
secured by these money market instruments, such as repurchase
agreements.
Lending Cash or Securities
The Equity Fund, Growth & Income Fund and Special Values Fund will
not lend any of their assets except portfolio securities, the market
value of which do not exceed one-third of the value of a Fund's
total assets.
The Quantitative Equity Fund and Emerging Markets Fund will not lend
any of their assets except portfolio securities.
This shall not prevent the above Funds from purchasing or holding
U.S. government obligations, money market instruments, demand master
notes, bonds, debentures, notes, certificates of indebtedness, or
other debt securities, entering into repurchase agreements, or
engaging in other transactions where permitted by each Fund's
investment objective, policies, and limitations.
The Equity Index Fund will not lend any of its assets except
portfolio securities, the market value of which does not exceed
one-third of the value of the Fund's total assets. This shall not
prevent the purchase or holding of corporate or government bonds,
debentures, notes, certificates of indebtedness or other debt
securities of an issuer, repurchase agreements, or engaging in other
transactions where permitted by the Fund's investment objective,
policies and limitations.
The Balanced Fund, Fixed Income Fund, Intermediate Fixed Income Fund
and Short-Term Fixed Income Fund will not lend any of their assets,
except portfolio securities up to one-third of the value of their
total assets. This shall not prevent a Fund from purchasing or
holding U.S. government obligations, money market instruments,
variable rate demand notes, bonds, debentures, notes, certificates
of indebtedness, or other debt securities, entering into repurchase
agreements, or engaging in other transactions where permitted by the
Funds' investment objectives, policies, and limitations.
The Georgia Municipal Bond Fund, North Carolina Municipal Bond Fund,
and Virginia Municipal Bond Fund will not lend any assets except
portfolio securities. The Funds may, however, acquire publicly or
non-publicly issued municipal bonds or temporary investments or
enter into repurchase agreements in accordance with each Fund's
investment objective, policies, limitations and the Trust's
Declaration of Trust.
The South Carolina Municipal Bond Fund will not lend any of its
assets except portfolio securities up to one-third of the value of
its total assets. The Fund may, however, acquire publicly or
non-publicly issued municipal bonds or temporary investments or
enter into repurchase agreements in accordance with its investment
objective, policies, and limitations or the Trust's Declaration of
Trust.
Investing in Restricted Securities
The South Carolina Municipal Bond Fund will not invest more than 10%
of the value of its net assets in securities subject to restrictions
on resale under the Securities Act of 1933.
Dealing in Puts and Calls
The South Carolina Municipal Bond Fund will not buy or sell puts,
calls, straddles, spreads, or any combination of these.
The above investment limitations cannot be changed without shareholder
approval. The following limitations, however, may be changed by the Trustees
without shareholder approval. Shareholders will be notified before any material
change in these limitations becomes effective.
Investing in Securities of Other Investment Companies
The Funds will limit their investment in other investment companies
to not more than 3% of the total outstanding voting stock of any
investment company, will invest no more than 5% of their total
assets in any one investment company, and will invest no more than
10% of their total assets in investment companies in general,
unless, they are permitted to exceed these limitations by action of
the SEC. The Funds will purchase securities of closed-end investment
companies only in open market transactions involving only customary
brokers' commissions. However, these limitations are not applicable
if the securities are acquired in a merger, consolidation,
reorganization, or acquisition of assets. It should be noted that
investment companies incur certain expenses such as custodian and
transfer agency fees, and therefore, any investment by a Fund in
shares of another investment company would be subject to such
duplicate expenses. The Funds will invest in other investment
companies primarily for the purpose of investing their short-term
cash on a temporary basis.
However, the Equity Index Fund may invest in Standard & Poor's
Depository Receipts (SPDRs), which represent interests in the
portfolio of securities held by a unit investment trust, a type of
investment company. SPDRs trade like shares of common stock on the
American Stock Exchange and are intended to provide investment
results that generally correspond to the price and yield performance
of the S&P 500 Index. The Fund's purchase of SPDRs are subject to
the 3%, 5% and 10% limitations described above and secondary market
purchases and sales are subject to ordinary brokerage commissions.
The Funds have a present intention of investing no more than 5% of
their total assets in investment companies during the current fiscal
year.
Investing in Restricted Securities
The Funds will not invest more than 10% of their total assets in
securities subject to restrictions on resale under the Securities
Act of 1933, except for certain restricted securities which meet the
criteria for liquidity as established by the Trustees.
Investing in Illiquid Securities
The Funds will not invest more than 15% of their net assets in
securities which are illiquid, including repurchase agreements
providing for settlement in more than seven days after notice,
over-the-counter options, non-negotiable time deposits with
maturities over seven days, and certain securities not determined
under guidelines established by the Trustees to be liquid.
Investing in Put Options
The Funds (except Georgia Municipal Bond Fund, North Carolina
Municipal Bond Fund, South Carolina Municipal Bond Fund, and
Virginia Municipal Bond Fund) will not purchase put options on
securities, other than put options on stock indices, unless the
securities are held in a Fund's portfolio and not more than 5% of
the value of the Fund's total assets would be invested in premiums
on open put option positions.
The Georgia Municipal Bond Fund, North Carolina Municipal Bond Fund,
South Carolina Municipal Bond Fund, and Virginia Municipal Bond Fund
will not buy or sell puts, calls, straddles, spreads, or any
combination of these.
Writing Covered Call Options
The Funds will not write call options on securities unless the
securities are held in a Fund's portfolio or unless a Fund is
entitled to them in deliverable form without further payment or
after segregating cash in the amount of any further payment.
Investing in Warrants
The Funds will not invest more than 5% of their net assets in
warrants. No more than 2% of a Fund's net assets, to be included
within the overall 5% limit on investments in warrants, may be
warrants which are not listed on the New York Stock Exchange or the
American Stock Exchange.
Purchasing Securities to Exercise Control
The Funds will not purchase securities of a company for purposes of
exercising control or management.
Arbitrage Transactions
The Funds will not enter into transactions for the purpose of
engaging in arbitrage.
Except with respect to borrowing money, if a percentage limitation is
adhered to at the time of investment, a later increase or decrease in percentage
resulting from any change in value or net assets will not result in a violation
of such restriction.
For purposes of its policies and limitations, the Funds consider
certificates of deposit and demand and time deposits issued by a U.S. branch of
a domestic bank or savings association, having capital, surplus, and undivided
profits in excess of $100,000,000 at the time of deposit, to be "cash items."
The Funds did not borrow money in excess of 5% of the value of their total
assets during the last fiscal year and has no present intent to do so in the
coming fiscal year.
<PAGE>
The Wachovia Funds and The Wachovia Municipal Funds Management
Officers and Trustees
Officers and Trustees of the Trusts are listed with their principal
occupations, birthdates, and present positions. Except as listed below, none of
the Trustees or Officers are affiliated with Wachovia Bank, N.A., Federated
Investors, Federated Securities Corp., Federated Services Company, or Federated
Administrative Services.
James A. Hanley
4272 Sanctuary Way
Bonita Springs, FL
August 13, 1931
Trustee
Retired; Vice President and Treasurer, Abbott Laboratories (health care
products) (until 1992).
Samuel E. Hudgins
715 Whitemore Court, N.W.
Atlanta, GA
March 4, 1929
Trustee
Independent Consultant; President, Percival Hudgins & Company, LLC (investment
bankers/financial consultants) (until September 1997); Director, Atlantic
American Corporation (insurance holding company).
J. Berkley Ingram, Jr.
114-L Reynolda Village
Winston-Salem, NC
April 17, 1924
Trustee
Real estate investor and partner; formerly, Vice Chairman, Massachusetts Mutual
Life Insurance Company.
D. Dean Kaylor
2835 Greenbriar
Harbor Springs, MI
June 29, 1930
Trustee
Retired; Executive Vice President and Chief Financial Officer, NBD Bank, N.A.
and NBD Bancorp, Inc. (bank and bank holding company) (until
1990).
Charles S. Way, Jr.*
211 King Street
Suite 300
Charleston, SC
December 18, 1937
Trustee
President and CEO, The Beach Company and its various affiliated companies and
partnerships.
<PAGE>
John W. McGonigle
Federated Investors Tower
Pittsburgh, PA
October 26, 1938
President and Treasurer
President and Chief Executive Officer, Federated Investors Management Company;
Executive Vice President, Secretary, General Counsel, and Trustee, Federated
Investors; Trustee, Federated Advisers, Federated Management, Federated
Research, and Federated Services Company; and Director, Federated Securities
Corp.
Charles L. Davis, Jr.
Federated Investors Tower
Pittsburgh, PA
March 23, 1960
Vice President and Assistant Treasurer
Vice President, Federated Services Company.
Peter J. Germain
Federated Investors Tower
Pittsburgh, PA
September 3, 1959
Secretary
Senior Vice President and Director of Proprietary Funds Services, Federated
Services Company; formerly, Senior Corporate Counsel, Federated Services
Company.
* This Trustee is deemed to be an "interested person" as defined in the
Investment Company Act of 1940.
Fund Ownership
Officers and Trustees own less than 1% of each Fund's outstanding shares.
The following list indicates the beneficial ownership of shareholders who
are the beneficial owners of more than 5% of the outstanding shares of the
following Funds as of February 13, 1998:
Balanced Fund: Wachovia Bank, N.A., Winston-Salem, NC, on behalf of certain
underlying accounts, was owner of record of 1,272,100 Class A Shares (25.12%).
Wachovia Bank, N.A., Winston-Salem, NC, on behalf of certain underlying
accounts, was owner of record of 9,490,694 Class Y Shares (39.90%).
Equity Fund: Wachovia Bank, N.A., Winston-Salem, NC, on behalf of certain
underlying accounts, was owner of record of 482,220 Class A Shares (15.76%); and
Wachovia Securities, Inc., Winston-Salem, NC, on behalf of certain underlying
accounts, was owner of record of 155,476 Class A Shares (5.08%). Wachovia Bank,
N.A., Winston-Salem, NC, on behalf of certain underlying accounts, was owner of
record of 4,896,867 Class Y Shares (39.49%).
Fixed Income Fund: Wachovia Bank, N.A., Winston-Salem, NC, on behalf of certain
underlying accounts, was owner of record of 375,322 Class A Shares (30.23%);
Wachovia Securities, Inc., Winston-Salem, NC, on behalf of certain underlying
accounts, was owner of record of 115,924 Class A Shares (9.34%); and Delaware
Management Trust, Dalton, GA, on behalf of certain underlying accounts, was
owner of record of 70,102 Class A Shares (5.65%). Wachovia Securities, Inc.,
Winston-Salem, NC, on behalf of certain underlying accounts, was owner of record
of 14,947 Class B Shares (71.68%). Wachovia Bank, N.A., Winston-Salem, NC, on
behalf of certain underlying accounts, was owner of record of 3,981,522 Class Y
Shares (20.25%).
Equity Index Fund: Wachovia Bank, N.A., Winston-Salem, NC, on behalf of certain
underlying accounts, was owner of record of 1,145,063 Class A Shares (34.56%).
Wachovia Bank, N.A., Winston-Salem, NC, on behalf of certain underlying
accounts, was owner of record of 9,184,818 Class Y Shares (69.96%).
Short-Term Fixed Income Fund: Wachovia Bank, N.A., Winston-Salem, NC, on behalf
of certain underlying accounts, was owner of record of 793,160 Class A Shares
(73.09%). Wachovia Bank, N.A., Winston-Salem, NC, on behalf of certain
underlying accounts, was owner of record of 7,200,825 Class Y Shares (72.77%).
Special Values Funds: Wachovia Bank, N.A., Winston-Salem, NC, on behalf of
certain underlying accounts, was owner of record of 237,541 Class A Shares
(8.12%); and Morgan Stanley Trust Company, Brooklyn, NY, on behalf of certain
underlying accounts, owner of record of 217,234 Class A Shares (7.42%). Wachovia
Bank, N.A., Winston-Salem, NC, on behalf of certain underlying accounts, was
owner of record of 2,363,219 Class Y Shares (46.47%).
Quantitative Equity Fund: Wachovia Bank, N.A., Winston-Salem, NC, on behalf of
certain underlying accounts, was owner of record of 334,689 Class A Shares
(14.49%). Wachovia Bank, N.A., Winston-Salem, NC, on behalf of certain
underlying accounts, was owner of record of 6,683,256 Class Y Shares (61.28%).
Emerging Markets Fund: Wachovia Bank, N.A., Winston-Salem, NC, on behalf of
certain underlying accounts, was owner of record of 3,684,324 Class Y Shares
(25.84%).
Georgia Municipal Bond Fund: Wachovia Bank, N.A., Winston-Salem, NC, on behalf
of certain underlying accounts, was owner of record of 419,058 Class Y Shares
(35.16%).
North Carolina Municipal Bond Fund: Wachovia Securities, Inc., Winston-Salem,
NC, on behalf of certain underlying accounts, was owner of record of 54,950
Class A Shares (5.91%). Wachovia Bank, N.A., Winston-Salem, NC, on behalf of
certain underlying accounts, was owner of record of 234,962 Class Y Shares
(5.75%).
Trustees Compensation
NAME AND TOTAL COMPENSATION PAID
POSITION WITH THE TO THE TRUSTEES FROM THE TRUSTS
TRUST AND FUND COMPLEX*+#
- -------------------------------------------------------------------------------
James A. Hanley, $28,800
Trustee
Samuel E. Hudgins, $28,800
Trustee
J. Berkley Ingram, Jr., $24,000
Trustee
D. Dean Kaylor, $24,000
Trustee
Charles S. Way, Jr., $24,000
Trustee
- -------------------------------------------------------------------------------
*Information is furnished for the fiscal year ended November 30, 1997.
+The total compensation is paid by The Wachovia Funds, which, at November
30, 1997, was comprised of twelve portfolios and The Wachovia Municipal Funds,
which was comprised of three portfolios.
#The Fund Complex was, at November 30, 1997, comprised of 15 portfolios.
Trustee Liability
The Trust's Declaration of Trust provides that the Trustees are not liable
for errors of judgment or mistakes of fact or law. However, they are not
protected against any liability to which they would otherwise be subject by
reason of willful misfeasance, bad faith, gross negligence, or reckless
disregard of the duties involved in the conduct of their office.
Investment Advisory Services
Adviser to the Funds
Investment decisions for The Wachovia Funds and The Wachovia Municipal
Funds are made by Wachovia Asset Management, a business unit of Wachovia Bank,
N.A. (the "Adviser").
Twin Capital Management, Inc. ("Twin Capital") serves as the sub-adviser
to the Quantitative Equity Fund under the terms of an investment sub-advisory
agreement between the Adviser and Twin Capital. Twin Capital, incorporated as a
Pennsylvania corporation in 1989, is a registered investment adviser under the
Investment Advisers Act of 1940.
The Adviser shall not be liable to the Trust, a Fund or any shareholder of
the Funds for any losses that may be sustained in the purchase, holding, or sale
of any security, or for anything done or omitted by it, except acts or omissions
involving willful misfeasance, bad faith, gross negligence, or reckless
disregard of the duties imposed upon it by its contracts with the Trusts.
Because of the internal controls maintained by Wachovia Bank to restrict
the flow of non-public information, Fund investments are typically made without
any knowledge of Wachovia Bank's or its affiliates' lending relationships with
an issuer.
Advisory and Sub-Advisory Fees
For its advisory services, the Adviser receives an annual investment
advisory fee as described in the prospectuses. The following shows all
investment advisory fees incurred by the Funds and the amounts of those fees
that were voluntarily waived. Twin Capital receives an annual sub-advisory fee,
payable solely by the Adviser, as described in the prospectuses.
Year Amount Year Ended Amount Year Ended Amount
Ended Waived-199Nov. 30, Waived-19Nov. 30, Waived-1995
Nov. 30, 1996 1995
Fund Name 1997
Equity Fund $1,230,414$119,625 $1,003,098 $107,888 $754,597 $76,995
Quantitative $1,345,445$146,406 $984,868 $100,131 $728,298 $89,503
Equity Fund
Equity Index $808,170 $61,816 $616,302 $88,233 $545,415 $97,171
Fund
Special Value $766,650 $15,052 $324,764 $76,655 $160,840 $59,075
Fund
Emerging $1,604,745$0 $1,057 $371,458** $60,903
Markets Fund $1,006,829
Balanced Fund $1,986,263$446,571 $1,588,214 $1,394,516 $316,346
$352,189
Fixed Income $1,123,245$205,339 $1,047,666 $177,507 $957,389 $159,425
Fund
Short-Term $632,994 $224,696 $649,181 $211,508 $768,294 $220,989
Fixed Income
Fund
Georgia $113,578 $113,578 $ 84,212 $78,762 $49,436** $40,609
Municipal Bond
Fund
North Carolina $365,397 $208,414 $210,288 $77,710** $63,053
Municipal Bond $176,041
Fund
South Carolina $767,628 $489,271 $743,153 $500,413 $639,686 $469,407
Municipal Bond
Fund
**Represents the period from December 26, 1994 (date of initial public
investment) to November 30, 1995.
Brokerage Transactions
When selecting brokers and dealers to handle the purchase and sale of
portfolio instruments, the Adviser looks for prompt execution of the order at a
favorable price. In working with dealers, the Adviser will generally use those
who are recognized dealers in specific portfolio instruments, except when a
better price and execution of the order can be obtained elsewhere. The Adviser
makes decisions on portfolio transactions and selects brokers and dealers
subject to guidelines established by the Trustees. The Adviser may select
brokers and dealers who offer brokerage and research services. These services
may be furnished directly to a Fund or to the Adviser and may include: advice as
to the advisability of investing in securities; security analysis and economic
reports; economic studies; industry studies; receipt of quotations for portfolio
evaluations; and similar services. Research services provided by brokers and
dealers may be used by the Adviser or its affiliates in advising a Fund and
other accounts. To the extent that receipt of these services may supplant
services for which the Adviser or its affiliates might otherwise have paid, it
would tend to reduce its expenses. The Adviser and its affiliates exercise
reasonable business judgment in selecting brokers who offer brokerage and
research transactions. They determine in good faith that commissions charged by
such persons are reasonable in relationship to the value of the brokerage and
research services provided. For the fiscal years ended November 30, 1997, 1996,
and 1995, the Equity Fund paid $197,705, $252,493, and $176,610, respectively,
in commissions on brokerage transactions. For the fiscal years ended November
30, 1997, 1996, and 1995, the Quantitative Equity Fund paid $136,576, $165,434,
and $98,771, respectively, in commissions on brokerage transactions. For the
fiscal years ended November 30, 1997, 1996, and 1995, the Equity Index Fund paid
$12,595, $15,333, and $28,337, respectively, in commissions on brokerage
transactions. For the fiscal years ended November 30, 1997, 1996, and 1995, the
Special Values Fund paid $206,032, $155,248, and $57,052, respectively, in
commissions on brokerage transactions. For the fiscal year ended November 30,
1997, 1996 and 1995, the Emerging Markets Fund paid $846,113, $538,172, and
$437,055, respectively, in commissions on brokerage transactions. For the fiscal
years ended November 30, 1997, 1996, and 1995, the Balanced Fund paid $238,931,
$269,729, and $140,316, respectively, in commissions on brokerage transactions.
For the fiscal years ended November 30, 1997, 1996, and 1995, the Fixed Income
Fund, Short-Term Fixed Income Fund, Georgia Municipal Bond Fund, North Carolina
Municipal Bond Fund and South Carolina Municipal Bond Fund, paid no commissions
on brokerage transactions.
As of November 30, 1997, the Balanced Fund owned $13,734,485 of securities
issued by Goldman Sachs Group, LP, one of its regular broker/dealers, which
derives more than 15% of its gross revenues from securities-related activities.
As of November 30, 1997, the Fixed Income Fund owned $4,264,553 of
securities issued by Goldman Sachs Group, LP, one of its regular broker/dealers,
which derive more than 15% of its gross revenues from securities-related
activities.
As of November 30, 1997, the Short-Term Fixed Income Fund owned $5,040,320
of securities issued by Merrill Lynch & Co., one of its regular broker/dealers,
which derives more than 15% of its gross revenues from securities-related
activities.
Although investment decisions for the Funds are made independently from
those of the other accounts managed by the Adviser, investments of the type the
Funds may make may also be made by those other accounts. When a Fund and one or
more other accounts managed by the Adviser are prepared to invest in, or desire
to dispose of, the same security, available to investments or opportunities for
sales will be allocated in a manner believed by the Adviser to be equitable to
each. In some cases, this procedure may adversely affect the price paid or
received by a Fund or the size of the position obtained or disposed of by a
Fund. In other cases, however, it is believed that coordination and the ability
to participate in volume transactions will be to the benefit of a participating
Fund.
Other Services
Administration
Federated Administrative Services ("FAS"), a subsidiary of Federated
Investors, provides administrative personnel and services to the Funds for a fee
as described in the prospectuses. The following shows all fees earned by FAS and
the amounts of those fees that were voluntarily waived:
Year Amount Year Ended Amount Year Ended Amount
Fund Name Ended Waived-199Nov. 30, Waived-19Nov. 30, Waived-1995
Nov. 30, 1996 1995
1997
Equity Fund $147,147 $0 $124,288 $0 $96,714 $0
Quantitative $160,933 $0 $121,949 $0 $93,391 $0
Equity Fund
Equity Index $225,519 $0 $178,161 $0 $163,299 $0
Fund
Special Value $80,170 $0 $35,122 $0 $75,000 $56,955
Fund
Emerging $134,379 $0 $87,231 $0 $75,000** $41,860
Markets Fund
Balanced Fund $237,616 $0 $196,750 $0 $178,968 $46,191
Fixed Income $156,900 $0 $151,450 $0 $143,274 $0
Fund
Short-Term $96,093 $0 $102,429 $0 $125,580 $0
Fixed Income
Fund
Georgia $12,683 $0 $9,732 $0 $50,000** $44,142
Municipal Bond
Fund
North Carolina $40,794 $0 $24,266 $0 $50,000** $40,270
Municipal Bond
Fund
South Carolina $85,740 $0 $86,019 $0 $76,587 $0
Municipal Bond
Fund
**Represents the period from December 26, 1994 (date of initial public
investment) to November 30, 1995.
Custodian
Wachovia Bank, N.A., Winston-Salem, North Carolina, is custodian (the
"Custodian") for the securities and cash of the Funds. Under the Custodian
Agreement, the Custodian holds the Funds' portfolio securities in safekeeping
and keeps all necessary records and documents relating to its duties. For the
services to be provided to the Trusts pursuant to the Custodian Agreement, the
Trusts pay the Custodian an annual fee based upon the average daily net assets
of the Funds and which is payable monthly. The Custodian will also charge
transaction fees and out-of-pocket expenses.
Transfer Agent
Federated Services Company, Pittsburgh, Pennsylvania a subsidiary of
Federated Investors, is transfer agent (the "Transfer Agent") for the shares of
the Funds, and dividend disbursing agent for the Funds. The Transfer Agent also
provides certain accounting and recordkeeping services with respect to the
Funds' portfolio investments.
Legal Services
Legal services for the Funds are provided by Kirkpatrick & Lockhart LLP,
Washington, D.C. Piper & Marbury L.L.P., Washington, D.C., serves as counsel to
the independent Trustees.
Independent Auditors
The independent auditors are Ernst & Young LLP, Pittsburgh, Pennsylvania.
Distribution Plan (Class B Shares Only) and Shareholder Services Plan (Class A
Shares and Class B Shares Only)
These arrangements permit the payment of fees to financial institutions,
the distributor, and Federated Shareholder Services Company, to stimulate
distribution activities and to cause services to be provided to shareholders by
a representative who has knowledge of the shareholders' particular circumstances
and goals. These activities and services may include, but are not limited to:
marketing efforts; providing office space, equipment, telephone facilities, and
various clerical, supervisory, computer, and other personnel as necessary or
beneficial to establish and maintain shareholder accounts and records;
processing purchase and redemption transactions and automatic investments of
client account cash balances; answering routine client inquiries; and assisting
clients in changing dividend options, account designations, and addresses.
By adopting Distribution Plans, the Trustees expect that the Funds will be
able to achieve a more predictable flow of cash for investment purposes and to
meet redemptions. This will facilitate more efficient portfolio management and
assist each Fund in pursuing its investment objective. By identifying potential
investors whose needs are served by a Fund's objectives, and properly servicing
these accounts, it may be possible to curb sharp fluctuations in rates of
redemptions and sales.
Other benefits, which may be realized under either arrangement, may
include: (1) providing personal services to shareholders; (2) investing
shareholder assets with a minimum of delay and administrative detail; (3)
enhancing shareholder recordkeeping systems; and (4) responding promptly to
shareholders' requests and inquiries concerning their accounts.
For the fiscal year ended November 30, 1997, payments in the amount of
$16,418 were made pursuant to the Plan on behalf of Equity Fund Class B Shares.
In addition, for the fiscal year the Equity Fund Class A Shares paid shareholder
service fees in the amount of $62,655, and Class B Shares paid $5,473.
For the fiscal year ended November 30, 1997, payments in the amount of
$25,574 were made pursuant to the Plan on behalf of Quantitative Equity Fund. In
addition, for the fiscal year the Quantitative Equity Fund Class A Shares paid
shareholder service fees in the amount of $54,409, and Class B Shares paid
$8,525.
For the fiscal year ended November 30, 1997, the Equity Index Fund Class A
Shares paid shareholder service fees in the amount of $67,684.
For the fiscal year ended November 30, 1997, the Special Values Fund Class
A Shares paid shareholder service fees in the amount of $44,077.
For the fiscal year ended November 30, 1997, the Emerging Markets Fund
Class A Shares paid shareholder service fees in the amount of $17,112.
For the fiscal year ended November 30, 1997, payments in the amount of
$28,954 were made pursuant to the Plan on behalf of Balanced Fund. In addition,
for the fiscal year the Balanced Fund Class A Shares paid shareholder service
fees in the amount of $66,011, and Class B Shares paid $9,652.
For the fiscal year ended November 30, 1997, payments in the amount of
$919 were made pursuant to the Plan on behalf of Fixed Income Fund. In addition,
for the fiscal year the Fixed Income Fund Class A Shares paid shareholder
service fees in the amount of $13,137, and Class B Shares paid $306.
For the fiscal year ended November 30, 1997, the Short-Term Fixed Income
Fund Class A Shares paid shareholder service fees in the amount of $6,504.
For the fiscal year ended November 30, 1997, Georgia Municipal Bond Fund
Class A Shares paid shareholder service fees in the amount of $15,543.
For the fiscal year ended November 30, 1997, North Carolina Municipal Bond
Fund Class A Shares paid shareholder service fees in the amount of $27,427.
For the fiscal year ended November 30, 1997, South Carolina Municipal Bond
Fund Class A Shares paid shareholder service fees in the amount of $144,641.
The Class A Shares of the Growth & Income Fund, the Intermediate Fixed
Income Fund and the Virginia Municipal Bond Fund were not offered during the
fiscal year ending November 30, 1997.
Purchasing Fund Shares
Shares of a Fund are sold at net asset value plus an applicable sales
charge on days on which Wachovia Bank, the New York Stock Exchange and the
Federal Reserve Wire System are open for business.
Conversion to Federal Funds
It is each Fund's policy to be as fully invested as possible so that
maximum interest may be earned. To this end, all payments from shareholders must
be in federal funds or be converted into federal funds. Wachovia Bank acts as
the shareholders' agent in depositing checks and converting them to federal
funds.
Exchanging Securities for Fund Shares
A Fund may accept securities in exchange for Fund shares. A Fund will
allow such exchanges only upon the prior approval of the Fund and a
determination by the Fund and the Adviser that the securities to be exchanged
are acceptable.
Any securities exchanged must meet the investment objective and policies
of a Fund, must have a readily ascertainable market value, must be liquid, and
must not be subject to restrictions on resale. The market value of any
securities exchanged in any initial investment, plus any cash, must be at least
equal to the minimum investment in the Fund.
Securities accepted by a Fund will be valued in the same manner as the
Fund values its assets. The basis of the exchange will depend on the net asset
value of Fund shares on the day the securities are valued. One share of the Fund
will be issued for each equivalent amount of securities accepted.
Any interest earned on the securities prior to the exchange will be
considered in valuing the securities. All interest, dividends, subscription or
other rights attached to the securities become the property of the Fund, along
with the securities.
If an exchange is permitted, it will be treated as a sale for federal
income tax purposes. Depending upon the cost basis of the securities exchanged
for Fund shares, a gain or loss may be realized by the investor.
Determining Net Asset Value
Net asset value generally changes each day. The days on which net asset
value is calculated by a Fund are described in the prospectuses.
Dividend income is recorded on the ex-dividend date, except certain
dividends from foreign securities where the ex-dividend date may have passed,
are recorded as soon as a Fund is informed of the ex-dividend date.
Determining Market Value of Securities
The market values of a Fund's portfolio securities are determined as
follows:
o for equity securities, according to the last sale price on a
national securities exchange, if available;
o in the absence of recorded sales for listed equity securities,
according to the mean between the last closing bid and asked
prices;
o for unlisted equity securities, the latest bid prices;
o for bonds and other fixed income securities, as determined by an
independent pricing service;
o for short-term obligations, according to the mean between bid and
asked prices as furnished by an independent pricing service; or
o for all other securities, at fair value as determined in good
faith by the Trustees.
Prices provided by independent pricing services may be determined without
relying exclusively on quoted prices and may reflect: institutional trading in
similar groups of securities, yield, quality, coupon rate, maturity, type of
issue, trading characteristics, and other market data.
The Fund will value futures contracts, options and put options on
financial futures at their market values established by the exchanges at the
close of option trading on such exchanges, unless the Trustees determine in good
faith that another method of valuing option positions is necessary.
Redeeming Fund Shares
A Fund redeems shares at the next computed net asset value after the Fund
receives the redemption request. Redemption procedures are explained in the
prospectuses under "Redeeming Shares."
Redemption in Kind
Although each Fund intends to redeem shares in cash, it reserves the right
under certain circumstances to pay the redemption price in whole or in part by a
distribution of securities from the Fund's portfolio. To the extent available,
such securities will be readily marketable.
Redemption in kind will be made in conformity with applicable SEC rules,
taking such securities at the same value employed in determining net asset value
and selecting the securities in a manner the Trustees determine to be fair and
equitable.
Redemption in kind is not as liquid as a cash redemption. If redemption is
made in kind, shareholders receiving their securities and selling them before
their maturity could receive less than the redemption value of their securities
and could incur transaction costs.
The Trusts have elected to be governed by Rule 18f-1 under the 1940 Act
which obligates a Fund to redeem shares for any one shareholder in cash only up
to the lesser of $250,000 or 1% of the Fund's net asset value during any 90-day
period.
Massachusetts Business Trusts
Under certain circumstances, shareholders may be held personally liable
under Massachusetts law for acts or obligations of the Trusts. To protect
shareholders, the Trusts have filed legal documents with Massachusetts that
expressly disclaim the liability of shareholders for such acts or obligations of
the Trusts. These documents require notice of this disclaimer to be given in
each agreement, obligation, or instrument the Trusts or the Trustees enter into
or sign on behalf of a Fund.
In the unlikely event a shareholder is held personally liable for a
Trust's obligations on behalf of a Fund, the Trust is required by its
Declaration of Trust to use the property of the Fund to protect or compensate
the shareholder. On request, a Trust will defend any claim made and pay any
judgment against a shareholder of a Fund for any act or obligation of the Trust
on behalf of the Fund. Therefore, financial loss resulting from liability as a
shareholder of a Fund will occur only if the Trust cannot meet its obligations
to indemnify shareholders and pay judgments against them from the assets of the
Fund.
Tax Status
The Funds' Tax Status
Each Fund expects to pay no federal income tax because it intends to meet
the requirements of Subchapter M of the Internal Revenue Code applicable to
regulated investment companies and to receive the special tax treatment afforded
to such companies. To qualify for this treatment, each Fund must, among other
requirements:
o derive at least 90% of its gross income from dividends, interest,
and gains from the sale of securities;
o invest in securities within certain statutory limits; and
o distribute to its shareholders at least 90% of its net income
earned during the year.
Federal income tax law requires the holder of a zero coupon convertible
security to recognize income with respect to the security prior to the receipt
of cash payments. To maintain its qualification as a regulated investment
company and to avoid liability of federal income taxes, a Fund will be required
to distribute income accrued with respect to zero coupon convertible securities
which it owns, and may have to sell portfolio securities (perhaps at
disadvantageous times) in order to generate cash to satisfy these distribution
requirements.
Shareholders' Tax Status
Shareholders of the Equity Fund, Quantitative Equity Fund, Growth & Income
Fund, Equity Index Fund, Special Values Fund, Emerging Markets Fund, Balanced
Fund, Fixed Income Fund, Intermediate Fixed Income Fund and Short-Term Fixed
Income Fund are subject to federal income tax on dividends received as cash or
additional shares. The dividends received deduction for corporations will apply
to ordinary income distributions to the extent the distribution represents
amounts that would qualify for the dividends received deduction to a Fund if the
Fund were a regular corporation, and to the extent designated by the Fund as so
qualifying. These dividends, and any short-term capital gains, are taxable as
ordinary income.
No portion of any income dividend income paid by the Georgia Municipal
Bond Fund, North Carolina Municipal Bond Fund, South Carolina Municipal Bond
Fund, and Virginia Municipal Bond Fund is eligible for the dividends received
deductions available to corporations.
Capital Gains
Long-term capital gains distributed to shareholders will be treated as
long-term capital gains regardless of how long shareholders have held the
shares.
Capital gains or losses may be realized by the Georgia Municipal Bond
Fund, North Carolina Municipal Bond Fund, South Carolina Municipal Bond Fund,
and Virginia Municipal Bond Fund on the sale of portfolio securities and as a
result of discounts from par value on securities held to maturity. Sales would
generally be made because of:
o the availability of higher relative yields;
o differentials in market values;
o new investment opportunities;
o changes in creditworthiness of an issuer; or
o an attempt to preserve gains or limit losses.
Distribution of long-term capital gains are taxed as such, whether they
are taken in cash or reinvested, and regardless of the length of time the
shareholder has owned the shares.
Total Return
The average annual total return is the average compounded rate of return
for a given period that would equate a $1,000 initial investment to the ending
redeemable value of that investment. The ending redeemable value is computed by
multiplying the number of shares owned at the end of the period by the net asset
value per share at the end of the period. The number of shares owned at the end
of the period is based on the number of shares purchased at the beginning of the
period with $1,000, less any applicable sales load, adjusted over the period by
any additional shares, assuming the reinvestment of all dividends and
distributions.
Cumulative total return reflects a Fund's total performance over a
specific period of time. This total return assumes and is reduced by the payment
of the maximum sales charge. The Funds' cumulative total returns are
representative of investment activity since a Fund's effective date.
Fund Name Class A Class A Class A
Shares Shares Shares
Average Average Average
Annual Annual Annual
Total Return Total Return Total Return
1-year 5-Year Since
Period* Period* Inception**
- -----------------------------------------------------
Equity Fund 14.79% --% 16.18%+
Quantitative 23.55% --% 21.74%#
Equity
Fund
Equity Index 21.84% --% 19.37%+
Fund
Special 27.08% --% 19.46%+
Values
Fund
Emerging (8.14)% --% 2.50%##
Markets
Fund
Balanced Fund 9.96% --% 12.62%+
Fixed Income 1.39% --% 4.74%+
Fund
Short-Term 2.48% --% 4.24%+
Fixed
Income Fund
Georgia 0.65% --% 6.52%##
Municipal
Bond Fund
North 0.61% --% 6.72%##
Carolina
Municipal
Bond Fund
South 1.25% 5.87% 6.73%###
Carolina
Municipal
Bond Fund
* For the fiscal year ended November 30, 1997 ** Start of performance + May 7,
1993 through November 30, 1997 ++ July 23, 1996 through November 30, 1997 #
March 25, 1994 through November 30, 1997 ## December 23, 1994 through November
30, 1997 ### January 11, 1991 through November 30, 1997
Fund Name Class B Class B Class Y Class Y
Shares Shares Shares Shares
Average Average Average Average
Annual Annual Annual Annual
Total Return Total Return Total Return Total Return
1-year Since 1-year Since
Period* Inception Period* Inception
- ------------------------------------------------------------------
Equity Fund 13.52% 26.54%++ 20.44% 30.86%++
Quantitative 23.05% 34.61%++ 29.60% 38.66%++
Equity
Fund
Equity Index N/A N/A 27.91% 37.28%++
Fund
Special N/A N/A 33.29% 37.02%++
Values
Fund
Emerging N/A N/A (3.64)% (4.20)%++
Markets
Fund
Balanced Fund 8.49% 18.63%++ 15.37% 22.94%++
Fixed Income (0.03)% 5.15% 6.38% 9.34%
Fund
Short-Term N/A N/A 5.33% 6.19%++
Fixed
Income Fund
Georgia N/A N/A 5.63% 7.40%++
Municipal
Bond Fund
North N/A N/A 5.57% 7.54%++
Carolina
Municipal
Bond Fund
South N/A N/A 6.23% 8.27%++
Carolina
Municipal
Bond Fund
* For the fiscal year ended November 30, 1997 ** Start of performance + May 7,
1993 through November 30, 1997 ++ July 23, 1996 through November 30, 1997 #
March 25, 1994 through November 30, 1997 ## December 23, 1994 through November
30, 1997 ### January 11, 1991 through November 30, 1997
<PAGE>
Yield
The yield for a Fund is determined each day by dividing the net investment
income per share (as defined by the SEC) earned by the Fund over a thirty-day
period by the maximum offering price per share of the Fund on the last day of
the period. This value is then annualized using semi-annual compounding. This
means that the amount of income generated during the thirty-day period is
assumed to be generated each month over a 12-month period and is reinvested
every six months. The yield does not necessarily reflect income actually earned
by a Fund because of certain adjustments required by the SEC and, therefore, may
not correlate to the dividends or other distributions paid to shareholders.
To the extent that financial institutions and broker/dealers charge fees
in connection with services provided in conjunction with an investment in a
Fund, the performance will be reduced for those shareholders paying those fees.
The Funds' yields for the thirty-day period ended November 30, 1997, were
as follows:
Fund Name Class A Shares Class B Shares Class Y Shares
------------------------------------------------------------------------------
Equity Fund 0.99% 0.30% 1.28%
Quantitative 1.03% 0.35% 1.32%
Equity Fund
Equity Index Fund 1.11% --% 1.41%
Special Values 0.50% --% 0.77%
Fund
Emerging Markets --% --% --%
Fund
Balanced Fund 2.81% 2.20% 3.06%
Fixed Income Fund 5.13% 4.62% 5.63%
Short-Term Fixed 4.89% --% 5.27%
Income Fund
Georgia Municipal 3.44% --% 3.85%
Bond Fund
North Carolina 3.49% --% 3.91%
Municipal Bond
Fund
South Carolina 3.95% --% 4.39%
Municipal Bond
Fund
Tax-Equivalent Yield
The tax-equivalent yield of a Fund is calculated similarly to the yield,
but is adjusted to reflect the taxable yield that the Fund would have had to
earn to equal its actual yield, assuming that income is 100% tax-exempt.
The Funds may also use a tax-equivalency table in advertising and sales
literature. The interest earned by the municipal bonds in a Fund's portfolio
generally remain free from federal regular income tax,* and is often free from
state and local taxes as well. As the tables below indicate, a "tax-free"
investment is an attractive choice for investors, particularly in times of
narrow spreads between tax-free and taxable yields.
<PAGE>
Georgia Municipal Bond Fund Class A Shares' tax-equivalent yield for the
thirty-day period ended November 30, 1997 was 4.99%, assuming a 31% tax bracket.
Georgia Municipal Bond Fund Class Y Shares' tax-equivalent yield for the
thirty-day period ended November 30, 1997 was 5.58%, assuming a 31% tax bracket.
- -------------------------------------------------------------------------------
TAXABLE YIELD EQUIVALENT FOR 1998
STATE OF GEORGIA
- -------------------------------------------------------------------------------
TAX BRACKET:
FEDERAL COMBINED 15.00% 28.00% 31.00% 36.00% 39.60%
COMBINED FEDERAL 21.00% 34.00% 37.00% 42.00% 45.60%
AND STATE
- -------------------------------------------------------------------------------
JOINT RETURN $1- $40,101- $96,901- $147,701- OVER
40,100 96,900 147,700 263,750 $263,750
SINGLE RETURN $1- $24,001- $58,151- $121,301- OVER
24,000 58,150 121,300 263,750 $263,750
- -------------------------------------------------------------------------------
Tax-Exempt Yield Taxable Yield Equivalent
- -------------------------------------------------------------------------------
1.50% 1.90% 2.27% 2.38% 2.59% 2.76%
2.00% 2.53% 3.03% 3.17% 3.45% 3.68%
2.50% 3.16% 3.79% 3.97% 4.31% 4.60%
3.00% 3.80% 4.55% 4.76% 5.17% 5.51%
3.50% 4.43% 5.30% 5.56% 6.03% 6.43%
4.00% 5.06% 6.06% 6.35% 6.90% 7.35%
4.50% 5.70% 6.82% 7.14% 7.76% 8.27%
5.00% 6.33% 7.58% 7.94% 8.62% 9.19%
5.50% 6.96% 8.33% 8.73% 9.48% 10.11%
6.00% 7.59% 9 .09% 9.52% 10.34% 11.03%
6.50% 8.23% 9.85% 10.32% 11.21% 11.95%
7.00% 8.86% 10.61% 11.11% 12.07% 12.87%
<PAGE>
North Carolina Municipal Bond Fund Class A Shares' tax-equivalent yield
for the thirty-day period ended November 30, 1997 was 5.06%, assuming a 31% tax
bracket.
North Carolina Municipal Bond Fund Class Y Shares' tax-equivalent yield
for the thirty-day period ended November 30, 1997 was 5.67%, assuming a 31% tax
bracket.
- -------------------------------------------------------------------------------
TAXABLE YIELD EQUIVALENT FOR 1998
STATE OF NORTH CAROLINA
- -------------------------------------------------------------------------------
TAX BRACKET:
FEDERAL COMBINED 15.00% 28.00% 31.00% 36.00% 39.60%
COMBINED FEDERAL 22.00% 35.00% 38.75% 43.75% 47.35%
AND STATE
- -------------------------------------------------------------------------------
JOINT RETURN $1- $40,101- $96,901- $147,701- OVER
40,100 96,900 147,700 263,750 $263,750
SINGLE RETURN $1- $24,001- $58,151- $121,301- OVER
24,000 58,150 121,300 263,750 $263,750
- -------------------------------------------------------------------------------
Tax-Exempt Yield Taxable Yield Equivalent
- -------------------------------------------------------------------------------
3.50% 4.49% 5.38% 5.71% 6.22% 6.65%
4.00% 5.13% 6.15% 6.53% 7.11% 7.60%
4.50% 5.77% 6.92% 7.35% 8.00% 8.55%
5.00% 6.41% 7.69% 8.16% 8.89% 9.50%
5.50% 7.05% 8.46% 9.98% 9.78% 10.45%
6 .00% 7.69% 9.23% 9.80% 10.67% 11.40%
6.50% 8.33% 10.00% 10.61% 11.56% 12.35%
7.00% 8.97% 10.77% 11.43% 12.44% 13.30%
7.50% 9.62% 11.54% 12.24% 13.33% 14 .25%
8.00% 10.26% 12.31% 13.06% 14.22% 15.19%
<PAGE>
South Carolina Municipal Bond Fund Class A Shares' tax-equivalent yield
for the thirty-day period ended November 30, 1997 was 5.72%, assuming a 31% tax
bracket.
South Carolina Municipal Bond Fund Class Y Shares' tax-equivalent yield
for the thirty-day period ended November 30, 1997 was 6.36%, assuming a 31% tax
bracket.
- -------------------------------------------------------------------------------
TAXABLE YIELD EQUIVALENT FOR 1998
STATE OF SOUTH CAROLINA
- -------------------------------------------------------------------------------
TAX BRACKET:
FEDERAL COMBINED 15.00% 28.00% 31.00% 36.00% 39.60%
COMBINED FEDERAL 22.00% 35.00% 38.00% 43.00% 46.60%
AND STATE
- -------------------------------------------------------------------------------
JOINT RETURN $1- $40,101- $96,901- $147,701- OVER
40,100 96,900 147,700 263,750 $263,750
SINGLE RETURN $1- $24,001- $58,151- $121,301- OVER
24,000 58,150 121,300 263,750 $263,750
- -------------------------------------------------------------------------------
Tax-Exempt Yield Taxable Yield Equivalent
- -------------------------------------------------------------------------------
2.50% 3.21% 3.85% 4.03% 4.39% 4.68%
3.00% 3.85% 4.62% 4.84% 5.26% 5.62%
3.50% 4.49% 5.38% 5.65% 6.14% 6.55%
4.00% 5.13% 6.15% 6.45% 7.02% 7.49%
4.50% 5.77% 6.92% 7.26% 7.89% 8.43%
5 .00% 6.41% 7.69% 8.06% 8.77% 9.36%
5.50% 7.05% 8.46% 8.87% 9.65% 10.30%
6 .00% 7.69% 9.23% 9.68% 10.53% 11.24%
6.50% 8.33% 10.00% 10.48% 11.40% 12.17%
7.00% 8.97% 10.77% 11.29% 12.28% 13.11%
<PAGE>
- -------------------------------------------------------------------------------
TAXABLE YIELD EQUIVALENT FOR 1998
COMMONWEALTH OF VIRGINIA
- -------------------------------------------------------------------------------
TAX BRACKET:
FEDERAL COMBINED 15.00% 28.00% 31.00% 36.00% 39.60%
COMBINED FEDERAL 22.00% 35.00% 38.00% 43.00% 46.60%
AND STATE
- -------------------------------------------------------------------------------
JOINT RETURN $1- $40,101- $96,901- $147,701- OVER
40,100 96,900 147,700 263,750 $263,750
SINGLE RETURN $1- $24,001- $58,151- $121,301- OVER
24,000 58,150 121,300 263,750 $263,750
- -------------------------------------------------------------------------------
Tax-Exempt Yield Taxable Yield Equivalent
- -------------------------------------------------------------------------------
2.50% 3.21% 3.85% 4.03% 4.39% 4.68%
3.00% 3.85% 4.62% 4.84% 5.26% 5.62%
3.50% 4.49% 5.38% 5.65% 6.14% 6.55%
4.00% 5.13% 6.15% 6.45% 7.02% 7.49%
4.50% 5.77% 6.92% 7.26% 7.89% 8.43%
5 .00% 6.41% 7.69% 8.06% 8.77% 9.36%
5.50% 7.05% 8.46% 8.87% 9.65% 10.30%
6 .00% 7.69% 9.23% 9.68% 10.53% 11.24%
6.50% 8.33% 10.00% 10.48% 11.40% 12.17%
7.00% 8.97% 10.77% 11.29% 12.28% 13.11%
Note: The maximum marginal tax rate for each bracket was used in
calculating the taxable yield equivalent. Furthermore, additional state and
local taxes paid on comparable taxable investments were not used to increase
federal deductions.
The charts above are for illustrative purposes only. They are not
indicators of past or future performance of the Funds.
* Some portion of a Fund's income may be subject to the federal alternative
minimum tax and state and local taxes.
Performance Comparisons
A Fund's performance depends upon such variables as:
o portfolio quality;
o average portfolio maturity;
o type of instruments in which the portfolio is invested;
o changes in interest rates and market value of portfolio securities;
o changes in the Fund's expenses;
o the relative amount of Fund cash flow; and
o various other factors.
A Fund's performance fluctuates on a daily basis largely because net
earnings and the maximum offering price (i.e., net asset value plus any sales
charge) per share fluctuate daily. Both net earnings and offering price per
share are factors in the computation of yield and total return.
Investors may use financial publications and/or indices to obtain a more
complete view of the Fund's performance. When comparing performance, investors
should consider all relevant factors, such as the composition of any index used,
prevailing market conditions, portfolio compositions of other funds, and methods
used to value portfolio securities and compute offering price. The financial
publications and/or indices which a Fund uses in advertising may include:
o Lipper Analytical Services, Inc. ranks funds in various fund
categories by making comparative calculations using total return.
Total return assumes the reinvestment of all capital gains
distributions and income dividends and takes into account any change
in maximum offering price over a specific period of time. From time
to time, a Fund will quote its Lipper ranking in advertising and
sales literature.
o Dow Jones Industrial Average ("DJIA") represents share prices of
selected blue-chip industrial corporations. The DJIA indicates daily
changes in the average price of stock of these corporations. Because
it represents the top corporations of America, the DJIA index is a
leading economic indicator for the stock market as a whole.
o Standard & Poor's Daily Stock Price Index of 500 Common Stocks (the
"S&P Index"), is a composite index of common stocks in industry,
transportation, and financial and public utility companies. In
addition, the S&P Index assumes reinvestment of all dividends paid
by stocks listed on the S&P Index. Taxes due on any of these
distributions are not included, nor are brokerage or other fees
calculated in the S&P Index figures.
o Russell 2000 Index is a broadly diversified index consisting of
approximately 2,000 small capitalization common stocks that can be
used to compare the total returns of funds whose portfolios are
invested primarily in small capitalization common stocks.
o Europe, Australia, and Far East ("EAFE") is a market capitalization
weighted foreign securities index, which is widely used to measure
the performance of European, Australian, New Zealand and Far Eastern
stock markets. The index covers approximately 1,020 companies drawn
from 18 countries in the above regions. The index values its
securities daily in both U.S. dollars and local currency and
calculates total returns monthly. EAFE U.S. dollar total return is a
net dividend figure less Luxembourg withholding tax. The EAFE is
monitored by Capital International, S.A., Geneva, Switzerland.
o International Finance Corporation ("IFC") Emerging Market Indices
are market capitalization-weighted foreign securities indices,
which are used to measure the performance of emerging markets (as
defined by the World Bank) in Europe, Asia, Latin America and the
Middle East/Africa. The IFC calculates both a "Global" and an
"Investable" version of its index. The "Global" version includes
companies and countries with regard to their access to foreign
investors. The "Investable" Index adjusts company and market
weights to reflect their accessibility to foreign investors. The
IFC Global Index currently covers approximately 1,200 securities
in 25 markets; the IFC Investable Index currently covers
approximately 900 securities in 24 markets. Both indices are
presently calculated in local currency and in US dollars, without
dividends and with gross dividends reinvested (e.g., before
withholding taxes). The IFC is a subsidiary of the World Bank,
and has been collecting data on emerging markets since 1975.
o Morgan Stanley Capital International ("MSCI") Emerging Markets
Indices are market capitalization-weighted foreign securities
indices, which are used to measure the performance of emerging
markets (as defined by the World Bank) in Europe, Asia, Latin
America and the Middle East/Africa. MSCI calculates a "Global" and a
"Free" version of its index. The "Global" version includes companies
and countries without regard to their access to foreign investors.
The "Free" Index adjusts company and market weights to reflect their
accessibility to foreign investors. The MSCI Global Index currently
covers approximately 630 securities in 20 markets; the MSCI Free
Index currently covers approximately 560 securities in 19 markets.
Both indices are presently calculated in local currency and in US
dollars, without dividends and with gross dividends reinvested
(e.g., before withholding taxes).
o Merrill Lynch Composite 1-3 Year Treasury Index is an unmanaged index
tracking short-term U.S. government securities with maturities between
1 and 2.99 years. The index is produced by Merrill Lynch, Pierce,
Fenner & Smith.
o Merrill Lynch Composite 1-5 Year Treasury Index is comprised of
approximately 66 issues of U.S. Treasury securities maturing between
1 and 4.99 years, with coupon rates of 4.25% or more. These total
return figures are calculated for one, three, six, and twelve month
periods and year-to-date and include the value of the bond plus
income and any price appreciation or depreciation.
o Salomon Brothers 3-5 Year Government Index quotes total returns for
U.S. Treasury issues (excluding flower bonds) which have maturities
of three to five years. These total returns are year-to-date figures
which are calculated each month following January 1.
o Merrill Lynch 3-5 Year Treasury Index is comprised of approximately
24 issues of intermediate-term U.S. government and U.S. Treasury
securities with maturities between 3 and 4.99 years and coupon rates
above 4.25%. Index returns are calculated as total returns for
periods of one, three, six and twelve months as well as
year-to-date.
o Merrill Lynch 3-Year Treasury Yield Curve Index is an unmanaged
index comprised of the most recently issued 3-year U.S. Treasury
notes. Index returns are calculated as total returns for periods of
one, three, six, and twelve months as well as year-to-date.
o Lehman Brothers Government Index is an unmanaged index comprised of
all publicly issued, non-convertible domestic debt of the U.S.
government, or any agency thereof, or any quasi-federal corporation
and of corporate debt guaranteed by the U.S. government. Only notes
and bonds with a minimum outstanding principal of $1 million and a
minimum maturity of one year are included.
o Lehman Brothers Aggregate Bond Index is a total return index measuring
both the capital price changes and income provided by the underlying
universe of securities, weighted by market value outstanding. The
Aggregate Bond Index is comprised of the Lehman Brothers Government
Bond Index, Corporate Bond Index, Mortgage-Backed Securities Index and
the Yankee Bond Index. These indices include: U.S. Treasury
obligations, including bonds and notes; U.S. agency obligations,
including those of the Farm Credit System, including the National Bank
for Cooperatives, Farm Credit Banks, and Banks for Cooperatives;
Farmers Home Administration; Federal Home Loan Banks; Federal Home
Loan Mortgage Corporation; Fannie Mae; Government National Mortgage
Association and Student Loan Marketing Association; foreign
obligations; and U.S. investment-grade corporate debt and
mortgage-backed obligations. All corporate debt included in the
Aggregate Bond Index has a minimum S&P rating of BBB or a minimum
Moody's rating of Baa.
o Merrill Lynch Corporate and Government Index includes issues which
must be in the form of publicly placed, nonconvertible,
coupon-bearing domestic debt and must carry a term of maturity of at
least one year. Par amounts outstanding must be no less than $10
million at the start and at the close of the performance measurement
period. Corporate instruments must be rated by S&P or by Moody's as
investment grade issues (i.e., BBB/Baa or better).
o Merrill Lynch Domestic Master Index includes issues which must be in
the form of publicly placed, nonconvertible, coupon-bearing domestic
debt and must carry a term to maturity of at least one year. Par
amounts outstanding must be no less than $10 million at the start
and at the close of the performance measurement period. The Domestic
Master Index is a broader index than the Merrill Lynch Corporate and
Government Index and includes, for example, mortgage-related
securities. The mortgage market is divided by agency, type of
mortgage and coupon and the amount outstanding in each
agency/type/coupon subdivision must be no less than $200 million at
the start and at the close of the performance measurement period.
Corporate instruments must be rated by S&P or by Moody's as
investment-grade issues (i.e. BBB/Baa or better).
o S&P 500/Lehman Brothers Government/Corporate (Weighted Index) and
the S&P 500/Lehman Brothers Government (Weighted Index) combine the
components of a stock-oriented index and a bond-oriented index to
obtain results which can be compared to the performance of a managed
fund. The indices' total returns will be assigned various weights
depending upon a Fund's current asset allocation.
o Salomon Brothers AAA-AA Corporate index calculates total returns of
approximately 775 issues which include long-term, high grade
domestic corporate taxable bonds, rated AAA-AA with maturities of
twelve years or more and companies in industry, public utilities,
and finance.
o Lehman Brothers Intermediate Government/Corporate Bond Index is an
unmanaged index comprised of all the bonds issued by the Lehman
Brothers Government/Corporate Bond Index with maturities between 1
and 9.99 years. Total return is based on price
appreciation/depreciation and income as a percentage of the original
investment. Indices are rebalanced monthly by market capitalization.
o SEI Balanced Universe is composed of 916 portfolios managed by 390
managers representing $86 billion in assets. To be included in the
universe, a portfolio must contain a 5% minimum commitment in both
equity and fixed-income securities. Consulting universes may be
composed of pension, profit-sharing, commingled,
endowment/foundation and mutual funds.
o Lehman Brothers Government/Corporate (Total) index is comprised of
approximately 5,000 issues which include: non-convertible bonds
publicly issued by the U.S. government or its agencies; corporate
bonds guaranteed by the U.S. government and quasi-federal
corporations; and publicly issued, fixed rate, non-convertible
domestic bonds of companies in industry, public utilities, and
finance. The average maturity of these bonds approximates nine
years. Tracked by Lehman Brothers, the index calculates total
returns for one-month, three-month, twelve-month, and ten-year
periods and year-to-date.
o Merrill Lynch Corporate Master is an unmanaged index comprised of
approximately 4,356 corporate debt obligations rated BBB or better.
These quality parameters are based in composites of ratings assigned
by S&P and Moody's. Only bonds with a minimum maturity of one year
are included.
o Lehman Brothers State General Obligations Index is an index
comprised of all state general obligation debt issues and is
compiled without regard to maturities. These bonds are rated A or
better and represent a variety of coupon ranges. Index figures are
total returns calculated for one, three, and twelve month periods as
well as year-to-date. Total returns are also calculated as of the
inception of the index, December 31, 1979.
o Lehman Brothers Five-Year State General Obligations Bonds is an
index comprised of all state general obligation debt issues with
maturities between four and six years. These bonds are rated A or
better and represent a variety of coupon ranges. Index figures are
total returns calculated for one, three, and twelve month periods as
well as year-to-date. Total returns are also calculated as of the
inception of the index, December 31, 1979.
o Lehman Brothers Three-Year State General Obligations Bonds is an
index comprised of the same issues noted above except that the
maturities range between two and four years. Index figures are total
returns calculated for the same periods as listed above.
o Morningstar, Inc., an independent rating service, is the publisher
of the bi-weekly Mutual Fund Values. Mutual Fund Values rates more
than 1,000 NASDAQ-listed mutual funds of all types, according to
their risk-adjusted returns. The maximum rating is five stars, and
ratings are effective for two weeks.
Advertisements and other sales literature for the Funds may quote total
returns which are calculated on non-standardized base periods. These total
returns also represent the historic change in the value of investments in the
Funds based on monthly reinvestment of dividends over a specified period of
time.
Advertisements may quote performance information which does not reflect
the effect of the sales load.
Financial Statements
The financial statements for the fiscal period ended November 30, 1997 are
incorporated herein by reference from the Funds' Annual Reports dated November
30, 1997 (File Nos. 33-44590 and 811-6504). A copy of the Annual Report may be
obtained without charge by contacting the Funds at the address located on the
back cover of the prospectuses or by calling the Funds at 1-800-994-4414.
Standard & Poor's
Standard & Poor's ("S&P") makes no representation or warranty, express or
implied, to the owners of a Fund or any member of the public regarding the
advisability of investing in securities generally or in a Fund particularly or
the ability of the S&P 500 Index (as defined in the prospectuses) to track
general stock market performance. S&P's only relationship to Federated
Securities Corp., the Funds' distributor (the "Licensee") is the licensing of
certain trademarks and trade names of S&P and of the S&P 500 Index which is
determined, composed and calculated by S&P without regard to the Licensee or a
Fund. S&P has no obligation to take the needs of the Licensee or the owners of a
Fund into consideration in determining, composing or calculating the S&P 500
Index. S&P is not responsible for and has not participated in the determination
of, the timing of, prices at, or quantities of a Fund to be issued or in the
determination or calculation of the equation by which a Fund is to be converted
into cash. S&P has no obligation or liability in connection with the
administration, marketing or trading of a Fund.
S&P does not guarantee the accuracy and/or the completeness of the S&P 500
Index or any data included therein. S&P makes no warranty, express or implied,
as to results to be obtained by the Licensee, owners of a Fund, or any other
person or entity from the use of the S&P 500 Index or any data included therein
in connection with the rights licensed hereunder or for any other use. S&P makes
no express or implied warranties, and expressly disclaims all warranties or
merchantability or fitness for a particular purpose or use with respect to the
S&P 500 Index or any data included therein. Without limiting any of the
foregoing, in no event shall S&P have any liability for any special, punitive,
indirect or consequential damages (including lost profits), even if notified of
the possibility of such damages.
<PAGE>
Appendix
Standard & Poor's Corporate Bond Ratings
AAA--Debt rated "AAA" has the highest rating assigned by S&P. Capacity to
pay interest and repay principal is extremely strong.
AA--Debt rated "AA" has a very strong capacity to pay interest and repay
principal and differs from the higher rated issues only in small degree.
A--Debt rated "A" has a strong capacity to pay interest and repay
principal although it is somewhat more susceptible to the adverse effects of
changes in circumstances and economic conditions than debt in higher rated
categories.
BBB--Debt rated "BBB" is regarded as having an adequate capacity to pay
interest and repay principal. Whereas it normally exhibits adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay interest and repay principal for
debt in this category than in higher rated categories.
BB, B, CCC, CC -- Debt rated "BB", "B", "CCC", and "CC" is regarded, on
balance, as predominantly speculative with respect to capacity to pay interest
and repay principal in accordance with the terms of the obligation. "BB"
indicates the lowest degree of speculation and "CC" the highest degree of
speculation. While such debt will likely have some quality and protective
characteristics, these are outweighed by large uncertainties of major risk
exposure to adverse conditions.
C -- The rating "C" is reserved for income bonds on which no interest is
being paid.
D -- Debt rated "D" is in default, and payment of interest and/or
repayment of principal is in arrears.
NR--NR indicates that no public rating has been requested, that there is
insufficient information on which to base a rating, or that S&P does not rate a
particular type of obligation as a matter of policy.
S&P may apply a plus (+) sign or minus (-) sign to the above rating
classifications to show relative standing within the classifications.
Moody's Investors Service, Inc. Corporate Bond Rating
Aaa--Bonds which are rated "Aaa" are judged to be of the best quality.
They carry the smallest degree of investment risk and are generally referred to
as "gilt edged." Interest payments are protected by a large or by an
exceptionally stable margin and principal is secure. While the various
protective elements are likely to change, such changes as can be visualized are
most unlikely to impair the fundamentally strong position of such issues.
Aa--Bonds which are rated "Aa" are judged to be of high quality by all
standards. Together with the "Aaa" group they comprise what are generally known
as high grade bonds. They are rated lower than the best bonds because margins of
protection may not be as large as in "Aaa" securities or fluctuation of
protective elements may be of greater amplitude or there may be other elements
present which make the long-term risks appear somewhat larger than in "Aaa"
securities.
A--Bonds which are rated "A" possess many favorable investment attributes
and are to be considered as upper medium grade obligations. Factors giving
security to principal and interest are considered adequate but elements may be
present which suggest a susceptibility to impairment some time in the future.
Baa--Bonds which are rated "Baa" are considered as medium-grade
obligations, (i.e., they are neither highly protected nor poorly secured).
Interest payments and principal security appear adequate for the present but
certain protective elements may be lacking or may be characteristically
unreliable over any great length of time. Such bonds lack outstanding investment
characteristics and in fact have speculative characteristics as well.
Ba--Bonds which are "Ba" are judged to have speculative elements; their
future cannot be considered as well assured. Often the protection of interest
and principal payments may be very moderate and thereby not well safeguarded
during both good and bad times over the future. Uncertainty of position
characterizes bonds in this class.
B--Bonds which are rated "B" generally lack characteristics of a desirable
investment. Assurance of interest and principal payments or of maintenance of
other terms of the contract over any long period of time may be small.
Caa -- Bonds which are rated "Caa" are of poor standing. Such issues may
be in default or there may be present elements of danger with respect to
principal or interest.
Ca--Bonds which are rated "Ca" represent obligations which are speculative
in a high degree. Such issues are often in default or have other marked
shortcomings.
C--Bonds which are rated "C" are the lowest rated class of bonds and
issues so rated can be regarded as having extremely poor prospects or ever
attaining any real investment standing.
NR--Not rated by Moody's. Moody's applies numerical modifiers, 1, 2 and 3
in each generic rating classification from "Aa" through "B" in its corporate
bond rating system. The modifier 1 indicates that the security ranks in the
higher end of its generic rating category; the modifier 2 indicates a mid-range
ranking; and the modifier 3 indicates that the issue ranks in the lower end of
its generic rating category.
Standard & Poor's Commercial Paper Ratings
A-1--This highest category indicates that the degree of safety regarding
timely payment is strong. Those issues determined to possess extremely strong
safety characteristics are denoted with a plus sign (+) designation.
A-2--Capacity for timely payment on issues with this designation is
satisfactory. However, the relative degree of safety is not as high as for
issues designated "A-1."
A-3--Issues carrying this designation have adequate capacity for timely
payment. They are, however, more vulnerable to the adverse effects of changes in
circumstances than obligations carrying the higher designations.
B--Issues rated "B" are regarded as having only speculative capacity for
timely payment.
C--This rating is assigned to short-term debt obligations with a doubtful
capacity for payment.
D--Debt rated "D" is in payment default. The "D" rating category is used
when interest payments or principal payments are not made on the date due, even
if the applicable grace period has not expired, unless S&P believes that such
payments will be made during such grace period.
Moody's Investors Service, Inc. Commercial Paper Rating Definitions
Prime-1--Issuers rated "Prime-1" (or related supporting institutions) have
a superior capacity for repayment of short-term promissory obligations.
"Prime-1" repayment capacity will normally be evidenced by many of the following
characteristics:
o Leading market positions in well-established industries;
o High rates of return on funds employed;
o Conservative capitalization structure with moderate reliance on debt
and ample asset protection;
o Broad margins in earnings coverage of fixed financial charges and high
internal cash generation; or
o Well-established access to a range of financial markets and assured
sources of alternate liquidity.
Prime-2--Issuers rated "Prime-2" (or related supporting institutions) have
a strong capacity for repayment of short-term promissory obligations. This will
normally be evidenced by many of the characteristics cited above, but to a
lesser degree. Earnings trends and coverage ratios, while sound, will be more
subject to variation. Capitalization characteristics, while still appropriate,
may be more affected by external conditions. Ample alternate liquidity is
maintained.
Standard & Poor's Municipal Bond Ratings
AAA--Debt rated "AAA" has the highest rating assigned by S&P. Capacity to
pay interest and repay principal is extremely strong.
AA--Debt rated "AA" has a very strong capacity to pay interest and repay
principal and differs from the higher rated issues only in small degree.
A--Debt rated "A" has a strong capacity to pay interest and repay
principal although it is somewhat more susceptible to the adverse effect of
changes in circumstances and economic conditions than debt in higher rated
categories.
BBB--Debt rated "BBB" is regarded as having an adequate capacity to pay
interest and repay principal. Whereas it normally exhibits adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay interest and repay principal for
debt in this category than in higher rated categories.
BB, B, CCC, CC--Debt rated "BB," "B," "CCC" and "CC" is regarded, on
balance, as predominantly speculative with respect to capacity to pay interest
and repay principal in accordance with the terms of the obligation. "BB"
indicates the lowest degree of speculation and "CC" the highest degree of
speculation. While such debt will likely have some quality and protective
characteristics, these outweighed by large uncertainties of major risk exposure
to adverse conditions.
C--The rating "C" is reversed for income bonds on which no interest is
being paid.
D--Debt rated "D" is in default, and payment of interest and/or repayment
of principal is in arrears.
Standard & Poor's Municipal Note Ratings
SP-1--Very strong or strong capacity to pay principal and interest. Those
issues determined to possess overwhelming safety characteristics will be given a
plus sign (+) designation.
SP-2--Satisfactory capacity to pay principal and interest.
SP-3--Speculative capacity to pay principal and interest.
Moody's Investors Service, Inc. Municipal Bond Ratings
Aaa--Bonds which are rated "Aaa" are judged to be of the best quality.
They carry the smallest degree of investment risk and are generally referred to
as "gilt edged." Interest payments are protected by a large or by an
exceptionally stable margin and principal is secure. While the various
protective elements are likely to change, such changes as can be visualized are
most unlikely to impair the fundamentally strong position of such issues.
Aa--Bonds which are rated "Aa" are judged to be of high quality by all
standards. Together with the "Aaa" group they comprise what are generally known
as high grade bonds. They are rated lower than the best bonds because margins of
protection may not be as large as in "Aaa" securities or fluctuation of
protective elements may be of greater amplitude or there may be other elements
present which make the long term risks appear somewhat larger than in "Aaa"
securities.
A--Bonds which are rated "A" possess many favorable investment attributes
and are to be considered as upper medium grade obligations. Factors giving
security to principal and interest are considered adequate but elements may be
present which suggest a susceptibility to impairment some time in the future.
Baa--Bonds which are rated "Baa" are considered as medium grade
obligations, i.e., they are neither highly protected nor poorly secured.
Interest payments and principal security appear adequate for the present but
certain protective elements may be lacking or may be characteristically
unreliable over any great length of time. Such bonds lack outstanding investment
characteristics and in fact have speculative characteristics as well.
Ba--Bonds which are "Ba" are judged to have speculative elements; their
future cannot be considered as well assured. Often the protection of interest
and principal payments may be very moderate and thereby not well safeguarded
during both good and bad times over the future. Uncertainty of position
characterizes bonds in this class.
B--Bonds which are rated "B" generally lack characteristics of the
desirable investment. Assurance of interest and principal payments or of
maintenance of other terms of the contract over any long period of time may be
small.
Caa--Bonds which are rated "Caa" are of poor standing. Such issues may be
in default or there may be present elements of danger with respect to principal
or interest.
Ca--Bonds which are rated "Ca" represent obligations which are speculative
in a high degree. Such issues are often in default or have other marked
shortcomings.
C--Bonds which are rated "C" are the lowest rated class of bonds and
issues so rated can be regarded as having extremely poor prospects of ever
attaining any real investment standing.
Moody's Investors Service, Inc. Short-Term Debt Ratings
Prime-1--Issuers rated Prime-1 (or related supporting institutions) have a
superior capacity for repayment of short-term promissory obligations. Prime-1
repayment capacity will normally be evidenced by the following characteristics:
o Leading market positions in well established industries;
o High rates of return on funds employed;
o Conservative capitalization structure with moderate reliance on debt
and ample asset protection;
o Broad margins in earning coverage of fixed financial charges and high
internal cash generation; and
o Well-established access to a range of financial markets and assured
sources of alternate liquidity.
Prime-2--Issuers rated Prime-2 (or related supporting institutions) have a
strong capacity for repayment of short-term promissory obligations. This will
normally be evidenced by many of the characteristics cited above, but to a
lesser degree. Earnings trends and coverage ratios, while sound, will be more
subject to variation. Capitalization characteristics, while still appropriate,
may be more affected by external conditions. Ample alternate liquidity is
maintained.
Prime-3--Issuers rated Prime-3 (or related supporting institutions) have
an acceptable ability for repayment of senior short-term obligations. The effect
of industry characteristics and market compositions may be more pronounced.
Variability in earnings and profitability may result in changes in the level of
debt protection measurements and may require relatively high financial leverage.
Adequate alternate liquidity is maintained.
Not Prime--Issuers rated Not Prime do not fall within any of the Prime
rating categories.
Moody's Investors Service, Inc. Short Term Loan Ratings
MIG 1/VMIG 1--This designation denotes best quality. There is present
strong protection by established cash flows, superior liquidity support or
demonstrated broad based access to the market for refinancing.
MIG 2/VMIG 2--This designation denotes high quality. Margins of protection
are ample although not so large as in the preceding group.
MIG 3/VMIG 3--This designation denotes favorable quality. All security
elements are accounted for but there is lacking the undeniable strength of the
preceding grades. Liquidity and cash flow protection may be narrow and market
access for refinancing is likely to be less well established.
