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CENTURA QUALITY INCOME FUND
(A SERIES OF CENTURA FUNDS, INC.)
CLASS A SHARES AND CLASS B SHARES
3435 STELZER ROAD
COLUMBUS, OHIO 43219
GENERAL AND ACCOUNT INFORMATION
(800) 442-3688
CENTURA BANK -- ADVISER
SOVEREIGN ADVISERS -- SUB-ADVISER
BISYS FUND SERVICES -- ADMINISTRATOR AND SPONSOR
CENTURA FUNDS DISTRIBUTOR, INC. -- DISTRIBUTOR
This Prospectus describes Centura Quality Income Fund ("Fund"), one of the
seven Funds ("Funds") comprising Centura Funds, Inc. ("Company"), a registered
open-end management investment company advised by Centura Bank ("Adviser") and
Sovereign Advisers ("Sub-Adviser"). The Fund is a separate portfolio of the
Company.
This Prospectus relates to Class A shares and Class B shares which are sold
to the public as an investment vehicle for individuals, institutions,
corporations and fiduciaries. Class C shares, available only to certain
institutional investors, are not offered hereby. (See "Other Information --
Capitalization"). Class A shares and Class B shares each bear certain expenses
related to their distribution, calculated at an annual rate and based on a
percentage of the average daily net assets of the class.
SHARES OF THE FUND ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR
ENDORSED BY, ANY BANK, AND FUND SHARES ARE NOT FEDERALLY INSURED BY THE FEDERAL
DEPOSIT INSURANCE CORPORATION, THE FEDERAL RESERVE BOARD, OR ANY OTHER AGENCY.
INVESTMENTS IN MUTUAL FUNDS, SUCH AS THE FUND, INVOLVE RISK, INCLUDING POSSIBLE
LOSS OF PRINCIPAL.
This Prospectus sets forth concisely the information a prospective investor
should know before investing in the Fund and should be read and retained for
information about the Fund.
A Statement of Additional Information (the "SAI"), dated April 24, 1999,
containing additional and more detailed information about the Funds, has been
filed with the Securities and Exchange Commission ("SEC") and is hereby
incorporated by reference into the Prospectus. It is available without charge
and can be obtained by writing or calling the Fund at the address and
information numbers printed above.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
The Date of this Prospectus is April 24, 1999
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TABLE OF CONTENTS
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PAGE
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Highlights.................................................. 3
Fund Expenses............................................... 5
The Fund.................................................... 7
Description of Securities and Investment Practices.......... 7
Investment Restrictions..................................... 15
Risks of Investing in the Fund.............................. 16
Management of the Fund...................................... 18
Pricing of Fund Shares...................................... 21
Minimum Purchase Requirements............................... 23
Purchase of Fund Shares..................................... 24
Retirement Plan Accounts.................................... 25
Exchange of Fund Shares..................................... 25
Redemption of Fund Shares................................... 26
Portfolio Transactions...................................... 30
Fund Share Valuation........................................ 30
Dividends, Distributions, and Federal Income Taxation....... 31
Other Information........................................... 32
Performance Information..................................... 33
Appendix.................................................... i
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HIGHLIGHTS
THE FUND
The Fund seeks current income and capital appreciation. It pursues this
objective by investing in a diversified portfolio consisting primarily of
investment grade debt securities. The investment objective of the Fund is a
fundamental policy of the Fund and may not be changed without approval of the
Fund's shareholders. See "The Fund."
RISKS OF INVESTING IN THE FUND
Investment in the Fund involves certain risks. The value of securities in
the Fund's portfolio, and of the Fund's shares, will move up and down in
response to interest rate fluctuations and other economic conditions. Generally,
increases in current interest rates will cause the value of the Fund's portfolio
securities, and thus its shares, to decline, while declines in current interest
rates will cause the Fund's portfolio securities and its shares to increase in
value. These changes can provide opportunity for capital gain or loss for the
Fund. There can, of course, be no assurance that the Fund will achieve its
investment objective or be successful in preventing or minimizing the risk of
loss in principal value that is inherent in its investments. The Fund has
authority to invest in various types of derivative instruments, which entail
special risks. See "Risks of Investing in the Fund."
THE ADVISER AND SUB-ADVISER
Management supervision of the Fund is provided by Centura Bank (the
"Adviser"), headquartered in Rocky Mount, North Carolina. Day-to-day management
of the Fund's portfolio is provided by Sovereign Advisers ("Sub-Adviser"), a
registered investment adviser located in Charlotte, North Carolina. For its
management services, the Adviser is entitled to receive from the Fund a fee at
an annual rate of 0.60% based on the Fund's average daily net assets. Out of its
fee the Adviser pays the Sub-Adviser a fee at an annual rate of 0.30% based on
the Fund's average daily net assets.
THE DISTRIBUTOR, ADMINISTRATOR AND SPONSOR
Centura Funds Distributor, Inc. ("Distributor") distributes the Fund's
shares and may be reimbursed for certain of its distribution-related expenses.
BISYS Fund Services Limited Partnership d/b/a BISYS Fund Services ("BISYS") acts
as Sponsor and Administrator to the Fund. For its services as Administrator, the
Fund pays BISYS a fee at the annual rate of 0.15% of its average daily net
assets. BISYS Fund Services, Inc., an affiliate of BISYS, also acts as transfer
agent and fund accounting agent for the Fund, for which it receives additional
fees.
CLASSES OF SHARES
Class A shares and Class B shares differ principally with respect to sales
charges and the rate of expenses to which they are subject. Investors may select
the class that best suits their investment needs. Class A shares are offered
with a maximum front-end sales charge of 2.75%. The initial sales charge may be
reduced or waived in certain cases. See "Purchase of Fund Shares." Class B
shares are offered at net asset value, with no front-end sales charge. Shares of
each class are also subject to service and distribution fees calculated as a
percentage of the net asset value of each class which, pursuant to voluntary
limits set by the Distributor, may not exceed 0.25% for Class A shares and 0.75%
for Class B shares. Without these limits, the maximum fee for Class A shares
would be 0.50%, and, for Class B shares, would be 1.00%. Shareholders who redeem
Class B shares within five years from the date of purchase will be assessed a
contingent deferred sales charge ("CDSC") declining from a maximum in the first
year after purchase of 3.00% to a minimum in the fifth year after purchase of
1.00% with no CDSC for
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redemptions subsequent to the fifth year. The CDSC may be waived in certain
cases. On the seventh anniversary of their purchase date, Class B shares convert
automatically to Class A shares, which bear a lower Service and Distribution
Fee. See "Management of The Fund -- The Distributor." Class C shares of the
Fund, not offered by this Prospectus, are available only to certain
institutional investors. See "Other Information -- Capitalization."
A prospective investor in Class A or Class B shares, in selecting between
these classes, should consider the respective impact of the sales charge or CDSC
together with the cumulative effect of the Service and Distribution Fees for
each class over the anticipated period of investment, as well as the effect of
any sales charge or CDSC waivers to which the investor may be entitled. For
purchasers (other than those eligible to invest in Class C shares) contemplating
an investment of at least $250,000, the Fund believes it is preferable to
purchase Class A shares. Investors should be aware that other expenses
attributable to each class may differ slightly due to the allocation to each
class of certain "class specific" expenses, including, primarily, distribution
expenses. Finally, investors should be aware that persons selling shares of the
Fund may receive different levels of compensation for sales of Class A and Class
B shares.
GUIDE TO INVESTING IN THE FUND
Purchase orders for the Fund received by your broker or Service
Organization in proper order and transmitted to the Fund prior to 4:00 p.m.
Eastern time will become effective that day.
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Minimum Initial Investment.................................. $1,000
Minimum Initial Investment for IRAs and other qualified
retirement plans.......................................... $ 250
Minimum Subsequent Investment............................... $ 250
(no minimum for IRA and other qualified retirement plans)
Minimum Investment per pay period for Payroll Deduction
Plan...................................................... $ 50
(No investment is required to initiate this plan.)
Minimum Amount Per Investment Under Automatic Investment
Plan...................................................... $ 50
(No investment is required to initiate this plan.)
Shareholders may exchange shares of a particular class of
Fund for shares of the same class in another Fund by
telephone or mail, but they should first obtain and
read the prospectus for the other Fund
Minimum exchange............................................ NONE
(HOWEVER, AN INVESTOR MUST SATISFY THE $1,000 MINIMUM
INVESTMENT FOR EACH FUND INTO WHICH HE OR SHE
EXCHANGES.)
SHAREHOLDERS MAY REDEEM SHARES BY TELEPHONE, MAIL OR WIRE.
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The Fund reserves the right to redeem upon not less than 30 days' notice
all shares for a shareholder account having an aggregate value of less than
$1,000.
All dividends and distributions will be automatically reinvested at net
asset value in additional shares of the same class of the Fund unless cash
payment is requested. The Fund pays dividends from income, if any, monthly.
See "Purchase Of Fund Shares," "Redemption Of Fund Shares" And "Dividends,
Distributions And Federal Income Taxation" for more information.
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FUND EXPENSES
The following expense tables indicate costs and expenses that an investor
in Class A shares or Class B shares should anticipate incurring either directly
or indirectly as a shareholder in the Fund.
FEE TABLE*
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CLASS A CLASS B
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SHAREHOLDER TRANSACTION EXPENSES
Maximum Sales Charge Imposed on Purchases (as a percentage
of offering price)........................................ 2.75% none
Maximum Sales Charge Imposed on Reinvested Dividends (as a
percentage of offering price)............................. none none
Deferred Sales Charge (as a percentage of redemption
proceeds)(a).............................................. none 3.00%
Exchange Fees............................................... none none
ANNUAL FUND OPERATING EXPENSES (as a percentage of average
net assets annualized)
Management Fees............................................. 0.60% 0.60%
12b-1 Fees.(after waiver)(b)................................ 0.25% 0.75%
Other Expenses.............................................. 0.55% 0.55%
Total Portfolio Operating Expenses(c)....................... 1.40% 1.90%
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* The information in the Fee Table relates only to Class A shares and Class B
shares. Class C shares pay no Sales Charge, Deferred Sales Charge or
12b-1 fees. (See "Other Information -- Capitalization.")
(a) Shareholders who redeem shares by wire may be charged a fee by the banks
receiving the wire payments on their behalf. (See "Redemption of Fund
Shares.")
(b) Under rules of the National Association of Securities Dealers, Inc. (the
"NASD"), a 12b-1 fee may be treated as a sales charge for certain purposes
under those rules. Because the 12b-1 fee is an annual fee charged against
the assets of the Fund, long-term shareholders may pay more initial sales
charges than the economic equivalent of the maximum front-end sales charge
permitted by rules of the NASD. The 12b-1 fees in the above Fee Table
represent fees anticipated to be paid by the Fund. Class A shares of the
Fund are permitted to pay 12b-1 fees up to 0.50%, and Class B shares are
permitted to pay 12b-1 fees up to 1.00%. However, the Distributor has
undertaken to limit 12b-1 fees to 0.25% for Class A shares and to 0.75% for
Class B shares for the current fiscal year. See "Management of the
Fund -- The Distributor."
(c) Total Portfolio Operating Expenses for the Fund are estimated. Absent the
limitation applicable to 12b-1 fees, "Total Portfolio Operating Expenses"
for Class A shares would be 1.65% and "Total Portfolio Operating Expenses"
for Class B shares of the Fund would be 2.15%.
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EXAMPLE*
An investor would pay the following expenses on a $1,000 investment,
assuming 5% annual return:
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CLASS A CLASS B
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Assuming complete redemption at the end of each time period:
1 year.................................................... $41 $49
3 years................................................... $71 $90
Class B Shares assuming no redemption:
1 year.................................................... $19
3 years................................................... $60
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* This example should not be considered a representation of future expenses
which may be more or less than those shown. The assumed 5% annual return is
hypothetical and should not be considered a representation of past or future
annual return. Actual return may be greater or less than the assumed amount.
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THE FUND
The Fund's investment objective is to provide current income and capital
appreciation. It pursues this objective by investing in a diversified portfolio
consisting primarily of investment grade debt obligations, including U.S.
government securities. Under normal market conditions, at least 65% of the
Fund's total assets will be invested in: obligations of the U.S. government, its
agencies and instrumentalities; corporate bonds of U.S. issuers; and
mortgage-backed securities issued by U.S. government agencies. These debt
obligations may pay either fixed or variable rates of interest.
The Fund also has authority to invest in other types of securities,
including preferred stocks, securities convertible into common stock,
dollar-denominated obligations of non-U.S. issuers, various types of
asset-backed securities, taxable municipal obligations and money market
instruments. The Fund may also invest in income-producing securities issued by
real estate investment trusts ("REITs"). The Fund may engage in transactions in
covered options and interest-rate futures contracts in order to lengthen or
shorten the average maturity of its portfolio. The Fund expects to maintain a
dollar-weighted average portfolio maturity of between 5 and 15 years.
Debt obligations acquired by the Fund will be rated at least investment
grade (BBB or better by Standard & Poor's Corporation ("S&P") or Baa by Moody's
Investors Service, Inc. ("Moody's"), or deemed of comparable quality by the
Sub-Adviser. At least 70% of the Fund's portfolio securities will be rated A or
better by Moody's or S&P or, if unrated, deemed of comparable quality by the
Sub-Adviser. If the rating of a security held by the Fund is reduced, the
Sub-Adviser is not required to sell the security but will do so if and when the
Sub-Adviser believes the sale is in the best interests of the Fund. Up to 30% of
the Fund's assets may be invested in securities rated BBB by S&P or Baa by
Moody's (or, if unrated, deemed of comparable quality by the Sub-Adviser) at the
time of purchase by the Fund, in preferred stocks, zero coupon obligations and
in convertible securities. (See "Risks of Investing in the Fund" for risks of
investing in securities rated BBB or Baa.)
OTHER INVESTMENT POLICIES OF THE FUND
The Fund may also invest up to 5% of its total assets in another investment
company, not to exceed 10% of the value of its total assets in the securities of
other investment companies. The Fund will incur additional expenses due to the
duplication of expenses as a result of investing in other mutual funds because
investors bear indirectly a proportionate share of the expenses of such
companies, including operating costs, and investment advisory and administration
fees. The Fund has authority to lend its portfolio securities.
DESCRIPTION OF SECURITIES AND INVESTMENT PRACTICES
U.S. Government Securities. U.S. Government securities are obligations
issued or guaranteed by the U.S. Government, its agencies or instrumentalities.
U.S. Treasury bills, which have a maturity of up to one year, are direct
obligations of the United States and are the most frequently issued marketable
U.S. Government security. The U.S. Treasury also issues securities with longer
maturities in the form of notes and bonds.
U.S. Government agency and instrumentality obligations are debt securities
issued by U.S. Government-sponsored enterprises and federal agencies. Some
obligations of agencies are supported by the full faith and credit of the United
States or by U.S. Treasury guarantees, such as mortgage-backed certificates
issued by the Government National Mortgage Association; others, such as
obligations of the Federal Home Loan Banks, Federal Farm Credit Banks, Bank for
Cooperatives, Federal Intermediate Credit Banks and the Federal Land Bank, are
guaranteed by the right of the issuer to borrow from the U.S. Treasury; others,
such as obligations of the Federal National Mortgage Association, are supported
by discretionary authority of the U.S. Government to purchase certain
obligations of the agency or instrumentality; and others, such as obligations of
the Student Loan
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Marketing Association and the Tennessee Valley Authority, are backed only by the
credit of the agency or instrumentality issuing the obligation. In the case of
obligations not backed by the full faith and credit of the United States, the
investor must look principally to the agency issuing or guaranteeing the
obligation for ultimate repayment.
Bank Obligations. These obligations include negotiable certificates of
deposit and bankers' acceptances. The Fund limits its bank investments to
dollar-denominated obligations of U.S. or foreign banks which have more than $1
billion in total assets at the time of investment and, in the case of U.S.
banks, are members of the Federal Reserve System or are examined by the
Comptroller of the Currency, or whose deposits are insured by the Federal
Deposit Insurance Corporation.
Commercial Paper. Commercial paper includes short-term unsecured promissory
notes, variable rate demand notes and variable rate master demand notes issued
by domestic and foreign bank holding companies, corporations and financial
institutions, as well as similar instruments issued by government agencies and
instrumentalities.
Preferred Stock. Preferred stock represents an equity in a corporation that
is intermediate between bonds and common stock in its right to dividends.
Convertible Securities. Convertible securities give the holder the right to
exchange the security for a specific number of shares of common stock.
Convertible securities include convertible preferred stocks, convertible bonds,
notes and debentures, and other securities. Convertible securities typically
involve less credit risk than common stock of the same issuer because
convertible securities are "senior" to common stock -- i.e., they have a prior
claim against the issuer's assets. Convertible securities generally pay lower
dividends or interest than non-convertible securities of similar quality. They
may also reflect changes in the value of the underlying common stock.
Corporate Debt Securities. The Fund's investments in corporate debt
securities are limited to corporate debt securities (corporate bonds,
debentures, notes and other similar corporate debt instruments) which meet the
previously disclosed minimum ratings and maturity criteria established for the
Fund under the direction of the Board of Directors or, if unrated, are in the
Sub-Adviser's opinion comparable in quality to corporate debt securities in
which the Fund may invest. See "The Fund."
Repurchase Agreements. Securities held by the Fund may be subject to
repurchase agreements. A repurchase agreement is a transaction in which the
seller of a security commits itself at the time of the sale to repurchase that
security from the buyer at a mutually agreed-upon time and price. These
agreements permit the Fund to earn income for periods as short as overnight.
Repurchase agreements may be considered to be loans by the purchaser
collateralized by the underlying securities. These agreements will be fully
collateralized at all times and the collateral will be marked-to-market daily.
The Fund will enter into repurchase agreements only with dealers, domestic banks
or recognized financial institutions which, in the opinion of the Sub-Adviser,
present minimal credit risks in accordance with guidelines adopted by the Board
of Directors. In the event of default by the seller under a repurchase
agreement, the Fund may have problems in exercising its rights to the underlying
securities and may experience time delays in connection with the disposition of
such securities.
Loans Of Portfolio Securities. To increase current income the Fund may lend
its portfolio securities worth up to 5% of the Fund's total assets to brokers,
dealers and financial institutions, provided certain conditions are met,
including the condition that each loan is secured continuously by collateral
maintained on a daily mark-to-
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market basis in an amount at least equal to the current market value of the
securities loaned. For further information, see the SAI.
Variable And Floating Rate Demand And Master Demand Notes. The Fund may,
from time to time, buy variable or floating rate demand notes issued by
corporations, bank holding companies and financial institutions and similar
instruments issued by government agencies and instrumentalities. These
securities will typically have a maturity over one year but carry with them the
right of the holder to put the securities to a remarketing agent or other entity
at designated time intervals and on specified notice. The obligation of the
issuer of the put to repurchase the securities may be backed by a letter of
credit or other obligation issued by a financial institution. The repurchase
price is ordinarily par plus accrued and unpaid interest. Generally, the
remarketing agent will adjust the interest rate every seven days (or at other
specified intervals) in order to maintain the interest rate at the prevailing
rate for securities with a seven-day or other designated maturity. The Fund's
investment in demand instruments which provide that the Fund will not receive
the principal note amount within seven days' notice, in combination with the
Fund's other investments in illiquid instruments, will be limited to an
aggregate total of 15% of the Fund's net assets.
The Fund may also buy variable rate master demand notes. The terms of these
obligations permit the Fund to invest fluctuating amounts at varying rates of
interest pursuant to direct arrangements between the Fund, as lender, and the
borrower. These instruments permit weekly and, in some instances, daily changes
in the amounts borrowed. The Fund has the right to increase the amount under the
note at any time up to the full amount provided by the note agreement, or to
decrease the amount, and the borrower may repay up to the full amount of the
note without penalty. The notes may or may not be backed by bank letters of
credit. Because the notes are direct lending arrangements between the Fund and
borrower, it is not generally contemplated that they will be traded, and there
is no secondary market for them, although they are redeemable (and, thus,
immediately repayable by the borrower) at principal amount, plus accrued
interest, at any time. In connection with any such purchase and on an ongoing
basis, the Sub-Adviser will consider the earning power, cash flow and other
liquidity ratios of the issuer, and its ability to pay principal and interest on
demand, including a situation in which all holders of such notes make demand
simultaneously. While master demand notes, as such, are not typically rated by
credit rating agencies, a Fund may, under its minimum rating standards, invest
in them only if, at the time of an investment, the issuer meets the Fund's
rating criteria.
Forward Commitments And When-Issued Securities. The Fund may purchase
when-issued securities and make contracts to purchase securities for a fixed
price at a future date beyond customary settlement time if the Fund holds, and
maintains until the settlement date in a segregated account cash or liquid
securities in an amount sufficient to meet the purchase price, or if the Fund
enters into offsetting contracts for the forward sale of other securities it
owns. Purchasing securities on a when-issued basis and forward commitments
involves a risk of loss if the value of the security to be purchased declines
prior to the settlement date, which risk is in addition to the risk of decline
in value of the Fund's other assets. No income accrues on securities purchased
on a when-issued basis prior to the time delivery of the securities is made,
although the Fund may earn interest on securities it has deposited in the
segregated account because it does not pay for the when-issued securities until
they are delivered. Investing in when-issued securities has the effect of (but
is not the same as) leveraging the Fund's assets. Although the Fund would
generally purchase securities on a when-issued basis or enter into forward
commitments with the intention of actually acquiring securities, the Fund may
dispose of a when-issued security or forward commitment prior to settlement if
the Sub-Adviser deems it appropriate to do so. The Fund may realize short-term
profits or losses upon such sales.
Mortgage-Related Securities. Mortgage pass-through securities are
securities representing interests in "pools" of mortgages in which payments of
both interest and principal on the securities are made monthly, in
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effect passing through monthly payments made by the individual borrowers on the
residential mortgage loans which underlie the securities (net of fees paid to
the issuer or guarantor of the securities). Early repayment of principal on
mortgage pass-through securities (arising from prepayments of principal due to
sale of the underlying property, refinancing, or foreclosure, net of fees and
costs which may be incurred) may expose the Fund to a lower rate of return upon
reinvestment of principal. Also, if a security subject to prepayment has been
purchased at a premium, in the event of prepayment the value of the premium
would be lost. Like other fixed-income securities, when interest rates rise, the
value of a mortgage-related security generally will decline; however, when
interest rates decline, the value of mortgage-related securities with prepayment
features may not increase as much as other fixed-income securities. In
recognition of this prepayment risk to investors, the Public Securities
Association (the "PSA") has standardized the method of measuring the rate of
mortgage loan principal prepayments. The PSA formula, the Constant Prepayment
Rate (the "CPR"), or other similar models that are standard in the industry will
be used by the Fund in calculating maturity for purposes of its investment in
mortgage-related securities. Upward trends in interest rates tend to lengthen
the average life of mortgage-related securities and also cause the value of
outstanding securities to drop. Thus, during periods of rising interest rates,
the value of these securities held by the Fund would tend to drop and the
portfolio-weighted average life of such securities held by a Fund may tend to
lengthen due to this effect. Longer-term securities tend to experience more
price volatility. Under these circumstances, the Sub-Adviser may, but is not
required to, sell securities in part in order to maintain an appropriate
portfolio-weighted average life.
Payment of principal and interest on some mortgage pass-through securities
(but not the market value of the securities themselves) may be guaranteed by the
full faith and credit of the U.S. Government (such as securities guaranteed by
the Government National Mortgage Association ("GNMA")); or guaranteed by
agencies or instrumentalities of the U.S. Government (such as securities
guaranteed by the Federal National Mortgage Association ("FNMA") or the Federal
Home Loan Mortgage Corporation ("FHLMC"), which are supported only by the
discretionary authority of the U.S. Government to purchase the agency's
obligations. Mortgage pass-through securities created by nongovernmental issuers
(such as commercial banks, savings and loan institutions, private mortgage
insurance companies, mortgage bankers and other secondary market issuers) may be
supported by various forms of insurance or guarantees, including individual
loan, title, pool and hazard insurance, and letters of credit, which may be
issued by governmental entities, private insurers or the mortgage poolers.
The Fund may also invest in investment grade Collateralized Mortgage
Obligations ("CMOs") which are hybrid instruments with characteristics of both
mortgage-backed bonds and mortgage pass-through securities. Similar to a bond,
interest and prepaid principal on a CMO are paid, in most cases, semiannually.
CMOs may be collateralized by whole mortgage loans but are more typically
collateralized by portfolios of mortgage pass-through securities guaranteed by
GNMA, FHLMC or FNMA. CMOs are structured into multiple classes, with each class
bearing a different stated maturity. Monthly payments of principal, including
prepayments, are first returned to investors holding the shortest maturity
class; investors holding longer maturity classes receive principal only after
the first class has been retired. CMOs may be issued by government and
nongovernmental entities. Some CMOs are debt obligations of FHLMC issued in
multiple classes with different maturity dates secured by the pledge of a pool
of conventional mortgages purchased by FHLMC. Other types of CMOs are issued by
corporate issuers in several series, with the proceeds used to purchase
mortgages or mortgage pass-through certificates. With some CMOs, the issuer
serves as a conduit to allow loan originators (primarily builders or savings and
loan associations) to borrow against their loan portfolios. To the extent a
particular CMO is issued by an investment company, the Fund's ability to invest
in such CMOs will be limited. See "Investment Restrictions" in the SAI.
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Assumptions generally accepted by the industry concerning the probability
of early payment may be used in the calculation of maturities for debt
securities that contain put or call provisions, sometimes resulting in a
calculated maturity different from the stated maturity of the security.
It is anticipated that governmental, government-related or private entities
may create mortgage loan pools and other mortgage-related securities offering
mortgage pass-through and mortgage-collateralized investments in addition to
those described above. As new types of mortgage-related securities are developed
and offered to investors, the Sub-Adviser will, consistent with the Fund's
investment objectives, policies and quality standards, consider making
investments in such new types of mortgage-related securities, but no investments
will be made in such securities until the Fund's prospectus and/or SAI have been
revised to reflect such securities.
Other Asset-Backed Securities. Other asset-backed securities (unrelated to
mortgage loans) are developed from time to time and may be purchased by the Fund
to the extent consistent with its investment objective and policies.
Foreign Securities. The Fund may invest in dollar-denominated debt
obligations of foreign issuers. Securities of foreign issuers involve special
risks. See "Risks of Investing in the Fund."
Futures Contracts And Options. The Fund may purchase and sell futures
contracts on securities, and indices of securities, and write and sell put and
call options on securities, and indices of securities as a hedge against changes
in interest rates, security prices, and other market developments. See "Risks of
Investing in the Fund" for a discussion of risks related to investing in futures
contracts and options.
Interest Rate Futures Contracts. A futures contract is an agreement between
two parties to buy and sell a security for a set price on a future date. Futures
contracts are traded on designated "contracts markets" which, through their
clearing corporations, guarantee performance of the contracts. Currently, there
are futures contracts based on securities such as long-term U.S. Treasury bonds,
U.S. Treasury notes, GNMA Certificates and three-month U.S. Treasury bills. For
municipal securities, there is the Bond Buyer Municipal Bond Index.
Generally, if market interest rates increase, the value of outstanding debt
securities declines (and vice versa). Entering into a futures contract for the
sale of securities has an effect similar to the actual sale of securities,
although sale of the futures contract might be accomplished more easily and
quickly. For example, if the Fund holds long-term U.S. Government securities and
the Sub-Adviser anticipates a rise in long-term interest rates, the Fund could,
in lieu of disposing of its portfolio securities, enter into futures contracts
for the sale of similar long-term securities. If rates increased and the value
of the Fund's portfolio securities declined, the value of the Fund's futures
contracts would increase, thereby protecting the Fund by preventing net asset
value from declining as much as it otherwise would have. Similarly, entering
into futures contracts for the purchase of securities has an effect similar to
actual purchase of the underlying securities, but permits the continued holding
of securities other than the underlying securities. For example, if the
Sub-Adviser expects long-term interest rates to decline, the Fund might enter
into futures contracts for the purchase of long-term securities, so that it
could gain rapid market exposure that may offset anticipated increases in the
cost of securities it intends to purchase, while continuing to hold
higher-yielding short-term securities or waiting for the long-term market to
stabilize.
Option Writing and Purchasing. The Fund may write (or sell) put and call
options on the securities that the Fund is authorized to buy or already holds in
its portfolio. These option contracts may be listed for trading on a national
securities exchange or traded over-the-counter. The Fund may also purchase put
and call options. The Fund will not write covered calls on more than 25% of its
portfolio, and the Fund will not write covered calls with strike prices lower
than the underlying securities' cost bases on more than 24% of its total
portfolio. The Fund may not invest more than 5% of its total assets in option
purchases.
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A call option gives the purchaser the right to buy, and the writer the
obligation to sell, the underlying security at the agreed upon exercise (or
"strike") price during the option period. A put option gives the purchaser the
right to sell, and the writer the obligation to buy, the underlying security at
the strike price during the option period. Purchasers of options pay an amount,
known as a premium, to the option writer in exchange for the right under the
option contract.
The Fund may sell "covered" put and call options as a means of hedging the
price risk of securities in the Fund's portfolio. The sale of a call option
against an amount of cash equal to the put's potential liability constitutes a
"covered put." When the Fund sells an option, if the underlying securities do
not increase (in the case of a call option) or decrease (in the case of a put
option) to a price level that would make the exercise of the option profitable
to the holder of the option, the option will generally expire without being
exercised and the Fund will realize as profit the premium paid for such option.
When a call option of which the Fund is the writer is exercised, the option
holder purchases the underlying security at the strike price and the Fund does
not participate in any increase in the price of such securities above the strike
price. When a put option of which the Fund is the writer is exercised, the Fund
will be required to purchase the underlying securities at the strike price,
which may be in excess of the market value of such securities. At the time the
Fund writes a put option or a call option on a security it does not hold in its
portfolio in the amount required under the option, it will establish and
maintain a segregated account with its custodian consisting solely of cash, U.S.
Government securities and other liquid high grade debt obligations equal to its
liability under the option.
Over-the-counter options ("OTC options") differ from exchange-traded
options in several respects. They are transacted directly with dealers and not
with a clearing corporation, and there is a risk of non-performance by the
dealer. OTC options are available for a greater variety of securities and for a
wider range of expiration dates and exercise prices than exchange-traded
options. Because OTC options are not traded on an exchange, pricing is normally
done by reference to information from a market marker. This information is
carefully monitored by the Sub-Adviser and verified in appropriate cases. OTC
options transactions will be made by the Fund only with recognized U.S.
Government securities dealers. OTC options are subject to the Fund's 15% limit
on investments in securities which are illiquid or not readily marketable (see
"Investment Restrictions"), provided that OTC option transactions by the Fund
with a primary U.S. Government securities dealer which has given the Fund an
absolute right to repurchase according to a "repurchase formula" will not be
subject to such 15% limit.
It may be the Fund's policy, in order to avoid the exercise of an option
sold by it, to cancel its obligation under the option by entering into a closing
purchase transaction, if available, unless it is determined to be in the Fund's
interest to sell (in the case of a call option) or to purchase (in the case of a
put option) the underlying securities. A closing purchase transaction consists
of the Fund purchasing an option having the same terms as the option sold by the
Fund and has the effect of cancelling the Fund's position as a seller. The
premium which the Fund will pay in executing a closing purchase transaction may
be higher than the premium received when the option was sold, depending in large
part upon the relative price of the underlying security at the time of each
transaction. To the extent options sold by the Fund are exercised and the Fund
either delivers portfolio securities to the holder of a call option or
liquidates securities in its portfolio as a source of funds to purchase
securities put to the Fund, the Fund's portfolio turnover rate may increase,
resulting in a possible increase in short-term capital gains and a possible
decrease in long-term capital gains.
Options on Futures Contracts. The Fund may purchase and write put options
and call options on futures contracts that are traded on a U.S. exchange or
board of trade and enter into related closing transactions to attempt to gain
additional protection against the effects of interest rate or equity market
fluctuations. There can be no assurance that such closing transactions will be
available at all times. In return for the premium paid, such an
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<PAGE> 13
option gives the purchaser the right to assume a position in a futures contract
at any time during the option period for a specified exercise price.
The Fund may purchase put options on futures contracts in lieu of, and for
the same purpose as, the sale of a futures contract. It also may purchase such
put options in order to hedge a long position in the underlying futures
contract.
The purchase of call options on futures contracts is intended to serve the
same purpose as the actual purchase of the futures contracts. The Fund may
purchase call options on futures contracts in anticipation of a market advance
when it is not fully invested.
The Fund may write a call option on a futures contract in order to hedge
against a decline in the prices of the index or debt securities underlying the
futures contracts. If the price of the futures contract at expiration is below
the exercise price, the Fund would retain the option premium, which would
offset, in part, any decline in the value of its portfolio securities.
The writing of a put option on a futures contract is similar to the
purchase of the futures contracts, except that, if market price declines, the
Fund would pay more than the market price for the underlying securities or index
units. The net cost to the Fund would be reduced, however, by the premium
received on the sale of the put, less any transactions costs.
Limitations on Futures Contracts and Options on Futures Contracts. The Fund
will use financial futures contracts and related options only for "bona fide
hedging" purposes, as such term is defined in applicable regulations of the
Commodity Futures Trading Commission, or, with respect to positions in financial
futures and related options that do not qualify as "bona fide hedging"
positions, will enter such non-hedging positions only to the extent that
aggregate initial margin deposits plus premiums paid by it for open futures
option positions, less the amount by which any such positions are
"in-the-money," would not exceed 5% of the Fund's total assets. Futures
contracts and related put options written by the Fund will be offset by assets
held in a segregated custodial account sufficient to satisfy the Fund's
obligations under such contracts and options.
Municipal Obligations. The Fund may invest in taxable securities issued by
states, their political subdivisions and agencies and instrumentalities of the
foregoing ("Municipal Obligations"). Municipal Obligations include municipal
bonds, floating rate and variable rate Municipal Obligations, participation
interests in municipal bonds, asset-backed certificates, commercial paper,
short-term municipal notes, and stand-by commitments. It may be anticipated that
governmental, government-related or private entities will create other taxable
securities in addition to those described above. As these new types of
securities are developed, the Sub-Adviser will, consistent with the Fund's
investment objectives, policies and quality standards, consider making
investments in such types of Municipal Obligations. Municipal Obligations in
which the Fund may invest include "general obligation" and "revenue" securities.
General obligation securities are backed by the issuer's full faith, credit and
taxing power for the payment of principal and interest. The taxes that can be
levied for the payment of debt service may be limited or unlimited in terms of
rate or amount or special assessments. Revenue securities are secured primarily
by net revenues generated by a particular facility or group of facilities, or by
the proceeds of a special excise or other specific revenue source. Additional
security may be provided by a debt service reserve fund. Municipal bonds include
industrial development bonds ("IDBs"), moral obligation bonds, put bonds and
private activity bonds ("PABs"). PABs generally relate to the financing of a
facility used by a private entity or entities. The credit quality of such bonds
is usually directly related to that of the users of the facilities.
Municipal Lease Obligations. The Fund may invest in taxable municipal lease
obligations including certificates of participation ("COPs"), which finance a
variety of public projects. Because of the way these
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<PAGE> 14
instruments are structured, they may carry a greater risk than other types of
Municipal Obligations. The Fund may invest in lease obligations only when they
are rated by a rating agency or, if unrated, are deemed by the Sub-Adviser, to
be of a quality comparable to the Fund's quality standards. With respect to any
such unrated municipal lease obligations in which the Fund invests, the
Company's Board of Directors will be responsible for determining their credit
quality, on an ongoing basis, including assessing the likelihood that the lease
will not be canceled. Prior to purchasing a municipal lease obligation and on a
regular basis thereafter, the Sub-Adviser will evaluate the credit quality and,
pursuant to guidelines adopted by the Directors, the liquidity of the security.
In making its evaluation, the Sub-Adviser will consider various credit factors,
such as the necessity of the project, the municipality's credit quality, future
borrowing plans, and sources of revenue pledged for lease repayment, general
economic conditions in the region where the security is issued, and liquidity
factors, such as dealer activity. For further discussion regarding municipal
lease obligations, see "Risks of Investing in the Fund" in this Prospectus and
"Investment Policies" in the SAI.
Stand-By Commitments. The Fund may acquire "stand-by commitments," which
will enable it to improve its portfolio liquidity by making available same-day
settlements on sales of its securities. A stand-by commitment gives the Fund,
when it purchases a Municipal Obligation from a broker, dealer or other
financial institution ("seller"), the right to sell up to the same principal
amount of such securities back to the seller, at the Fund's option, at a
specified price. Stand-by commitments are also known as "puts." The Fund may
acquire stand-by commitments solely to facilitate portfolio liquidity and not to
protect against changes in the market price of the Fund's portfolio securities.
The exercise by the Fund of a stand-by commitment is subject to the ability of
the other party to fulfill its contractual commitment.
The Fund expects that stand-by commitments generally will be available
without the payment of any direct or indirect consideration. However, if
necessary or advisable, the Fund will pay for stand-by commitments, either
separately in cash or by paying a higher price for portfolio securities which
are acquired subject to the commitments.
It is difficult to evaluate the likelihood of use or the potential benefit
of a stand-by commitment. Therefore, it is expected that the Directors will
determine that stand-by commitments ordinarily have a "fair value" of zero,
regardless of whether any direct or indirect consideration was paid. However, if
the market price of the security subject to the stand-by commitment is less than
the exercise price of the stand-by commitment, such security will ordinarily be
valued at such exercise price. Where the Fund has paid for a stand-by
commitment, its cost will be reflected as unrealized depreciation for the period
during which the commitment is held.
There is no assurance that stand-by commitments will be available to the
Fund nor does the Fund assume that such commitments would continue to be
available under all market conditions.
Third Party Puts. The Fund may also purchase long-term fixed rate bonds
that have been coupled with an option granted by a third party financial
institution allowing the Fund at specified intervals to tender (or "put") the
bonds to the institution and receive the face value thereof (plus accrued
interest). These third party puts are available in several different forms, may
be represented by custodial receipts or trust certificates and may be combined
with other features such as interest rate swaps. The Fund receives a short-term
rate of interest (which is periodically reset), and the interest rate
differential between that rate and the fixed rate on the bond is retained by the
financial institution. The financial institution granting the option does not
provide credit enhancement. In the event that there is a default in the payment
of principal or interest, or downgrading of a bond to below investment grade,
the put option will terminate automatically. The risk to the Fund in this case
will be that of holding a long-term bond which would tend to lengthen the
weighted average maturity of the Fund's portfolio.
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Participation Interests. The Fund may purchase from banks participation
interests in all or part of specific holdings of Municipal Obligations. Each
participation is backed by an irrevocable letter of credit or guarantee of the
selling bank that the Sub-Adviser has determined meets the prescribed quality
standards of the Fund. Thus either the credit of the issuer of the Municipal
Obligation or the selling bank, or both, will meet the quality standards of the
Fund. The Fund has the right to sell the participation back to the bank after
seven days' notice for the full principal amount of the Fund's interest in the
Municipal Obligation plus accrued interest, but only (a) as required to provide
liquidity to the Fund, (b) to maintain a high quality investment portfolio or
(c) upon a default under the terms of the Municipal Obligation. The selling bank
will receive a fee from the Fund in connection with the arrangement.
INVESTMENT RESTRICTIONS
The following restrictions are applicable to the Fund. The Fund may not:
(1) with respect to 75% of its total assets, purchase more than 10% of
the voting securities of any one issuer or invest more than 5% of the value
of such assets in the securities or instruments of any one issuer, except
securities or instruments issued or guaranteed by the U.S. Government, its
agencies or instrumentalities.
(2) purchase securities or instruments which would cause 25% or more
of the market value of its total assets at the time of such purchase to be
invested in securities or instruments of one or more issuers having their
principal business activities in the same industry, provided that there is
no limit with respect to investments in the U.S. Government, its agencies
and instrumentalities.
(3) borrow money, except that the Fund may borrow from banks up to 10%
of the current value of its total net assets for temporary or emergency
purposes. A Fund will make no purchases if its outstanding borrowings
exceed 5% of its total assets.
(4) make loans, except that the Fund may (a) lend its portfolio
securities, (b) enter into repurchase agreements with respect to its
portfolio securities, and (c) purchase the types of debt instruments
described in this Prospectus or the SAI.
For purposes of investment restriction number (1), the Fund considers a
Municipal Obligation to be issued by the government entity (or entities) whose
assets and revenues back the Municipal Obligation. For a Municipal Obligation
backed only by the assets and revenues of a nongovernmental user, such user is
deemed to be the issuer; such issuers to the extent their principal business
activities are in the same industry, are also subject to investment restriction
(2). For purposes of investment restriction (2), public utilities are not deemed
to be a single industry but are separated by industrial categories, such as
telephone or gas utilities.
The foregoing investment restrictions and those described in the SAI as
fundamental are policies of the Fund which may be changed only when permitted by
law and approved by the holders of a majority of the Fund's outstanding voting
securities as described under "Other Information -- Voting."
Additionally, as a non-fundamental policy, the Fund may not invest more
than 15% of the aggregate value of its net assets in investments which are
illiquid, or not readily marketable (including repurchase agreements having
maturities of more than seven calendar days and variable and floating rate
demand and master demand notes not requiring receipt of the principal note
amount within seven days' notice).
If a percentage restriction on investment policies or the investment or use
of assets set forth in this Prospectus are adhered to at the time a transaction
is effected, later changes in percentage resulting from changing values will not
be considered a violation.
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RISKS OF INVESTING IN THE FUND
The price per share of the Fund will fluctuate with changes in the value of
the investments held by the Fund and shareholders can lose money on their
investment. Shareholders should expect the value of their shares to fluctuate
with changes in the value of the securities owned by the Fund. There is, of
course, no assurance that the Fund will achieve its investment objective or be
successful in preventing or minimizing the risk of loss that is inherent in
investing in particular types of investment products. In an attempt to minimize
that risk, the Sub-Adviser monitors developments in the economy, the securities
markets, and with each particular issuer. Also, as noted earlier, the Fund is
managed within certain limitations that restrict the amount of its investment in
any single issuer.
Debt Securities. The debt securities in which the Fund will primarily
invest have risks related to changes in interest rates, to their maturity and to
their credit ratings. The values of debt securities held by the Fund will tend
to vary inversely with changes in current interest rates. Thus, the value of the
debt securities held by the Fund will generally decrease if current interest
rates rise and will increase if current interest rates decline. It is also
generally true that the risk of principal fluctuation for debt securities is
greater the longer is their remaining term to maturity. Thus, the securities
held by the Fund, although they typically have a higher yield, will tend to
carry more risk of principal fluctuation than securities with shorter
maturities. Finally, the lower the credit rating of debt securities, the higher
is the risk of default for payment of principal and/or interest. Thus,
securities rated AAA or Aaa by S&P or Moody's will generally carry less risk of
default than securities rated BBB or Baa by S&P or Moody's. In particular,
securities rated BBB or Baa may have speculative characteristics. Although they
are considered to have adequate capacity to pay principal and interest when due,
certain protective elements are lacking so that unfavorable economic
developments may negatively affect their capacity to pay. Although securities
rated BBB or Baa typically pay higher yields than more highly rated securities,
they also have greater potential price variability.
Foreign Securities. The Fund may invest in dollar-denominated debt
obligations of foreign issuers. Investing in the securities of issuers in any
foreign country involves special risks an) considerations not typically
associated with investing in securities of U.S. issuers. These include
differences in accounting, auditing and financial reporting standards; generally
higher commission rates on foreign portfolio transactions; the possibility of
nationalization, expropriation or confiscatory taxation; adverse changes in
investment or exchange control regulations (which may include suspension of the
ability to transfer currency from a country); and political instability which
could affect U.S. investments in foreign countries. Additionally, foreign
securities and dividends and interest payable on those securities may be subject
to foreign taxes, including taxes withheld from payments on those securities.
Foreign securities often trade with less frequency and volume than domestic
securities and, therefore, may exhibit greater price volatility. Additional
costs associated with an investment in foreign securities may include higher
custodial fees than apply to domestic custodial arrangements. The Fund's
objective may be affected either unfavorably or favorably by indigenous economic
and political developments.
Through the Fund's flexible policies, the Sub-Adviser endeavors to avoid
unfavorable consequences and to take advantage of favorable developments in
particular nations where, from time to time, it may place the Fund's
investments. See the SAI for information about foreign securities.
Zero Coupon And Pay-In-Kind Securities. Zero coupon bonds (which do not pay
interest until maturity) and pay-in-kind securities (which pay interest in the
form of additional securities) may be more speculative and may fluctuate more in
value than securities which pay income periodically and in cash. In addition,
although the Fund receives no periodic cash payments from such investments,
applicable tax rules require the Fund to accrue
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<PAGE> 17
and pay out its income from such securities annually as income dividends and
require stockholders to pay tax on such dividends.
Municipal Lease Obligations. Municipal lease obligations have special risks
not normally associated with municipal bonds. These obligations frequently
contain "non-appropriation" clauses that provide that the governmental issuer of
the obligation has no obligation to make future payments under the lease or
contract unless money is appropriated for such purposes by the legislative body
on a yearly or other periodic basis. For more information on risks of municipal
lease investments, see the SAI.
Risks Of Options Transactions. The purchase and writing of options involves
certain risks. During the option period, the covered call writer has, in return
for the premium on the option, given up the opportunity to profit from a price
increase in the underlying securities above the exercise price, but, as long as
its obligation as a writer continues, has retained the risk of loss should the
price of the underlying security decline. The writer of an option has no control
over the time when it may be required to fulfill its obligation as a writer of
the option. Once an option writer has received an exercise notice, it cannot
effect a closing purchase transaction in order to terminate its obligation under
the option and must deliver the underlying securities at the exercise price. If
a put or call option purchased by the Fund is not sold when it has remaining
value, and if the market price of the underlying security, in the case of a put,
remains equal to or greater than the exercise price, or in the case of a call,
remains less than or equal to the exercise price, the Fund will lose its entire
investment in the option. Also, where a put or call option on a particular
security is purchased to hedge against price movements in a related security,
the price of the put or call option may move more or less than the price of the
related security. There can be no assurance that a liquid market will exist when
the Fund seeks to close out an option position. Furthermore, if trading
restrictions or suspensions are imposed on the options market, the Fund may be
unable to close out a position. If the Fund cannot effect a closing transaction,
it will not be able to sell the underlying security while the previously written
option remains outstanding, even if it might otherwise be advantageous to do so.
Risks Of Futures And Related Options Transactions. There are several risks
associated with the use of futures contracts and options on futures contracts.
While the Fund's use of futures contracts and related options for hedging may
protect the Fund against adverse movements in the general level of interest
rates or securities prices, such transactions could also preclude the
opportunity to benefit from favorable movements in the level of interest rates
or securities prices. There can be no guarantee that the Sub-Adviser's forecasts
about market value, interest rates and other applicable factors will be correct
or that there will be a correlation between price movements in the hedging
vehicle and in the securities being hedged. The skills required to invest
successfully in futures and options may differ from the skills required to
manage other assets in the Fund's portfolio. An incorrect forecast or imperfect
correlation could result in a loss on both the hedged securities in the Fund and
the hedging vehicle so that the Fund's return might have been better had hedging
not been attempted.
There can be no assurance that a liquid market will exist at a time when
the Fund seeks to close out a futures contract or futures option position. Most
futures exchanges and boards of trade limit the amount of fluctuation permitted
in futures contract prices during a single day; once the daily limit has been
reached on a particular contract, no trades may be made that day at a price
beyond that limit. In addition, certain of these instruments are relatively new
and without a significant trading history. As a result, there is no assurance
that an active secondary market will develop or continue to exist. Lack of a
liquid market for any reason may prevent the Fund from liquidating an
unfavorable position and the Fund would remain obligated to meet margin
requirements until the position is closed. The potential risk of loss to the
Fund from a futures transaction is unlimited.
The Fund will only enter into futures contracts or futures options which
are standardized and traded on a U.S. or foreign exchange or board of trade, or
similar entity, or are quoted on an automated quotation system.
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<PAGE> 18
The Fund may trade futures contracts and options on futures contracts on
U.S. domestic markets and on exchanges located outside of the United States.
Foreign markets may offer advantages such as trading in indices that are not
currently traded in the United States. Foreign markets, however, may have
greater risk potential than domestic markets. Unlike trading on domestic
commodity exchanges, trading on foreign commodity exchanges is not regulated by
the Commodity Futures Trading Commission and may be subject to greater risk than
trading on domestic exchanges. For example, some foreign exchanges are principal
markets so that no common clearing facility exists and a trader may look only to
the broker for performance of the contract. In addition, any profits that the
Fund might realize in trading could be eliminated by adverse changes in the
exchange rate of the currency in which the transaction is denominated, or the
Fund could incur losses as a result of changes in the exchange rate.
Transactions on foreign exchanges may include both commodities that are traded
on domestic exchanges or boards of trade and those that are not.
MANAGEMENT OF THE FUND
The business and affairs of each Fund are managed under the direction of
the Board of Directors. The Directors are Leslie H. Garner, Jr., James H. Speed,
Jr., Frederick E. Turnage, Lucy Hancock Bode and J. Franklin Martin. Additional
information about the Directors, as well as the Company's executive officers,
may be found in the SAI under the heading "Management -- Directors and
Officers."
THE ADVISER: CENTURA BANK
The Adviser, Centura Bank, 131 North Church Street, Rocky Mount, North
Carolina 27802, is a member bank of the Federal Reserve System. Centura Bank and
its parent, Centura Banks, Inc., were formed in 1990 through a merger of two
other Rocky Mount, North Carolina bank holding companies and their subsidiary
banks. The Adviser has served as investment adviser to Centura Funds, Inc. since
the Company's commencement of operations in 1994. The Adviser also, since 1991,
managed several common and collective trust funds that were later converted into
various of the Funds.
The Adviser provides overall management for the Company and the Fund. For
the management services it provides the Fund, the Adviser receives fees from the
Fund, payable monthly, at an annual rate of 0.60% based on the Fund's average
daily net assets. Out of its fees from the Fund, the Adviser pays the fees of
the Sub-Adviser. The Adviser also serves as Custodian for the Fund's assets, for
which it receives additional fees.
THE SUB-ADVISER
Sovereign Advisers, 6302 Fairview Road, Suite 450, Charlotte, North
Carolina 28210, serves as Sub-Adviser and is responsible for day-to-day
management of the Fund's portfolio and placement of orders for its portfolio
transactions. Fees paid to the Sub-Adviser by the Adviser for these services are
paid monthly at an annual rate of 0.30% based on the Fund's average daily net
assets.
Jeffrey R. Hines serves as portfolio manager for the Fund. Mr. Hines has
more than 17 years experience in the management of fixed income and equity
portfolios, and provides services to a wide spectrum of individual and
institutional clients including corporations, banks, hospitals, public bodies,
foundations, insurance companies and universities. Prior to joining Sovereign in
January 1994, he served as Senior Portfolio Manager for a Chicago-based
investment management firm with more than $1.3 billion in institutional client
portfolios (1992-1994) and Chief Portfolio Manager for Dana Investment Advisors
(1990-1992). Former Chief Investment Officer of a government agency, Mr. Hines
was responsible for the issuance of more than $200 million of municipal bonds as
well as all investment decisions on the agency's cash reserves. Mr. Hines
graduated from the University of Colorado and is a Chartered Financial Analyst.
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THE DISTRIBUTOR
Centura Funds Distributor, Inc., 3435 Stelzer Road, Columbus, Ohio 43219,
acts as the Fund's Distributor. The Distributor is an affiliate of the Fund's
Administrator, BISYS, and was formed specifically to distribute the Centura
Funds.
The Fund has adopted a Service and Distribution plan ("Plan") with respect
to its Class A and Class B shares. The Plan provides that each class of shares
will pay the Distributor a fee calculated as a percentage of the value of
average daily net assets of that class as reimbursement for its costs incurred
in financing certain distribution and shareholder service activities related to
that class.
Class A Plan. The Class A Plan provides for payments by the Fund to the
Distributor at an annual rate not to exceed 0.50% of the Fund's average net
assets attributable to its Class A shares. Such fees may include a Service Fee
totaling up to 0.25% of the average annual net assets attributable to the Fund's
Class A shares. Service Fees are paid to securities dealers and other financial
institutions for maintaining shareholder accounts and providing related services
to shareholders. The Distributor may also retain portions of the sales charges
paid on Class A shares. The Distributor will limit Plan fees for Class A shares
to 0.25% during the current fiscal year.
Class B Plan. The Class B Plan provides for payments by the Fund to the
Distributor at an annual rate not to exceed 1.00% of the Fund's average net
assets attributable to its Class B shares. For the current fiscal year, the
Distributor has agreed to limit fees for Class B shares of the Fund to 0.75%.
Such fees may include a Service Fee totaling up to 0.25% of the average annual
net assets attributable to a Fund's Class B shares. The Distributor also
receives the proceeds of any CDSC imposed on redemptions of Class B shares.
Although Class B shares are sold without an initial sales charge, the
Distributor pays a sales commission equal to 2.50% of the amounts invested in
the Fund to securities dealers and other financial institutions who sell Class B
shares. The Distributor may, at times, pay sales commissions higher than the
above on sales of Class B shares. These commissions are not paid on exchanges
from other Centura Funds and sales to investors for whom the CDSC is waived.
Under the Plan, the Fund pays the Distributor and other securities dealers
and other financial institutions and organizations for certain shareholder
service or distribution activities. Subject to overall limits applicable to each
class, selling dealers may be paid amounts totaling up to 0.50% of the value of
average daily net assets of Fund shares annually. Amounts received by the
Distributor may, additionally, subject to the Plan maximums, be used to cover
certain other costs and expenses related to the distribution of Fund shares and
provision of service to Fund shareholders, including: (a) advertising by radio,
television, newspapers, magazines, brochures, sales literature, direct mail or
any other form of advertising; (b) expenses of sales employees or agents of the
Distributor, including salary, commissions, travel and related expenses; (c)
costs of printing prospectuses and other materials to be given or sent to
prospective investors; and (d) such other similar services as the Directors
determine to be reasonably calculated to result in the sale of shares of the
Fund. The Fund will pay all costs and expenses in connection with the
preparation, printing and distribution of the Prospectus to current shareholders
and the operation of its Plan, including related legal and accounting fees. The
Fund will not be liable for distribution expenditures made by the Distributor in
any given year in excess of the maximum amount payable under the Plan in that
year.
SERVICE ORGANIZATIONS
Payments may be made by the Funds or by the Distributor to various banks,
trust companies, broker-dealers or other financial organizations (collectively,
"Service Organizations") for providing administrative services for the Fund and
its shareholders, such as maintaining shareholder records, answering shareholder
inquiries and
19
<PAGE> 20
forwarding materials and information to shareholders. The Fund may pay fees to
Service Organizations (which vary depending upon the services provided) in
amounts up to an annual rate of 0.50% of the daily net asset value of the shares
of either class owned by shareholders with whom the Service Organization has a
servicing relationship.
Some Service Organizations may impose additional or different conditions on
their clients, such as requiring clients to invest more than the Fund's minimum
initial or subsequent investments or charging a direct fee for servicing. If
imposed, these fees would be in addition to any amounts which might be paid to
the Service Organization by the Fund. Each Service Organization has agreed to
transmit to its clients a schedule of any such fees. Shareholders using Service
Organizations are urged to consult with them regarding any such fees or
conditions.
The Glass-Steagall Act and other applicable laws provide that among other
things, banks may not engage in the business of underwriting, selling or
distributing securities. There is currently no precedent prohibiting banks from
performing administrative and shareholder servicing functions as Service
Organizations. However, judicial or administrative decisions or interpretations
of such laws, as well as changes in either federal or state regulations relating
to the possible activities of banks and their subsidiaries or affiliates, could
prevent a bank Service Organization from continuing to perform all or a part of
its servicing activities. If a bank were prohibited from so acting, its
shareholder clients would be permitted to remain shareholders of the Fund and
alternative means for continuing the servicing of such shareholders would be
sought. It is not expected that shareholders would suffer any adverse financial
consequences as a result of any of these occurrences.
THE ADMINISTRATOR AND SPONSOR
BISYS Fund Services Limited Partnership d/b/a BISYS Fund Services
("BISYS"), 3435 Stelzer Road, Columbus, Ohio 43219 acts as Sponsor and
Administrator of the Company. BISYS is a subsidiary of BISYS Group, Inc., which
is headquartered in Little Falls, New Jersey, and supports more than 5,000
financial institutions and corporate clients through two strategic business
units. BISYS Information Services Group provides image and data processing
outsourcing, and pricing analysis to more than 600 banks nationwide. BISYS
Investment Services Group designs, administers and distributes over 60 families
of proprietary mutual funds consisting of more than 450 portfolios, and provides
401(k) marketing support, administration, and recordkeeping services in
partnership with banking institutions and investment management companies.
Pursuant to an Administration Agreement with the Company, BISYS provides
certain management and administrative services necessary for the Fund's
operations including: (a) general supervision of the operation of the Fund
including coordination of the services performed by the Adviser, the
Sub-Adviser, custodian, independent accountants and legal counsel; (b)
regulatory compliance, including the compilation of information for documents
such as reports to, and filings with, the SEC and state securities commissions,
and preparation of proxy statements and shareholder reports for the Funds; (c)
general supervision relative to the compilation of data required for the
preparation of periodic reports distributed to the Company's officers and Board
of Directors; and (d) furnishing office space and certain facilities required
for conducting the business of the Fund. For these services, the Administrator
receives from the Fund a fee, payable monthly, at the annual rate of 0.15% of
the Fund's average daily net assets.
Pursuant to a Transfer Agency Agreement, BISYS Fund Services, Inc. ("BFSI")
serves as the Fund's transfer agent. Additionally, pursuant to a Fund Accounting
Agreement, BFSI provides assistance in calculating the Fund's net asset values
and provides other accounting services for the Fund. The Transfer Agency
Agreement provides for a per account fee and reimbursement for out-of-pocket
expenses in connection with shareholder
20
<PAGE> 21
servicing. The Fund Accounting Agreement provides for the Fund to pay $2,500 per
month plus out-of-pocket expenses.
OTHER EXPENSES
The Fund bears all costs of its operations other than expenses specifically
the responsibility of the Administrator, the Adviser, the Sub-Adviser, or other
service providers. In addition to service fees paid to providers described
above, the costs borne by the Fund, some of which may vary among the classes, as
noted above, include: legal and accounting expenses; Directors' fees and
expenses; insurance premiums; custodian and transfer agent fees and expenses;
expenses incurred in acquiring or disposing of the Fund's portfolio securities;
expenses of registering the Fund's shares for sale with the SEC and of
satisfying requirements of various state securities commissions; expenses of
maintaining the Fund's legal existence and of shareholders' meetings; and
expenses of preparing and distributing reports, proxy statements and
prospectuses to existing shareholders. The Fund bears its own expenses
associated with its establishment as a portfolio of the Company. Company
expenses directly attributable to the Fund or a class are charged to the Fund or
class; other Company expenses are allocated proportionately among all of the
Funds and classes in the Company in relation to the net assets of each Fund and
class.
PRICING OF FUND SHARES
CLASS A SHARES
Orders for the purchase of Class A shares will be executed at the net asset
value per share of that class next determined after an order has been received,
plus any applicable sales charge (the "public offering price"). The sales charge
on purchases of Class A shares of the Fund is as follows:
AMOUNT OF SALES CHARGE REALLOWED
<TABLE>
<CAPTION>
SALES CHARGE AS A
PERCENTAGE OF TO DEALERS
---------------------------- AS A PERCENTAGE OF
PUBLIC NET AMOUNT PUBLIC
OFFERING PRICE INVESTED OFFERING PRICE*
-------------- ---------- ------------------
<S> <C> <C> <C>
CLASS A SHARES --
AMOUNT OF INVESTMENT:
Less than $50,000............................... 2.75% 2.83% 2.75%
$50,000 but less than $100,000.................. 2.50% 2.56% 2.50%
$100,000 but less than $250,000................. 2.25% 2.30% 2.50%
$250,000 but less than $500,000................. 1.75% 1.78% 1.75%
$500,000 but less than $1,000,000............... 1.00% 1.01% 1.00%
$1,000,000 and over............................. 0.00%** 0.00%** (See below)
</TABLE>
- ---------------
* The staff of the Securities and Exchange Commission has indicated that dealers
who receive more than 90% of the sales charge may be considered underwriters.
** A 0.75% CDSC will be assessed on shares redeemed within 18 months of purchase
(excluding shares purchased with reinvested dividends and/or distributions).
Although no sales charge is applied to purchases of $1,000,000 or more,
Centura Funds Distributor, Inc. may pay the following dealer concessions for
such purchases up to 0.75% on purchases of $1,000,000 to
21
<PAGE> 22
$1,999,999, plus an additional 0.50% on amounts from $2,000,000 to $4,999,999,
plus an additional 0.25% on amounts of $5,000,000 or more.
The sales charge will not apply to purchases of Class A shares by: (a)
trust, investment management and other fiduciary accounts managed by the Adviser
or the Sub-Adviser pursuant to a written agreement; (b) any person purchasing
shares with the proceeds of a distribution from a trust, investment management
or other fiduciary account managed by the Adviser or the Sub-Adviser pursuant to
a written agreement; (c) BISYS or any of its affiliates; (d) Directors or
officers of the Centura Funds; (e) directors or officers of BISYS or the
Adviser, the Sub-Adviser, or affiliates or bona fide full-time employees of any
of the foregoing who have acted as such for not less than 90 days (including
members of their immediate families and their retirement plans or accounts); or
(f) retirement accounts or plans (or monies from retirement accounts or plans)
for which there is a written service agreement between the Company and the plan
sponsor, so long as such shares are purchased through the Fund; or (g) any
person purchasing shares within an approved asset allocation program sponsored
by a financial services organization. The sales charge also does not apply to
shares sold to representatives of selling brokers and members of their immediate
families. In addition, the sales charge does not apply to sales to bank trust
departments, acting on behalf of one or more clients, of shares having an
aggregate value equal to or exceeding $200,000.
For purchases of $250,000 or more, the Fund believes that it is preferable
for an investor (other than an institutional investor eligible to purchase Class
C shares) to purchase Class A rather than Class B shares. This belief is based
on an assessment of the relative costs of the two classes, including applicable
sales charge or CDSC and Service and Distribution Fees. Accordingly, the Fund
has adopted guidelines directing authorized brokers, investment advisers and
Service Organizations that purchases of $250,000 or more by their non-
institutional clients should be of Class A shares. The Fund reserves the right
to vary these guidelines at any time.
CLASS B SHARES
The Fund offers its Class B shares at their net asset value next determined
after a purchase order has been received. No sales charge is imposed at the time
of purchase. A CDSC is, however, imposed on certain redemptions of Class B
shares. See "Redemption of Fund Shares" for more information on the CDSC. On the
seventh anniversary of their purchase date, Class B shares automatically convert
to Class A shares. See "Management of the Fund -- the Distributor."
See "Dividends, Distributions and Federal Income Taxation," for an
explanation of circumstances in which a sales charge paid to acquire shares of a
mutual fund may not be taken into account in determining gain or loss on the
disposition of those shares.
QUANTITY DISCOUNTS IN THE SALES CHARGES
Right Of Accumulation
The Fund permits sales charges on Class A shares to be reduced through
rights of accumulation. For Class A shares, the schedule of reduced sales
charges will be applicable once the accumulated value of the account has reached
$50,000. For this purpose, the dollar amount of the qualifying concurrent or
subsequent purchase is added to the net asset value of any other Class A shares
of those Funds in the Company owned at the time by the investor. The sales
charge imposed on the Class A shares being purchased will then be at the rate
applicable to the aggregate of Class A shares purchased. For example, if the
investor held Class A shares of the Fund and of other Centura Funds valued at
$100,000 and purchased an additional $20,000 of shares of these Funds (totalling
an investment of $120,000), the sales charge for the $20,000 purchase would be
at the next lower sales charge on the schedule (i.e., the sales charge for
purchases over $100,000 but less than $250,000). There can be no
22
<PAGE> 23
assurance that investors will receive the cumulative discounts to which they may
be entitled unless, at the time of placing their purchase order, the investors,
their dealers, or Service Organizations make a written request for the discount.
The cumulative discount program may be amended or terminated at any time. This
particular privilege does not entitle the investor to any adjustment in the
sales charge paid previously on purchases of shares of the Centura Funds. If the
investor knows that he will be making additional purchases of shares in the
future, he may wish to consider executing a Letter of Intent.
Letter Of Intent
The schedule of reduced sales charges is also available to Class A
investors who enter into a written Letter of Intent providing for the purchase,
within a 13-month period, of Class A shares of the Fund. Shares of the Fund
previously purchased during a 90-day period prior to the date of receipt by the
Fund of the Letter of Intent which are still owned by the shareholder may also
be included in determining the applicable reduction, provided the shareholder,
dealer, or Service Organization notifies the Fund of such prior purchases.
A Letter of Intent permits an investor in Class A shares to establish a
total investment goal to be achieved by any number of investments over a
13-month period. Each investment made during the period will receive the reduced
sales commission applicable to the amount represented by the goal as if it were
a single investment. A number of shares totalling 5% of the dollar amount of the
Letter of Intent will be held in escrow by the Fund in the name of the
shareholder. The initial purchase under a Letter of Intent must be equal to at
least 5% of the stated investment goal.
The Letter of Intent does not obligate the investor to purchase, or the
Fund to sell, the indicated amount. In the event the Letter of Intent goal is
not achieved within the 13-month period, the investor is required to pay the
difference between the sales charge otherwise applicable to the purchases made
during this period and sales charges actually paid. The Fund is authorized by
the shareholder to liquidate a sufficient number of escrowed shares to obtain
such difference. If the goal is exceeded and purchases pass the next sales
charge level, the sales charge on the entire amount of the purchase that results
in passing that level and on subsequent purchases will be subject to further
reduced sales charges in the same manner as set forth under "Right of
Accumulation," but there will be no retroactive reduction of sales charges on
previous purchases. At any time while a Letter of Intent is in effect, a
shareholder may, by written notice to the Fund, increase the amount of the
stated goal. In that event, shares purchased during the previous 90-day period
and still owned by the shareholder will be included in determining the
applicable sales charge reduction. The 5% escrow and minimum purchase
requirements will be applicable to the new stated goal. Investors electing to
purchase Fund shares pursuant to a Letter of Intent should carefully read the
application for Letter of Intent which is available from the Fund.
MINIMUM PURCHASE REQUIREMENTS
The minimum initial investment in the Fund is $1,000, except that the
minimum investment required for an IRA or other qualified retirement plan is
$250. Any subsequent investments must be at least $250, except for an IRA or
qualified retirement plan investment. All initial investments should be
accompanied by a completed Purchase Application unless otherwise agreed upon
when purchases are made through an authorized securities dealer or financial
institution. A Purchase Application accompanies this Prospectus. However, a
separate application is required for IRA and other qualified retirement plan
investments. The Fund reserves the right to reject purchase orders.
23
<PAGE> 24
PURCHASE OF FUND SHARES
All consideration received by the Fund for the purchase of shares is
invested in full and fractional shares of the indicated class of the Fund.
Certificates for shares are not issued. BISYS maintains records of each
shareholder's holdings of Fund shares, and each shareholder receives a monthly
statement of transactions, holdings and dividends.
An investment may be made using any of the following methods:
Through an Authorized Broker, Investment Adviser or Service Organization.
Shares are available to new and existing shareholders through authorized
brokers, investment advisers and Service Organizations. To make an investment
using this method, a Purchase Application must have been completed and the
customer must notify the broker, investment adviser or Service Organization of
the amount to be invested. The broker will then contact the Fund to place the
order.
Orders received by the broker or Service Organization in proper order prior
to the determination of net asset value and transmitted to the Fund prior to the
close of its business day (which is currently 4:00 p.m., Eastern time), will
become effective that day. Brokers who receive orders are obligated to transmit
them promptly. Written confirmation of an order should be received a few days
after the broker has placed the order.
Through The Fund. Orders may be placed directly with the Fund. For an
initial investment, the investor should submit a completed Purchase Application
together with a check or other negotiable bank draft for at least $1,000 (or any
lower applicable minimum required for an initial investment) to:
Centura Funds, Inc.
P.O. Box 182485
Columbus, Ohio 43218-2485
No third party or foreign checks will be accepted.
Subsequent investments may be made by sending a check or other negotiable
bank draft for at least $250 (or any lower applicable minimum for a subsequent
investment) to the same address. The investor's letter of instruction should
include: (a) the name of the Fund and class of shares to be purchased; and (b)
the account number.
If orders placed through the Fund's Distributor are paid for by check, the
order becomes effective on the day on which funds are made available with
respect to the check, which will be the same day of receipt of the check if the
check is received by 2:00 p.m., Eastern time. A customer who purchases Fund
shares through the Distributor by personal check will be permitted to redeem
those shares only after the purchase check has been collected, which may take up
to 15 days or more. Customers who anticipate the need for more immediate access
to their investment should purchase shares with federal funds. A customer
purchasing Fund shares through a Shareholder Servicing Agent should contact his
or her Shareholder Servicing Agent with respect to the ability to purchase
shares by check and the related procedures.
By Wire. Investments may be made directly through the use of wire transfers
of Federal funds. An investor's bank may wire Federal funds to the Fund. In most
cases, the bank will either be a member of the Federal Reserve Banking System or
have a relationship with a bank that is a member. The bank will normally charge
a fee for handling the transaction. A completed Account Application must be
overnighted to the Fund at Centura Funds, Inc., 3435 Stelzer Road, Columbus,
Ohio 43219-8021. Notification must be given to the Fund at 1-800-442-3688 prior
to 4:00 p.m., Eastern Time, of the wire date. Federal funds purchases will be
accepted only
24
<PAGE> 25
on a day on which the Fund, the Distributor and the custodian bank are all open
for business. To purchase shares by a federal funds wire, investors should first
contact the Fund at 1-800-442-3688 for complete instructions.
Investors who have read the Prospectus may establish a new regular account
through the Wire Desk; IRAs and other qualified retirement plan accounts may not
be opened in this way. When new accounts are established by wire, the
distribution options will be set to reinvest all dividends and the social
security or tax identification number ("TIN") will not be certified until a
signed application is received. Completed applications should be forwarded
immediately to the Fund. By using the Purchase Application, an investor may
specify other distribution options and may add any special features offered by
the Fund.
Should any dividend distributions or redemptions be paid before the TIN is
certified, they will be subject to 31% federal tax withholding.
Institutional Accounts. Bank trust departments and other institutional
accounts, not subject to sales charges, may place orders directly with the Fund
by telephone at 1-800-44CENTURA (442-3688).
Automatic Investment Program. An eligible shareholder may also participate
in the Centura Automatic Investment Program, an investment plan that
automatically debits money from the shareholder's bank account and invests it in
the Fund through the use of electronic funds transfers or automatic bank drafts.
No investment is required to initiate this Program. Shareholders may elect to
make investments by transfers of a minimum of $50 on either the fifth or
twentieth day of each month or calendar quarter into their established Fund
account. Contact the Fund for more information about the Centura Automatic
Investment Program.
By Payroll Direct Deposits. Investors may set up a payroll direct deposit
arrangement for amounts to be automatically invested in the Fund. Participants
in the Payroll Direct Deposit Program may make periodic investments of at least
$50 per pay period. Contact the Fund for more information about Payroll Direct
Deposits.
RETIREMENT PLAN ACCOUNTS
The Fund may be used as a funding medium for IRAs and other qualified
retirement plans ("Retirement Plans"). The minimum initial investment for an IRA
or a Retirement Plan is $250, with no minimum for subsequent investments.
Completion of a special application is required in order to create such an
account. Fund shares may also be purchased for IRAs and Retirement Plans
established with other authorized custodians. Contributions to IRAs are subject
to prevailing amount limits set by the Internal Revenue Service. For more
information about IRAs and other Retirement Plan accounts, call the Fund at
1-800-44CENTURA (442-3688).
EXCHANGE OF FUND SHARES
The Fund offers two convenient ways to exchange shares of the Fund for
shares of another Fund in the Company. Shares of a particular class of the Fund
may be exchanged only for shares of that same class in another Fund. Before
engaging in an exchange transaction, a shareholder should obtain and read
carefully the Prospectus describing the Fund into which the exchange will occur.
A shareholder may not exchange shares of a class of the Fund for shares of the
same class of another Fund that has not satisfied applicable requirements for
sale in the state of the shareholder's residence. There is no minimum for
exchanges, provided the investor has satisfied the $1,000 minimum investment
requirement for the Fund into which he or she is exchanging, and no service fee
is imposed for an exchange. The Company may terminate or amend the terms of the
exchange privilege at any time upon 60 days notice to shareholders.
25
<PAGE> 26
A new account opened by exchange must be established with the same name(s),
address and social security number as the existing account. All exchanges will
be made based on the respective net asset values of the applicable Funds next
determined following receipt of the request by the Fund in good order.
An exchange is taxable as a sale of a security on which a gain or loss may
be recognized. Shareholders should receive written confirmation of the exchange
within a few days of the completion of the transaction.
In the case of transactions subject to a sales charge, the sales charge
will be assessed on an exchange of shares, equal to the excess of the sales load
applicable to the shares to be acquired, over the amount of any sales load
previously paid on the shares to be exchanged. No sales charge is assessed on an
exchange of Class A shares that have been held for more than two years. No
service fee is imposed on any exchange. See "Dividends, Distributions and
Federal Income Taxation" for an explanation of circumstances in which a sales
charge paid to acquire shares of the Fund may not be taken into account in
determining gain or loss on the disposition of those shares.
Exchange By Mail. To exchange Fund shares by mail, shareholders should
simply send a letter of instruction to the Fund. The letter of instruction must
include: (a) the investor's account number; (b) the class of shares to be
exchanged; (c) the Fund from and the Centura Fund into which the exchange is to
be made; (d) the dollar or share amount to be exchanged; and (e) the signatures
of all registered owners or authorized parties.
Exchange By Telephone. To exchange Fund shares by telephone or to ask any
questions, shareholders may call the Fund at 1-800-44CENTURA (442-3688). Please
be prepared to give the telephone representative the following information: (a)
the account number, social security number and account registration; (b) the
class of shares to be exchanged; (c) the name of the Fund from which and the
Fund into which the exchange is to be made; and (d) the dollar or share amount
to be exchanged. Telephone exchanges are provided automatically to each
shareholder unless otherwise specifically indicated on the Purchase Application.
The Fund employs procedures, including recording telephone calls, testing
caller's identity, and sending written confirmation of telephone transactions,
designed to give reasonable assurance that instructions communicated by
telephone are genuine, and to discourage fraud. To the extent that the Fund does
not follow such procedures, it may be liable for losses due to unauthorized or
fraudulent telephone instructions. The Fund will not be liable for acting upon
instructions communicated by telephone that it reasonably believes to be
genuine. The Fund reserves the right to suspend or terminate the privilege of
exchanging by mail or by telephone at any time. Telephone Redemption and
Telephone Exchange will be suspended for a period of 10 days following a
telephonic address change.
REDEMPTION OF FUND SHARES
Shareholders may redeem their shares, in whole or in part on any business
day. If a shareholder holds shares in more than one class of the Fund, any
request for redemption must specify the class from which shares are to be
redeemed. In the event a shareholder fails to make such a specification or if
there are insufficient shares of the specified class to satisfy the redemption
order, the redemption order will be delayed until the Fund's transfer agent
receives further instructions from the shareholder.
Class A and Class B shares will be redeemed at the net asset value next
determined after a redemption request in good order has been received by the
Fund, provided that for Class B shares, redemption proceeds will be reduced by
any applicable CDSC. A CDSC payable to the Distributor is imposed on any
redemption of Class B shares that causes the current value of a Class B
shareholder's account to fall below the dollar amount of all payments by the
shareholder for the purchase of Class B shares ("purchase payments") during the
preceding five years. No charge is imposed to the extent the net asset value of
the Class B shares to be redeemed does not exceed (a) the current net asset
value of the Class B shares purchased through the reinvestment of dividends or
26
<PAGE> 27
capital gains distributions, plus (b) increases in the net asset value of the
shareholder's Class B shares above the purchase payments made during the
preceding five years.
In circumstances in which the CDSC is imposed, the amount of the charge
will depend on the number of years since the shareholder made the purchase
payment from which the amount is being redeemed. With respect to Class B share
redemptions only, the purchase payment from which a redemption is made is
assumed to be the earliest purchase payment from which a full redemption has not
already been effected. Solely for purposes of determining the number of years
since a purchase payment, all purchase payments during a month will be
aggregated and deemed to have been made on the last day of the preceding month.
The following table sets forth the rates of the charge for redemptions of Class
B shares of the Fund.
CONTINGENT DEFERRED SALES CHARGE
<TABLE>
<CAPTION>
YEARS SINCE PURCHASE CENTURA QUALITY INCOME FUND
-------------------- ---------------------------
<S> <C>
1 3.0%
2 3.0%
3 3.0%
4 2.0%
5 1.0%
6 0%
</TABLE>
Following the seventh anniversary of their purchase date, Class B shares
will convert automatically to Class A shares and thereafter will be subject to
the lower service and distribution plan fees applicable to Class A shares. See
"Management of the Fund -- The Distributor."
Waivers Of CDSC. The Class B CDSC will be waived on (a) involuntary
redemptions; and (b) redemptions of shares in connection with a combination of
any investment company with the Company or the Fund by merger, acquisition of
assets or otherwise. The CDSC will also be waived for the classes of investors
for which the initial sales charge is waived on purchases of Class A shares.
(See "Pricing of Fund Shares -- Class A Shares.")
Where the shares of any class to be redeemed have been purchased by check,
the redemption request will be held until the purchasing check has cleared,
which may take up to 15 days. Shareholders may avoid this delay by investing
through wire transfers of Federal funds. During the period prior to the time the
shares are redeemed, dividends on the shares will continue to accrue and be
payable and the shareholder will be entitled to exercise all other beneficial
rights of ownership.
Once the shares are redeemed, the Fund will ordinarily send the proceeds by
check to the shareholder at the address of record on the next business day. The
Fund may, however, take up to seven days to make payment, although this will not
be the customary practice. Also, if the New York Stock Exchange is closed (or
when trading is restricted) for any reason other than the customary weekend or
holiday closing or if an emergency condition as determined by the SEC merits
such action, the Fund may suspend redemptions or postpone payment dates. A
redemption is a transaction on which gain or loss may be recognized for tax
purposes.
REDEMPTION METHODS
To ensure acceptance of a redemption request, it is important that
shareholders follow the procedures described below. Although the Fund has no
present intention to do so, the Fund reserves the right to refuse or to limit
the frequency of any telephone or wire redemptions. Of course, it may be
difficult to place orders by
27
<PAGE> 28
telephone during periods of severe market or economic change, and a shareholder
should consider alternative methods of communications, such as couriers. The
Fund's services and their provisions may be modified or terminated at any time
by the Fund. If the Fund terminates any particular service, it will do so only
after giving written notice to shareholders. Redemption by mail will always be
available to shareholders. Requests in "proper order" must include the following
documentation: (a) a letter of instruction, if required, signed by all
registered owners of the shares in the exact names in which they are registered;
(b) any required signature guarantees (see "Signature Guarantees" below); and
(c) other supporting legal documents, if required, in the case of estates,
trusts, guardianships, custodianships, corporations, pension and profit sharing
plans and other organizations.
A shareholder may redeem shares using any of the following methods:
Through An Authorized Broker, Investment Adviser Or Service Organization.
The shareholder should contact his or her broker, investment adviser or Service
Organization and provide instructions to redeem shares. Such organizations are
responsible for prompt transmission of orders. The broker will contact the Fund
and place a redemption trade. The broker may charge a fee for this service.
By Mail. Shareholders may redeem shares by sending a letter directly to the
Fund. To be accepted, a letter requesting redemption must include: (a) the Fund
name, class of shares and account registration from which shares are being
redeemed; (b) the account number; (c) the amount to be redeemed; (d) the
signatures of all registered owners; and (e) a signature guarantee by any
eligible guarantor institution including members of national securities
exchanges, commercial banks or trust companies, broker-dealers, credit unions
and savings associations. Corporations, partnerships, trusts or other legal
entities will be required to submit additional documentation.
By Telephone. Shareholders may redeem shares by calling the Fund toll free
at 1-800-44CENTURA (442-3688). Be prepared to give the telephone representative
the following information: (a) the account number, social security number and
account registration; (b) the name of the class and the Fund from which shares
are being redeemed; and (c) the amount to be redeemed. Telephone redemptions are
available unless otherwise indicated on the Purchase Application or on the
Optional Services Form. The Fund employs procedures, including recording
telephone calls, testing a caller's identity, and sending written confirmation
of telephone transactions, designed to give reasonable assurance that
instructions communicated by telephone are genuine, and to discourage fraud. To
the extent that the Fund does not follow such procedures, it may be liable for
losses due to unauthorized or fraudulent telephone instructions. The Fund will
not be liable for acting upon instructions communicated by telephone that it
reasonably believes to be genuine. Telephone Redemption and Telephone Exchange
will be suspended for a period of 10 days following a telephonic address change.
By Wire. Shareholders may redeem shares by contacting the Funds by mail or
telephone and instructing the Funds to send a wire transmission to the
shareholder's bank.
The shareholder's instructions should include: (a) the account number,
social security number and account registration; (b) the name of the class and
the Fund from which shares are being redeemed; and (c) the amount to be
redeemed. Wire redemptions can be made unless otherwise indicated on the
shareholder's Purchase Application, and a copy is attached of a void check on an
account where proceeds are to be wired. The bank may charge a fee for receiving
a wire payment on behalf of its customer.
Systematic Withdrawal Plan. An owner of $12,000 or more of shares of the
Fund may elect to have periodic redemptions made from his account to be paid on
a monthly, quarterly, semiannual or annual basis. No CDSC will be imposed on
redemptions of Class B shares pursuant to a systematic withdrawal plan. The
maximum withdrawal per year is 12% of the account value at the time of the
election. A sufficient number of
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shares to make the scheduled redemption will normally be redeemed on the date
selected by the shareholder. Depending on the size of the payment requested and
fluctuation in the net asset value, if any, of the shares redeemed, redemptions
for the purpose of making such payments may reduce or even exhaust the account.
A shareholder may request that these payments be sent to a predesignated bank or
other designated party. Capital gains and dividend distributions paid to the
account will automatically be reinvested at net asset value on the distribution
payment date.
Reinstatement Privilege. A shareholder who has redeemed Class A shares on
which a sales charge was paid may reinvest, without a sales charge, up to the
full amount of such redemption at the net asset value determined at the time of
the reinvestment within 30 days of the original redemption. This privilege is
not applicable with respect to any CDSC imposed on redemptions of Class B
shares. The shareholder must reinvest in the same Fund, same class, and the same
account from which the shares were redeemed. A redemption is a taxable
transaction and gain may be recognized for federal income tax purposes even if
the reinstatement privilege is exercised. Any loss realized upon the redemption
will not be recognized as to the number of shares acquired by reinstatement,
except through an adjustment in the tax basis of the shares so acquired. See
"Dividends, Distributions and Federal Income Taxation" for an explanation of
circumstances in which a sales charge paid to acquire shares of the Fund may not
be taken into account in determining gain or loss on the disposition of those
shares.
Redemption Of Small Accounts. Due to the disproportionately higher cost of
servicing small accounts, the Fund reserves the right to redeem on not less than
30 days' notice, an account in the Fund that has been reduced by a shareholder
(not by market action) below $1,000. No CDSC will be imposed on Class B shares
so redeemed. Moreover, if during the 30-day notice period the shareholder
purchases sufficient shares to bring the value of the account above $1,000, the
account will not be redeemed.
Redemption In Kind. All redemptions of shares of the Fund shall be made in
cash, except that the commitment to redeem shares in cash extends only to
redemption requests made by a shareholder during any 90-day period of up to the
lesser of $250,000 or 1% of the net asset value of the Fund at the beginning of
such period. This commitment is irrevocable without the prior approval of the
SEC. In the case of redemption requests by shareholders in excess of such
amounts, the Board of Directors reserves the right to have the Fund make
payment, in whole or in part, in securities or other assets, in case of an
emergency or any time a cash distribution would impair the liquidity of the Fund
to the detriment of the existing shareholders. In this event, the securities
would be valued generally in the same manner as the securities of the Fund are
regularly valued. The value of securities payable in kind for a redemption of
Class B shares would reflect the deduction of any applicable CDSC. If the
recipient were to sell such securities, he or she would incur brokerage charges.
Signature Guarantees. To protect shareholder accounts, the Fund and the
Administrator from fraud, signature guarantees are required to enable the Fund
to verify the identity of the person who has authorized a redemption by mail
from an account. Signature guarantees are required for (1) redemptions where the
proceeds are to be sent to someone other than the registered shareholder(s) and
the registered address, (2) a redemption of $25,000 or more, and (3) share
transfer requests. Signature guarantees may be obtained from certain eligible
financial institutions, including but not limited to, the following: banks,
trust companies, credit unions, securities brokers and dealers, savings and loan
associations and participants in the Securities and Transfer Association
Medallion Program ("STAMP"), the Stock Exchange Medallion Program ("SEMP") or
the New York Stock Exchange Medallion Signature Program ("MSP"). Shareholders
may contact the Fund at 1-800-442-3688 for further details.
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<PAGE> 30
PORTFOLIO TRANSACTIONS
Pursuant to the Sub-Advisory Agreement the Sub-Adviser places orders for
the purchase and sale of portfolio investments for the Fund's accounts with
brokers or dealers it selects in its discretion.
In effecting purchases and sales of portfolio securities for the account of
the Fund, the Sub-Adviser will seek the best execution of the Fund's orders.
Purchases and sales of portfolio debt securities for the Fund are generally
placed by the Sub-Adviser with primary market makers for these securities on a
net basis, without any brokerage commission being paid by the Fund. Trading
does, however, involve transaction costs. Transactions with dealers serving as
primary market makers reflect the spread between the bid and asked prices. The
Fund may purchase securities during an underwriting, which will include an
underwriting fee paid to the underwriter. Purchases and sales of common stocks
are generally placed by the Sub-Adviser with broker-dealers which, in the
judgment of the Sub-Adviser, provide prompt and reliable execution at favorable
security prices and reasonable commission rates. Broker-dealers are selected on
the basis of a variety of factors such as reputation, capital strength, size and
difficulty of order, sale of Fund shares and research provided to the
Sub-Adviser. The Sub-Adviser may cause a Fund to pay commissions higher than
another broker-dealer would have charged if the Sub-Adviser believes the
commission paid is reasonable in relation to the value of the brokerage and
research services received by the Sub-Adviser.
The Fund may buy and sell securities to take advantage of investment
opportunities when such transactions are consistent with the Fund's investment
objectives and policies and when the Sub-Adviser believes such transactions may
improve the Fund's overall investment return. These transactions involve costs
in the form of spreads or brokerage commissions.
Consistent with the Rules of Fair Practice of the National Association of
Securities Dealers, Inc. and subject to seeking the most favorable price and
execution available and such other policies as the Directors may determine, the
Sub-Adviser may consider sales of shares of the Fund as a factor in the
selection of broker-dealers to execute portfolio transactions for the Fund.
FUND SHARE VALUATION
The net asset value per share for each class of shares of the Fund is
calculated at 4:00 p.m. (Eastern time), Monday through Friday, on each day the
New York Stock Exchange is open for trading, which excludes the following
customary business holidays: New Year's Day, Martin Luther King, Jr. Day,
Presidents' Day, Good Friday, Memorial Day, Independence Day, Labor Day,
Thanksgiving Day and Christmas Day except days on which there are not sufficient
changes in the value of the Fund's portfolio securities that the Fund's net
asset value might be materially affected or days during which no Shares are
tendered for redemption and no orders to purchase Shares are received. The net
asset value per share of each class of shares of the Fund is computed by
dividing the value of net assets of each class (i.e., the value of the assets
less the liabilities) by the total number of such class's outstanding shares.
All expenses, including fees paid to the Adviser, the Sub-Adviser and the
Administrator, are accrued daily and taken into account for the purpose of
determining the net asset value.
Bonds and other fixed-income securities are valued by using market
quotations and may be valued on the basis of prices provided by a pricing
service approved by the Board of Directors. Securities listed on an exchange are
valued on the basis of the last sale on the security's primary exchange prior to
the time the valuation is made. If there has been no sale since the immediately
previous valuation, then the current bid price is used. Portfolio securities
which are primarily traded on foreign exchanges may be valued with the
assistance of a pricing service and are generally valued at the preceding
closing values of such securities on their respective exchanges, except that
when an occurrence subsequent to the time a foreign security is valued is likely
to have changed such value,
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<PAGE> 31
then the fair value of those securities will be determined by consideration of
other factors by or under the direction of the Board of Directors.
Over-the-counter securities are valued on the basis of the bid price at the
close of business on each business day. Securities for which market quotations
are not readily available are valued at fair value as determined in good faith
by or at the direction of the Board of Directors. Securities with remaining
maturities of 60 days or less are valued at amortized cost.
DIVIDENDS, DISTRIBUTIONS, AND FEDERAL INCOME TAXATION
The Fund intends to qualify annually to elect to be treated as a regulated
investment company pursuant to the provisions of Subchapter M of the Internal
Revenue Code of 1986, as amended (the "Code"). To qualify, the Fund must meet
certain income, distribution and diversification requirements. In any year in
which the Fund qualifies as a regulated investment company and timely
distributes all of its taxable income and substantially all of its net
tax-exempt interest income, the Fund generally will not pay any U.S. federal
income or excise tax.
The Fund intends to distribute to its shareholders substantially all of its
investment company taxable income (which includes, among other items, dividends
and interest and the excess, if any, of net short-term capital gains over net
long-term capital losses). The Fund will declare dividends from its investment
company taxable income (other than the capital gain component thereof) daily and
pay them out monthly. The Fund intends to distribute, at least annually,
substantially all net realized long and short-term capital gain. In determining
amounts of capital gains to be distributed, any capital loss carryovers from
prior years will be applied against capital gains.
The amount declared each day as a dividend may be based on projections of
estimated monthly net investment income and may differ from the actual
investment income determined in accordance with generally accepted accounting
principles. An adjustment will be made to the dividend each month to account for
any difference between the projected and actual monthly investment income.
Distributions will be paid in additional Fund shares of the relevant class
based on the net asset value of shares of that class at the close of business of
the payment date of the distribution, unless the shareholder elects in writing,
not less than five full business days prior to the record date, to receive such
distributions in cash. Dividends declared in, and attributable to, the preceding
month will be paid within five business days after the end of each month. Shares
purchased will begin earning dividends on the day after the purchase order is
executed, and shares redeemed will earn dividends through the day the redemption
is executed. Net investment income for a Saturday, Sunday or holiday will be
declared as a dividend on the previous business day.
Distributions of investment company taxable income (regardless of whether
derived from dividends, interest or short-term capital gains) will be taxable to
shareholders as ordinary income. If a portion of the Fund's income consists of
dividends paid by U.S. corporations, a portion of the dividends paid by the Fund
may qualify for the deduction for dividends received by corporations.
Distributions of net long-term capital gains (in excess of net short-term
capital losses) designated by the Fund as capital gain dividends will be taxable
as long-term capital gains, regardless of how long a shareholder has held his
Fund shares. Distributions are taxable in the same manner whether received in
additional shares or in cash.
A distribution will be treated as paid on December 31 of the calendar year
if it is declared by the Fund during October, November, or December of that year
to shareholders of record in such a month and paid by the Fund during January of
the following calendar year. Such distributions will be taxable to shareholders
in the calendar year in which the distributions are declared, rather than the
calendar year in which the distributions are received.
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<PAGE> 32
Any gain or loss realized by a shareholder upon the sale or other
disposition of Fund shares, or upon receipt of a distribution in complete
liquidation of the Fund, generally will be a capital gain or loss which will be
long-term or short-term generally depending upon the shareholder's holding
period for the shares.
If a shareholder elects to receive distributions in cash, and checks (1)
are returned and marked as "undeliverable" or (2) remain uncashed for six
months, the shareholder's cash election will be changed automatically and future
dividend and capital gains distributions will be reinvested in the Fund at the
per share net asset value determined as of date of payment of the distribution.
In addition, any undeliverable check or checks that remain uncashed for six
months will be canceled and will be reinvested in the Fund at the per share net
asset value determined as of the date of cancellation.
The timing of a shareholder's investment could have undesirable tax
consequences. If a shareholder opens a new account or buys more shares for his
or her current account just before a distribution is made, the shareholder would
receive a portion of his or her investment back as a taxable distribution.
Under certain circumstances, the sales charge incurred in acquiring Class A
shares of the Fund may not be taken into account in determining the gain or loss
on the disposition of those shares. This rule applies when Class A shares of the
Fund are exchanged within 90 days after the date they were purchased and new
Class A shares of the Fund are acquired without a sales charge or at a reduced
sales charge. In that case, the gain or loss recognized on the exchange will be
determined by excluding from the tax basis of the Class A shares exchanged all
or a portion of the sales charge incurred in acquiring those shares. This
exclusion applies to the extent that the otherwise applicable sales charge with
respect to the newly acquired Class A shares is reduced as a result of having
incurred a sales charge initially. The portion of the sales charge affected by
this rule will be treated as a sales charge paid for the new Class A shares.
The Fund may be required to withhold federal income tax of 31% ("backup
withholding") of the distributions and the proceeds of redemptions payable to
shareholders who fail to provide a correct taxpayer identification number or to
make required certifications, or where the Fund or shareholder has been notified
by the Internal Revenue Service that the shareholder is subject to backup
withholding. Corporate shareholders and certain other shareholders specified in
the Code are exempt from backup withholding. Backup withholding is not an
additional tax. Any amounts withheld may be credited against the shareholder's
U.S. federal income tax liability.
Further information relating to tax consequences is contained in the SAI.
Shareholders will be notified annually by the Company as to the federal tax
status of distributions made by the Fund. Depending on the residence of the
shareholder for tax purposes, distributions also may be subject to state and
local taxes, including withholding taxes. Foreign shareholders may also be
subject to special withholding requirements. Special tax treatment including a
penalty on certain pre-retirement distributions, is accorded to accounts
maintained as IRAs. Shareholders should consult their own tax advisers as to the
federal, state and local tax consequences of ownership of shares of the Fund in
their particular circumstances.
OTHER INFORMATION
CAPITALIZATION
Centura Funds, Inc. ("Company") was organized as a Maryland corporation on
March 1, 1994 and currently consists of seven separately managed portfolios. The
Fund was established as a new portfolio of the Company on February 18, 1999. The
Board of Directors may establish additional portfolios in the future. The
capitalization of
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<PAGE> 33
the Company consists solely of 1.05 billion shares of common stock with a par
value of $0.001 per share. When issued, shares of the Fund are fully paid,
non-assessable and freely transferable.
This Prospectus relates to Class A shares and Class B shares of the Fund.
The Fund also offers Class C shares which are offered at net asset value with no
sales charge or CDSC only to accounts managed by the Adviser, the Sub-Adviser or
their affiliates and to non-profit institutions that invest at least $100,000.
Because Class C shares are not subject to service and distribution fees, their
performance will typically differ from that of Class A or Class B shares.
Information about Class C shares may be obtained from your sales representative
or the Fund by calling (800) 442- 3688.
VOTING
Shareholders have the right to vote in the election of Directors and on any
and all matters on which, by law or under the provisions of the Company's
Articles of Incorporation, they may be entitled to vote. The Company is not
required to hold regular annual meetings of the Fund's shareholders and does not
intend to do so. The Fund's shareholders vote separately on items affecting only
the Fund, and shareholders of each class of the Fund vote separately on matters
affecting only that class, such as the service and distribution plan for that
class.
The Articles of Incorporation provide that the holders of not less than
two-thirds of the outstanding shares of the Company may remove a person serving
as a Director either by a declaration in writing or at a meeting called for such
purpose. The Directors are required to call a meeting for the purpose of
considering the removal of a person serving as Director if requested in writing
to do so by the holders of not less than 10% of the outstanding shares of the
Company. See "Other Information-Voting Rights" in the SAI.
Shares entitle their holders to one vote per share (with proportionate
voting for fractional shares). As used in this Prospectus, the phrase "vote of a
majority of the outstanding shares" of the Fund, a class or the Company, as
applicable, means the vote of the lesser of: (1) 67% of the shares of the Fund
(a class or the Company) present at a meeting if the holders of more than 50% of
the outstanding shares are present in person or by proxy; or (2) more than 50%
of the outstanding shares of the Fund (a class or the Company).
PERFORMANCE INFORMATION
The performance of the Fund may be compared to various widely recognized
indexes of market performance. The indexes are unmanaged and thus reflect no
management fees. They also do not reflect the transaction costs that would be
incurred by an investor to acquire the included securities. Because the
securities reflected in an index will typically differ in many respects from
those held by the Fund, various factors that can affect performance may affect
the Fund in different ways than an index to which it is compared. Any
performance information should be considered in light of the Fund's investment
objectives and policies, characteristics and quality of the Fund and the market
conditions during the time period indicated, and should not be considered to be
representative of what may be achieved in the future. For a description of the
methods used to determine yield and total return for the Fund, see the SAI.
Indexes to which the Fund's performance may be compared may include:
- Lehman Brothers Intermediate Government Index -- A widely-recognized
unmanaged index generally representative of intermediate government
bonds.
- Lehman Brothers Government/Corporate Bond Index -- A
widely-recognized unmanaged index generally representative of
intermediate government and corporate bonds.
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<PAGE> 34
- Lipper Intermediate Investment Grade Universe Average -- A
widely-recognized index that tracks the performance of mutual funds
which invest at least 65% of their assets in investment grade bonds
having maturities between 5 and 10 years.
When performance records are developed by the Fund, they may, from time to
time, include the yield and total return for shares (including each class, as
applicable) in advertisements or reports to shareholders or prospective
investors. The methods used to calculate the yield and total return of the Fund
are mandated by the SEC. In general, the performance of the classes of the Fund
will differ due to (a) differences in the level of class specific expenses,
including service and distribution fees and (b) the fact that total return
figures for Class A shares will reflect the deduction of the maximum front-end
sales charge applicable for the Fund while the total return figures for Class B
shares will reflect the maximum CDSC for the Fund. Performance figures for Class
C shares will reflect the absence of any service and distribution fee, front-end
sales charge or CDSC. Due to these differences in fees and/or expenses borne by
Class A, Class B and Class C shares, yield and total return on Class A and Class
B shares can be expected to be lower than the yield and total return on Class C
shares for the same period.
Quotations of "yield" will be based on the investment income per share
during a particular 30-day (or one month) period (including dividends and
interest), less expenses accrued during the period ("net investment income"),
and will be computed by dividing net investment income by the maximum public
offering price per share (for each class, as applicable) on the last day of the
period.
Quotations of yield reflect the Fund's (and its classes') performance only
during the particular period on which the calculations are based. Yields will
vary based on changes in market conditions, the level of interest rates and the
level of the Fund's expenses, including class-specific expenses, and no reported
performance figure should be considered an indication of performance which may
be expected in the future. Quotations of average annual total return will be
expressed in terms of the average annual compounded rate of return of a
hypothetical investment in shares of the Fund (or class) over periods of 1, 5
and 10 years (up to the life of the Fund), reflect the deduction of a
proportional share of Fund and class-specific expenses, as applicable, on an
annual basis, and assume that all dividends and distributions are reinvested
when paid.
YEAR 2000
The investment services industry is evaluating the capability of existing
application software programs and operating systems to accommodate the date
value for the year 2000. Many existing applications software products in the
marketplace were designed only to accommodate a two-digit date position, which
represents the year (e.g., "95" is stored on the system and represents the year
1995). If the year 1999 is the maximum date value these systems are able to
accurately process, the improper identification of the year 2000 could result in
a computer system failure or miscalculations causing a disruption of operations.
The Funds' principal service providers are taking steps the Funds believe are
reasonably designed to address the year 2000 issues with respect to the computer
systems those providers operate. However, this is an ongoing process and testing
and other steps are scheduled to be completed in 1999. Nevertheless, the
inability of service providers to successfully address year 2000 issues could
result in interruptions in the Fund's business and have material adverse impact
on the Fund's operations.
With respect to securities in which the Fund invests, Year 2000 compliance
is considered as a factor in evaluating the Fund's investments, to the extent
such information is available.
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<PAGE> 35
ACCOUNT SERVICES
All transactions in shares of the Fund will be reflected in a statement for
each shareholder. In those cases where a Service Organization or its nominee is
shareholder of record of shares purchased for its customer, the Fund has been
advised that the statement may be transmitted to the customer at the discretion
of the Service Organization.
BISYS provides fund accounting functions for the Fund, and provides
personnel and facilities to perform shareholder servicing and transfer
agency-related services for the Company.
SHAREHOLDER INQUIRIES
All shareholder inquiries should be directed to Centura Funds, P.O. Box
182485, Columbus, Ohio 43218-2485.
General and Account Information: (800) 44CENTURA (442-3688).
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<PAGE> 36
APPENDIX
DESCRIPTION OF BOND RATINGS
DESCRIPTION OF MOODY'S BOND RATINGS:
Excerpts from Moody's description of its bond ratings are listed as
follows: Aaa -- judged to be the best quality and they carry the smallest degree
of investment risk; Aa -- judged to be of high quality by all
standards -- together with the Aaa group, they comprise what are generally known
as high grade bonds; A -- possess many favorable investment attributes and are
to be considered as "upper medium grade obligations"; Baa -- considered to be
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; Ba -- judged to
have speculative elements, their future cannot be considered as well assured;
B -- generally lack characteristics of the desirable investment; 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 -- speculative in a high
degree, often in default; C -- lowest rated class of bonds, regarded as having
extremely poor prospects.
Moody's also supplies numerical indicators 1, 2 and 3 to rating categories.
The modifier 1 indicates that the security is in the higher end of its rating
category; the modifier 2 indicates a mid-range ranking; and modifier 3 indicates
a ranking toward the lower end of the category.
DESCRIPTION OF S&P'S BOND RATINGS:
Excerpts from S&P's description of its bond ratings are listed as follows:
AAA -- highest grade obligations, in which capacity to pay interest and repay
principal is extremely strong; AA -- has a very strong capacity to pay interest
and repay principal, and differs from AAA issues only in a small degree; A --
has a strong capacity to pay interest and repay principal, although they are
somewhat more susceptible to the adverse effects of changes in circumstances and
economic conditions than debt in higher rated categories; BBB -- 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. This group is the lowest which qualifies for commercial bank
investment. BB, B, CCC, CC, C -- predominantly speculative with respect to
capacity to pay interest and repay principal in accordance with terms of the
obligations; BB indicates the highest grade and C the lowest within the
speculative rating categories. D -- interest or principal payments are in
default.
S&P applies indicators "+" no character, and "-" to its rating categories.
The indicators show relative standing within the major rating categories.
DESCRIPTION OF MOODY'S RATINGS OF SHORT-TERM MUNICIPAL OBLIGATIONS:
Moody's ratings for state and municipal short-term obligations will be
designated Moody's Investment Grade or MIG. Such ratings recognize the
differences between short-term credit and long-term risk. Short-term ratings on
issues with demand features (variable rate demand obligations) are
differentiated by the use of the VMIG symbol to reflect such characteristics as
payment upon periodic demand rather than fixed maturity dates and payments
relying on external liquidity. Ratings categories for securities in these groups
are as follows: MIG 1/VMIG 1 -- 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 -- denotes high
quality, margins of protection are ample although not as large as in the
preceding group; MIG 3/VMIG 3 --
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<PAGE> 37
denotes high quality, all security elements are accounted for but there is
lacking the undeniable strength of the preceding grades; MIG 4/VMIG 4 -- denotes
adequate quality, protection commonly regarded as required of an investment
security is present, but there is specific risk; SQ -- denotes speculative
quality, instruments in this category lack margins of protection.
DESCRIPTION OF MOODY'S COMMERCIAL PAPER RATINGS:
Excerpts from Moody's commercial paper ratings are listed as follows:
PRIME-1 -- issuers (or supporting institutions) have a superior ability for
repayment of senior short-term debt obligations; PRIME-2 -- issuers (or
supporting institutions) have a strong ability for repayment of senior
short-term debt obligations; PRIME-3 -- issuers (or supporting institutions)
have an acceptable ability for repayment of senior short-term debt obligations;
NOT PRIME -- issuers do not fall within any of the Prime categories.
DESCRIPTION OF S&P'S RATINGS FOR CORPORATE AND MUNICIPAL BONDS:
Investment grade ratings: AAA -- the highest rating assigned by S&P,
capacity to pay interest and repay principal is extremely strong; AA -- has a
very strong capacity to pay interest and repay principal and differs from the
highest rated issues only in a small degree; A -- has 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 -- 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.
Speculative grade ratings: BB, B, CCC, CC, C -- debt rated in these
categories is regarded as having predominantly speculative characteristics with
respect to capacity to pay interest and repay principal -- while such debt will
likely have some quality and protective characteristics, these are outweighed by
large uncertainties or major risk exposures to adverse conditions; CI --reserved
for income bonds on which no interest is being paid; D -- in default, and
payment of interest and/or repayment of principal is in arrears. Plus (+) OR
minus (-) -- the ratings from "AA" to "CCC" may be modified by the addition of a
plus or minus sign to show relative standing within the major rating categories.
Description of S&P's rating for municipal notes and short-term municipal demand
obligations:
Rating categories are as follows: SP-1 -- has a very strong or strong
capacity to pay principal and interest -- those issues determined to possess
overwhelming safety characteristics will be given a plus (+) designation; SP-2
-- has a satisfactory capacity to pay principal and interest; SP-3 -- issues
carrying this designation have a speculative capacity to pay principal and
interest.
Description of S&P's Ratings For Short-Term Corporate Demand Obligations
and Commercial Paper:
An S&P commercial paper rating is a current assessment of the likelihood of
timely repayment of debt having an original maturity of no more than 365 days.
Excerpts from S&P's description of its commercial paper ratings are listed as
follows: A-1 --the degree of safety regarding timely payment is strong -- those
issues determined to possess extremely strong safety characteristics will be
denoted with a plus (+) designation; A-2 -- capacity for timely payment is
satisfactory -- however, the relative degree of safety is not as high as for
issues designated "A-1;" A-3 -- has adequate capacity for timely payment
- --however, is more vulnerable to the adverse effects of changes in circumstances
than obligations carrying the higher designations; B -- regarded as having only
speculative capacity for timely payment; C -- a doubtful capacity for payment; D
-- 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.
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CENTURA LOGO
Address for:
GENERAL SHAREHOLDER INQUIRIES
Centura Funds, Inc.
P.O. Box 182485
Columbus, Ohio 43218-2485
INVESTMENT ADVISER AND CUSTODIAN
Centura Bank
131 North Church Street
Rocky Mount, North Carolina 27802
SUB-ADVISER
Sovereign Advisers
6302 Fairview Road, Suite 450
Charlotte, North Carolina 28210
ADMINISTRATOR AND SPONSOR
BISYS Fund Services
3435 Stelzer Road
Columbus, Ohio 43219
DISTRIBUTOR
Centura Funds Distributor, Inc.
125 West 55th Street
New York, New York 10019
COUNSEL
Dechert Price & Rhoads
1775 Eye Street, N.W.
Washington, D.C. 20006-2401
CENTURA LOGO
CENTURA QUALITY
INCOME FUND
(A SERIES OF CENTURA FUNDS, INC.)
PROSPECTUS
CLASS A SHARES AND CLASS B SHARES
CENTURA BANK
ADVISER
SOVEREIGN ADVISERS
SUB-ADVISER
APRIL 24, 1999
<PAGE> 40
CENTURA QUALITY INCOME FUND
(A SERIES OF CENTURA FUNDS, INC.)
CLASS C SHARES
3435 STELZER ROAD
COLUMBUS, OHIO 43219
GENERAL AND ACCOUNT INFORMATION:
(800) 442-3688
CENTURA BANK -- ADVISER
SOVEREIGN ADVISERS -- SUB-ADVISER
BISYS FUND SERVICES -- ADMINISTRATOR AND SPONSOR
CENTURA FUNDS DISTRIBUTOR, INC. -- DISTRIBUTOR
This Prospectus describes Centura Quality Income Fund ("Fund"), one of the
seven Funds ("Funds") comprising Centura Funds, Inc. ("Company"), a registered
open-end management investment company advised by Centura Bank ("Adviser") and
Sovereign Advisers ("Sub-Adviser"). The Fund is a separate portfolio of the
Company.
This Prospectus relates to Class C shares which are offered only to
accounts managed by the Adviser, the Sub-Adviser or its affiliates. Each Fund
also has Class A shares and Class B shares. (See "Other Information --
Capitalization.")
SHARES OF THE FUND ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR
ENDORSED BY, ANY BANK, AND FUND SHARES ARE NOT FEDERALLY INSURED BY THE FEDERAL
DEPOSIT INSURANCE CORPORATION, THE FEDERAL RESERVE BOARD, OR ANY OTHER AGENCY.
INVESTMENTS IN MUTUAL FUNDS, SUCH AS THE FUND, INVOLVE RISK, INCLUDING POSSIBLE
LOSS OF PRINCIPAL.
This Prospectus sets forth concisely the information a prospective investor
should know before investing in the Fund and should be read and retained for
information about the Fund.
A Statement of Additional Information (the "SAI"), dated April 24, 1999,
containing additional and more detailed information about the Funds, has been
filed with the Securities and Exchange Commission ("SEC") and is hereby
incorporated by reference into the Prospectus. It is available without charge
and can be obtained by writing or calling the Fund at the address and
information numbers printed above.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
The Date of this Prospectus is April 24, 1999
<PAGE> 41
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
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<S> <C>
Highlights.................................................. 2
Fund Expenses............................................... 4
The Fund.................................................... 5
Description of Securities and Investment Practices.......... 5
Investment Restrictions..................................... 13
Risks of Investing in the Fund.............................. 14
Management of the Fund...................................... 16
Minimum Purchase Requirements............................... 18
Pricing and Purchase of Fund Shares......................... 18
Exchange of Fund Shares..................................... 18
Redemption of Fund Shares................................... 19
Portfolio Transactions...................................... 21
Fund Share Valuation........................................ 21
Dividends, Distributions, and Federal Income Taxation....... 22
Other Information........................................... 24
Appendix.................................................... i
</TABLE>
HIGHLIGHTS
THE FUND
The Fund seeks current income and capital appreciation. It pursues this
objective by investing in a diversified portfolio consisting primarily of
investment grade debt securities. The investment objective of the Fund is a
fundamental policy of the Fund and may not be changed without approval of the
Fund's shareholders. See "The Fund."
RISKS OF INVESTING IN THE FUNDS
Investment in the Fund involves certain risks. The value of securities in
the Fund's portfolio, and of the Fund's shares, will move up an down in response
to interest rate fluctuations and other economic conditions. Generally,
increases in current interest rates will cause the value of the Fund's portfolio
securities, and thus of its shares, to decline, while declines in current
interest rates will cause the Fund's portfolio securities and its shares to
increase in value. These changes can provide opportunity for capital gain or
loss for the Fund. There can, of course, be no assurance that the Fund will
achieve its investment objective or be successful in preventing or minimizing
the risk of loss in principal value that is inherent in its investments. The
Fund has authority to invest in various types of derivative instruments, which
entail special risks. See "Risks of Investing in the Fund."
THE ADVISER AND SUB-ADVISER
Management supervision of the Fund is provided by Centura Bank (the
"Adviser"), headquartered in Rocky Mount, North Carolina. Day-to-day management
of the Fund's portfolio is provided by Sovereign Advisers
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("Sub-Adviser"), a registered investment adviser located in Charlotte, North
Carolina. For its management services, the Adviser is entitled to receive from
the Fund a fee at an annual rate of 0.60% based on the Fund's average daily net
assets. Out of its fee the Adviser pays the Sub-Adviser a fee at an annual rate
of 0.30% based on the Fund's average daily net assets.
THE DISTRIBUTOR, ADMINISTRATOR AND SPONSOR
Centura Funds Distributor, Inc. (the "Distributor") distributes the Fund's
shares. BISYS Fund Services, Inc. ("BISYS") acts as Sponsor and Administrator to
the Funds. For its services as Administrator, the Fund pays BISYS a fee at the
annual rate of 0.15% of its average daily net assets. BISYS also acts as
transfer agent and fund accounting agent for the Funds for which it receives
additional fees.
CLASSES OF SHARES
Class C shares are offered at net asset value with no sales charge, and no
contingent deferred sales charge ("CDSC") is imposed on redemptions. Class C
shares are available only to accounts managed by the Adviser, the Sub-Adviser or
their affiliates. See "Pricing and Purchase of Fund Shares" and "Redemption of
Fund Shares." The Fund also offers Class A shares (subject to a front-end sales
charge, unless waived) and Class B shares (subject to a CDSC, unless waived).
See "Other Information -- Capitalization."
The Fund reserves the right to redeem upon not less than 30 days' notice
all shares for a shareholder account which has an aggregate value of $1,000 or
less.
ALL DIVIDENDS AND DISTRIBUTIONS WILL BE AUTOMATICALLY REINVESTED AT NET
ASSET VALUE IN ADDITIONAL SHARES OF THE SAME CLASS OF THE FUND UNLESS CASH
PAYMENT IS REQUESTED. THE FUND PAYS DIVIDENDS FROM INCOME, IF ANY, MONTHLY.
SEE "PRICING AND PURCHASE OF FUND SHARES," "REDEMPTION OF FUND SHARES" AND
"DIVIDENDS, DISTRIBUTIONS AND FEDERAL INCOME TAXATION" FOR MORE INFORMATION.
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<PAGE> 43
FUND EXPENSES
The following expense table indicates costs and expenses that an investor
in Class C shares should anticipate incurring either directly or indirectly as a
shareholder in the Fund.
FEE TABLE
<TABLE>
<CAPTION>
CLASS C
-------
<S> <C>
Shareholder Transaction Expenses
Maximum Sales Charge Imposed on Purchases
(as a percentage of offering price)....................... None
Maximum Sales Charge Imposed on Reinvested
Dividends (as a percentage of offering price)............. None
Deferred Sales Charge (as a percentage of redemption
proceeds)(a).............................................. None
Exchange Fees............................................... None
Annual Fund Operating Expenses (as a
percentage of average net assets annualized) Management
Fees...................................................... 0.60%
12b-1 Fees.................................................. 0%
Other Expenses.............................................. 0.55%
Total Portfolio Operating Expenses.......................... 1.15%
</TABLE>
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(a) Shareholders who redeem shares by wire may be charged a fee by the banks
receiving the wire payments on their behalf. (See "Redemption of Fund
Shares.")
EXAMPLE*
An investor would pay the following expenses on a $1,000 investment,
assuming (1) 5% annual return and (2) redemption at the end of each time period:
<TABLE>
<CAPTION>
CLASS C
-------
<S> <C>
Assuming complete redemption at the end of each time period:
1 Year...................................................... $12
3 Years..................................................... $37
</TABLE>
- ---------------
* This example should not be considered a representation of future expenses
which may be more or less than those shown. The assumed 5% annual return is
hypothetical and should not be considered a representation of past or future
annual return. Actual return may be greater or less than the assumed amount.
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<PAGE> 44
THE FUND
The Fund's investment objective is to provide current income and capital
appreciation. It pursues this objective by investing in a diversified portfolio
consisting primarily of investment grade debt obligations, including U.S.
government securities. Under normal market conditions, at least 65% of the
Fund's total assets will be invested in: obligations of the U.S. government, its
agencies and instrumentalities; corporate bonds of U.S. issuers; and
mortgage-backed securities issued by U.S. government agencies. These debt
obligations may pay either fixed or variable rates of interest.
The Fund also has authority to invest in other types of securities,
including preferred stocks, securities convertible into common stock,
dollar-denominated obligations of non-U.S. issuers, various types of
asset-backed securities, taxable municipal obligations and money market
instruments. The Fund may also invest in income-producing securities issued by
real estate investment trusts ("REITs"). The Fund may engage in transactions in
covered options and interest-rate futures contracts in order to lengthen or
shorten the average maturity of its portfolio. The Fund expects to maintain a
dollar-weighted average portfolio maturity of between 5 and 15 years.
Debt obligations acquired by the Fund will be rated at least investment
grade (BBB or better by Standard & Poor's Corporation ("S&P") or Baa by Moody's
Investors Service, Inc. ("Moody's"), or deemed of comparable quality by the
Sub-Adviser. At least 70% of the Fund's portfolio securities will be rated A or
better by Moody's or S&P or, if unrated, deemed of comparable quality by the
Sub-Adviser. If the rating of a security held by the Fund is reduced, the
Sub-Adviser is not required to sell the security but will do so if and when the
Sub-Adviser believes the sale is in the best interests of the Fund. Up to 30% of
the Fund's assets may be invested in securities rated BBB by S&P or Baa by
Moody's (or, if unrated, deemed of comparable quality by the Sub-Adviser) at the
time of purchase by the Fund, in preferred stocks, zero coupon obligations and
in convertible securities. (See "Risks of Investing in the Fund" for risks of
investing in securities rated BBB or Baa.)
OTHER INVESTMENT POLICIES OF THE FUND
The Fund may also invest up to 5% of its total assets in another investment
company, not to exceed 10% of the value of its total assets in the securities of
other investment companies. The Fund will incur additional expenses due to the
duplication of expenses as a result of investing in other mutual funds because
investors bear indirectly a proportionate share of the expenses of such
companies, including operating costs, and investment advisory and administration
fees. The Fund has authority to lend its portfolio securities.
DESCRIPTION OF SECURITIES AND INVESTMENT PRACTICES
U.S. Government Securities. U.S. Government securities are obligations
issued or guaranteed by the U.S. Government, its agencies or instrumentalities.
U.S. Treasury bills, which have a maturity of up to one year, are direct
obligations of the United States and are the most frequently issued marketable
U.S. Government security. The U.S. Treasury also issues securities with longer
maturities in the form of notes and bonds.
U.S. Government agency and instrumentality obligations are debt securities
issued by U.S. Government-sponsored enterprises and Federal agencies. Some
obligations of agencies are supported by the full faith and credit of the United
States or by U.S. Treasury guarantees, such as mortgage-backed certificates
issued by the Government National Mortgage Association; others, such as
obligations of the Federal Home Loan Banks, Federal Farm Credit Banks, Bank for
Cooperatives, Federal Intermediate Credit Banks and the Federal Land Bank, are
guaranteed by the right of the issuer to borrow from the U.S. Treasury; others,
such as obligations of the Federal National Mortgage Association, are supported
by discretionary authority of the U.S. Government to purchase certain
obligations of the agency or instrumentality; and others, such as obligations of
the Student Loan
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<PAGE> 45
Marketing Association and the Tennessee Valley Authority, are backed only by the
credit of the agency or instrumentality issuing the obligation. In the case of
obligations not backed by the full faith and credit of the United States, the
investor must look principally to the agency issuing or guaranteeing the
obligation for ultimate repayment.
Bank Obligations. These obligations include negotiable certificates of
deposit and bankers' acceptances. The Fund limits its bank investments to
dollar-denominated obligations of U.S. or foreign banks which have more than $1
billion in total assets at the time of investment and, in the case of U.S.
banks, are members of the Federal Reserve System or are examined by the
Comptroller of the Currency, or whose deposits are insured by the Federal
Deposit Insurance Corporation.
Commercial Paper. Commercial paper includes short-term unsecured promissory
notes, variable rate demand notes and variable rate master demand notes issued
by domestic and foreign bank holding companies, corporations and financial
institutions, as well as similar instruments issued by government agencies and
instrumentalities.
Preferred Stock. Preferred stock represents an equity interest in a
corporation that is intermediate between bonds and common stock in its rights to
dividends.
Convertible Securities. Convertible securities give the holder the right to
exchange the security for a specific number of shares of common stock.
Convertible securities include convertible preferred stocks, convertible bonds,
notes and debentures, and other securities. Convertible securities typically
involve less credit risk than common stock of the same issuer because
convertible securities are "senior" to common stock -- i.e., they have a prior
claim against the issuer's assets. Convertible securities generally pay lower
dividends or interest than non-convertible securities of similar quality. They
may also reflect changes in the value of the underlying common stock.
Corporate Debt Securities. The Fund's investments in corporate debt
securities are limited to corporate debt securities (corporate bonds,
debentures, notes and other similar corporate debt instruments) which meet the
previously disclosed minimum ratings and maturity criteria established for the
Fund under the direction of the Board of Directors or, if unrated, are in the
Sub-Adviser's opinion comparable in quality to corporate debt securities in
which the Fund may invest. See "The Fund."
Repurchase Agreements. Securities held by the Fund may be subject to
repurchase agreements. A repurchase agreement is a transaction in which the
seller of a security commits itself at the time of the sale to repurchase that
security from the buyer at a mutually agreed-upon time and price. These
agreements permit the Fund to earn income for periods as short as overnight.
Repurchase agreements may be considered to be loans by the purchaser
collateralized by the underlying securities. These agreements will be fully
collateralized at all times and the collateral will be marked-to-market daily.
The Fund will enter into repurchase agreements only with dealers, domestic banks
or recognized financial institutions which in the opinion of the Sub-Adviser,
present minimal credit risks in accordance with guidelines adopted by the Board
of Directors. In the event of default by the seller under a repurchase agreement
the Fund may have problems in exercising its rights to the underlying securities
and may experience time delays in connection with the disposition of such
securities.
Loans Of Portfolio Securities. To increase current income the Fund may lend
its portfolio securities worth up to 5% of the Fund's total assets to brokers,
dealers and financial institutions, provided certain conditions are met,
including the condition that each loan is secured continuously by collateral
maintained on a daily mark-to-
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<PAGE> 46
market basis in an amount at least equal to the current market value of the
securities loaned. For further information, see the SAI.
Variable And Floating Rate Demand And Master Demand Notes. The Fund may,
from time to time, buy variable or floating rate demand notes issued by
corporations, bank holding companies and financial institutions and similar
instruments issued by government agencies and instrumentalities. These
securities will typically have a maturity over one year but carry with them the
right of the holder to put the securities to a remarketing agent or other entity
at designated time intervals and on specified notice. The obligation of the
issuer of the put to repurchase the securities may be backed by a letter of
credit or other obligation issued by a financial institution. The repurchase
price is ordinarily par plus accrued and unpaid interest. Generally, the
remarketing agent will adjust the interest rate every seven days (or at other
specified intervals) in order to maintain the interest rate at the prevailing
rate for securities with a seven-day or other designated maturity. The Fund's
investment in demand instruments which provide that the Fund will not receive
the principal note amount within seven days' notice, in combination with the
Fund's other investments in illiquid instruments, will be limited to an
aggregate total of 15% of the Fund's net assets.
The Fund may also buy variable rate master demand notes. The terms of these
obligations permit the Fund to invest fluctuating amounts at varying rates of
interest pursuant to direct arrangements between the Fund, as lender, and the
borrower. These instruments permit weekly and, in some instances, daily changes
in the amounts borrowed. The Fund has the right to increase the amount under the
note at any time up to the full amount provided by the note agreement, or to
decrease the amount, and the borrower may repay up to the full amount of the
note without penalty. The notes may or may not be backed by bank letters of
credit. Because the notes are direct lending arrangements between the Fund and
borrower, it is not generally contemplated that they will be traded, and there
is no secondary market for them, although they are redeemable (and, thus,
immediately repayable by the borrower) at principal amount, plus accrued
interest, at any time. In connection with any such purchase and on an ongoing
basis, the Sub-Adviser will consider the earning power, cash flow and other
liquidity ratios of the issuer, and its ability to pay principal and interest on
demand, including a situation in which all holders of such notes make demand
simultaneously. While master demand notes, as such, are not typically rated by
credit rating agencies, the Fund may, under its minimum rating standards, invest
in them only if, at the time of an investment, the issuer meets the Fund's
rating criteria.
Forward Commitments And When-Issued Securities. The Fund may purchase
when-issued securities and make contracts to purchase securities for a fixed
price at a future date beyond customary settlement time if the Fund holds, and
maintains until the settlement date in a segregated account cash, or liquid
securities in an amount sufficient to meet the purchase price, or if the Fund
enters into offsetting contracts for the forward sale of other securities it
owns. Purchasing securities on a when-issued basis and forward commitments
involves a risk of loss if the value of the security to be purchased declines
prior to the settlement date, which risk is in addition to the risk of decline
in value of the Fund's other assets. No income accrues on securities purchased
on a when-issued basis prior to the time delivery of the securities is made,
although the Fund may earn interest on securities it has deposited in the
segregated account because it does not pay for the when-issued securities until
they are delivered. Investing in when-issued securities has the effect of (but
is not the same as) leveraging the Fund's assets. Although the Fund would
generally purchase securities on a when-issued basis or enter into forward
commitments with the intention of actually acquiring securities, the Fund may
dispose of a when-issued security or forward commitment prior to settlement if
the Sub-Adviser deems it appropriate to do so. The Fund may realize short-term
profits or losses upon such sales.
Mortgage-Related Securities. Mortgage pass-through securities are
securities representing interests in "pools" of mortgages in which payments of
both interest and principal on the securities are made monthly, in
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<PAGE> 47
effect "passing through" monthly payments made by the individual borrowers on
the residential mortgage loans which underlie the securities (net of fees paid
to the issuer or guarantor of the securities). Early repayment of principal on
mortgage pass-through securities (arising from prepayments of principal due to
sale of the underlying property, refinancing, or foreclosure, net of fees and
costs which may be incurred) may expose the Fund to a lower rate of return upon
reinvestment of principal. Also, if a security subject to prepayment has been
purchased at a premium, in the event of prepayment the value of the premium
would be lost. Like other fixed-income securities, when interest rates rise, the
value of a mortgage-related security generally will decline; however, when
interest rates decline, the value of mortgage-related securities with prepayment
features may not increase as much as other fixed-income securities. In
recognition of this prepayment risk to investors, the Public Securities
Association (the "PSA") has standardized the method of measuring the rate of
mortgage loan principal prepayments. The PSA formula, the Constant Prepayment
Rate (the "CPR"), or other similar models that are standard in the industry will
be used by the Fund in calculating maturity for purposes of its investment in
mortgage-related securities. Upward trends in interest rates tend to lengthen
the average life of mortgage-related activities and also cause the value of
outstanding securities to drop. Thus, during periods of rising interest rates,
the value of these securities held by a Fund would tend to drop and the
portfolio-weighted average life of the securities held by the Fund may tend to
lengthen due to this effect. Longer-term securities tend to experience more
price volatility. Under these circumstances, the Sub-Adviser may, but is not
required to, sell securities in part in order to maintain an appropriate
portfolio-weighted average life.
Payment of principal and interest on some mortgage pass-through securities
(but not the market value of the securities themselves) may be guaranteed by the
full faith and credit of the U.S. Government (such as securities guaranteed by
the Government National Mortgage Association ("GNMA"); or guaranteed by agencies
or instrumentalities of the U.S. Government (such as securities guaranteed by
the Federal National Mortgage Association ("FNMA") or the Federal Home Loan
Mortgage Corporation ("FHLMC"), which are supported only by the discretionary
authority of the U.S. Government to purchase the agency's obligations). Mortgage
pass-through securities created by nongovernmental issuers (such as commercial
banks, savings and loan institutions, private mortgage insurance companies,
mortgage bankers and other secondary market issuers) may be supported by various
forms of insurance or guarantees, including individual loan, title, pool and
hazard insurance, and letters of credit, which may be issued by governmental
entities, private insurers or the mortgage poolers.
The Fund may also invest in investment grade Collateralized Mortgage
Obligations ("CMOs") which are hybrid instruments with characteristics of both
mortgage-backed bonds and mortgage pass-through securities. Similar to a bond,
interest and prepaid principal on a CMO are paid, in most cases, semi-annually.
CMOs may be collateralized by whole mortgage loans but are more typically
collateralized by portfolios of mortgage pass-through securities guaranteed by
GNMA, FHLMC or FNMA. CMOs are structured into multiple classes, with each class
bearing a different stated maturity. Monthly payments of principal, including
prepayments, are first returned to investors holding the shortest maturity
class; investors holding longer maturity classes receive principal only after
the first class has been retired. CMOs may be issued by government and
non-governmental entities. Some CMOs are debt obligations of FHLMC issued in
multiple classes with different maturity dates secured by the pledge of a pool
of conventional mortgages purchased by FHLMC. Other types of CMOs are issued by
corporate issuers in several series, with the proceeds used to purchase
mortgages or mortgage pass-through certificates. With some CMOs, the issuer
serves as a conduit to allow loan originators (primarily builders or savings and
loan associations) to borrow against their loan portfolios. To the extent a
particular CMO is issued by an investment company, the Fund's ability to invest
in such CMOs will be limited. See "Investment Restrictions" in the SAI.
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Assumptions generally accepted by the industry concerning the probability
of early payment may be used in the calculation of maturities for debt
securities that contain put or call provisions, sometimes resulting in a
calculated maturity different from the stated maturity of the security.
It is anticipated that governmental, government-related or private entities
may create mortgage loan pools and other mortgage-related securities offering
mortgage pass-through and mortgage-collateralized investments in addition to
those described above. As new types of mortgage-related securities are developed
and offered to investors, the Sub-Adviser will, consistent with the Fund's
investment objectives, policies and quality standards, consider making
investments in such new types of mortgage-related securities, but no investments
will be made in such securities until the Fund's prospectus and/or SAI have been
revised to reflect such securities.
Other Asset-Backed Securities. Other asset-backed securities (unrelated to
mortgage loans) are developed from time to time and may be purchased by the Fund
to the extent consistent with its investment objective and policies.
Foreign Securities. The Fund may invest in dollar-denominated debt
obligations of foreign issuers. Securities of foreign issuers involve special
risks. See "Risks of Investing in Funds."
Futures Contracts And Options. The Fund may purchase and sell futures
contracts on securities, and indices of securities, and write and sell put and
call options on securities, and indices of securities as a hedge against changes
in interest rates, security prices, and other market developments. See "Risks of
Investing in the Fund" for a discussion of risks related to investing in futures
contracts and options.
Interest Rate Futures Contracts. A futures contract is an agreement between
two parties to buy and sell a security for a set price on a future date. Futures
contracts are traded on designated "contracts markets" which, through their
clearing corporations, guarantee performance of the contracts. Currently, there
are futures contracts based on securities such as long-term U.S. Treasury bonds,
U.S. Treasury notes, GNMA Certificates and three-month U.S. Treasury bills. For
municipal securities, there is the Bond Buyer Municipal Bond Index.
Generally, if market interest rates increase, the value of outstanding debt
securities declines (and vice versa). Entering into a futures contract for the
sale of securities has an effect similar to the actual sale of securities,
although sale of the futures contract might be accomplished more easily and
quickly. For example, if the Fund holds long-term U.S. Government securities and
the Sub-Adviser anticipates a rise in long-term interest rates, the Fund could,
in lieu of disposing of its portfolio securities, enter into futures contracts
for the sale of similar long-term securities. If rates increased and the value
of the Fund's portfolio securities declined, the value of the Fund's futures
contracts would increase, thereby protecting the Fund by preventing net asset
value from declining as much as it otherwise would have. Similarly, entering
into futures contracts for the purchase of securities has an effect similar to
actual purchase of the underlying securities, but permits the continued holding
of securities other than the underlying securities. For example, if the
Sub-Adviser expects long-term interest rates to decline, the Fund might enter
into futures contracts for the purchase of long-term securities, so that it
could gain rapid market exposure that may offset anticipated increases in the
cost of securities it intends to purchase, while continuing to hold
higher-yielding short-term securities or waiting for the long-term market to
stabilize.
Option Writing and Purchasing. The Fund may write (or sell) put and call
options on the securities that the Fund is authorized to buy or already holds in
its portfolio. These option contracts may be listed for trading on a national
securities exchange or traded over-the-counter. The Fund may also purchase put
and call options. The Fund will not write covered calls on more than 25% of its
portfolio, and the Fund will not write covered calls with strike prices lower
than the underlying securities' cost bases on more than 24% of its total
portfolio. The Fund may not invest more than 5% of its total assets in option
purchases.
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<PAGE> 49
A call option gives the purchaser the right to buy, and the writer the
obligation to sell, the underlying security at the agreed upon exercise (or
"strike") price during the option period. A put option gives the purchaser the
right to sell, and the writer the obligation to buy, the underlying security at
the strike price during the option period. Purchasers of options pay an amount,
known as a premium, to the option writer in exchange for the right under the
option contract.
The Fund may sell "covered" put and call options as a means of hedging the
price risk of securities in the Fund's portfolio. The sale of a call option
against an amount of cash equal to the put's potential liability constitutes a
"covered put." When the Fund sells an option, if the underlying securities do
not increase (in the case of a call option) or decrease (in the case of a put
option) to a price level that would make the exercise of the option profitable
to the holder of the option, the option will generally expire without being
exercised and the Fund will realize as profit the premium paid for such option.
When a call option of which the Fund is the writer is exercised, the option
holder purchases the underlying security at the strike price and the Fund does
not participate in any increase in the price of such securities above the strike
price. When a put option of which the Fund is the writer is exercised, the Fund
will be required to purchase the underlying securities at the strike price,
which may be in excess of the market value of such securities. At the time the
Fund writes a put option or a call option on a security it does not hold in its
portfolio in the amount required under the option, it will establish and
maintain a segregated account with its custodian consisting solely of cash, U.S.
Government securities and other liquid high grade debt obligations equal to its
liability under the option.
Over-the-counter options ("OTC options") differ from exchange-traded
options in several respects. They are transacted directly with dealers and not
with a clearing corporation, and there is a risk of non-performance by the
dealer. OTC options are available for a greater variety of securities and for a
wider range of expiration dates and exercise prices than exchange-traded
options. Because OTC options are not traded on an exchange, pricing is normally
done by reference to information from a market marker. This information is
carefully monitored by the Sub-Adviser and verified in appropriate cases. OTC
options transactions will be made by the Fund only with recognized U.S.
Government securities dealers. OTC options are subject to the Fund's 15% limit
on investments in securities which are illiquid or not readily marketable (see
"Investment Restrictions"), provided that OTC option transactions by the Fund
with a primary U.S. Government securities dealer which has given the Fund an
absolute right to repurchase according to a "repurchase formula" will not be
subject to such 15% limit.
It may be the Fund's policy, in order to avoid the exercise of an option
sold by it, to cancel its obligation under the option by entering into a closing
purchase transaction, if available, unless it is determined to be in the Fund's
interest to sell (in the case of a call option) or to purchase (in the case of a
put option) the underlying securities. A closing purchase transaction consists
of the Fund purchasing an option having the same terms as the option sold by the
Fund and has the effect of cancelling the Fund's position as a seller. The
premium which the Fund will pay in executing a closing purchase transaction may
be higher than the premium received when the option was sold, depending in large
part upon the relative price of the underlying security at the time of each
transaction. To the extent options sold by the Fund are exercised and the Fund
either delivers portfolio securities to the holder of a call option or
liquidates securities in its portfolio as a source of funds to purchase
securities put to the Fund, the Fund's portfolio turnover rate may increase,
resulting in a possible increase in short-term capital gains and a possible
decrease in long-term capital gains.
Options on Futures Contracts. The Fund may purchase and write put options
and call options on futures contracts that are traded on a U.S. exchange or
board of trade and enter into related closing transactions to attempt to gain
additional protection against the effects of interest rate or equity market
fluctuations. There can be no assurance that such closing transactions will be
available at all times. In return for the premium paid, such an
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option gives the purchaser the right to assume a position in a futures contract
at any time during the option period for a specified exercise price.
The Fund may purchase put options on futures contracts in lieu of, and for
the same purpose as, the sale of a futures contract. It also may purchase such
put options in order to hedge a long position in the underlying futures
contract.
The purchase of call options on futures contracts is intended to serve the
same purpose as the actual purchase of the futures contracts. The Fund may
purchase call options on futures contracts in anticipation of a market advance
when it is not fully invested.
The Fund may write a call option on a futures contract in order to hedge
against a decline in the prices of the index or debt securities underlying the
futures contracts. If the price of the futures contract at expiration is below
the exercise price, the Fund would retain the option premium, which would
offset, in part, any decline in the value of its portfolio securities.
The writing of a put option on a futures contract is similar to the
purchase of the futures contracts, except that, if market price declines, the
Fund would pay more than the market price for the underlying securities or index
units. The net cost to the Fund would be reduced, however, by the premium
received on the sale of the put, less any transactions costs.
Limitations on Futures Contracts and Options on Futures Contracts. The Fund
will use financial futures contracts and related options only for "bona fide
hedging" purposes, as such term is defined in applicable regulations of the
CFTC, or, with respect to positions in financial futures and related options
that do not qualify as "bona fide hedging" positions, will enter such
non-hedging positions only to the extent that aggregate initial margin deposits
plus premiums paid by it for open futures option positions, less the amount by
which any such positions are "in-the-money," would not exceed 5% of the Fund's
total assets. Futures contracts and related put options written by the Fund will
be offset by assets held in a segregated custodial account sufficient to satisfy
the Fund's obligations under such contracts and options.
Municipal Obligations. The Fund may invest in taxable securities issued by
states, their political subdivisions and agencies and instrumentalities of the
foregoing ("Municipal Obligations"). Municipal Obligations include municipal
bonds, floating rate and variable rate Municipal Obligations, participation
interests in municipal bonds, asset-backed certificates, commercial paper,
short-term municipal notes, and stand-by commitments. It may be anticipated that
governmental, government-related or private entities will create other taxable
securities in addition to those described above. As these new types of
securities are developed, the Sub-Adviser will, consistent with the Fund's
investment objectives, policies and quality standards, consider making
investments in such types of Municipal Obligations. Municipal Obligations in
which the Fund may invest include "general obligation" and "revenue" securities.
General obligation securities are backed by the issuer's full faith, credit and
taxing power for the payment of principal and interest. The taxes that can be
levied for the payment of debt service may be limited or unlimited in terms of
rate or amount or special assessments. Revenue securities are secured primarily
by net revenues generated by a particular facility or group of facilities, or by
the proceeds of a special excise or other specific revenue source. Additional
security may be provided by a debt service reserve fund. Municipal bonds include
industrial development bonds ("IDBs"), moral obligation bonds, put bonds and
private activity bonds ("PABs"). PABs generally relate to the financing of a
facility used by a private entity or entities. The credit quality of such bonds
is usually directly related to that of the users of the facilities.
Municipal Lease Obligations. The Fund may invest in taxable municipal lease
obligations including certificates of participation ("COPs"), which finance a
variety of public projects. Because of the way these
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instruments are structured, they may carry a greater risk than other types of
Municipal Obligations. The Fund may invest in lease obligations only when they
are rated by a rating agency or, if unrated, are deemed by the Sub-Adviser, to
be of a quality comparable to the Fund's quality standards. With respect to any
such unrated municipal lease obligations in which the Fund invests, the
Company's Board of Directors will be responsible for determining their credit
quality, on an ongoing basis, including assessing the likelihood that the lease
will not be canceled. Prior to purchasing a municipal lease obligation and on a
regular basis thereafter, the Sub-Adviser will evaluate the credit quality and,
pursuant to guidelines adopted by the Directors, the liquidity of the security.
In making its evaluation, the Sub-Adviser will consider various credit factors,
such as the necessity of the project, the municipality's credit quality, future
borrowing plans, and sources of revenue pledged for lease repayment, general
economic conditions in the region where the security is issued, and liquidity
factors, such as dealer activity. For discussion regarding municipal lease
obligations, see "Risks of Investing in the Fund" in this Prospectus and
"Investment Policies" in the SAI.
Stand-By Commitments. The Fund may acquire "stand-by commitments," which
will enable it to improve its portfolio liquidity by making available same-day
settlements on sales of its securities. A stand-by commitment gives the Fund,
when it purchases a Municipal Obligation from a broker, dealer or other
financial institution ("seller"), the right to sell up to the same principal
amount of such securities back to the seller, at the Fund's option, at a
specified price. Stand-by commitments are also known as "puts." The Fund may
acquire stand-by commitments solely to facilitate portfolio liquidity and not to
protect against changes in the market price of the Fund's portfolio securities.
The exercise by the Fund of a stand-by commitment is subject to the ability of
the other party to fulfill its contractual commitment.
The Fund expects that stand-by commitments generally will be available
without the payment of any direct or indirect consideration. However, if
necessary or advisable, the Fund will pay for stand-by commitments either
separately in cash or by paying a higher price for portfolio securities which
are acquired subject to the commitments.
It is difficult to evaluate the likelihood of use or the potential benefit
of a stand-by commitment. Therefore, it is expected that the Directors will
determine that stand-by commitments ordinarily have a "fair value" of zero,
regardless of whether any direct or indirect consideration was paid. However, if
the market price of the security subject to the stand-by commitment is less than
the exercise price of the stand-by commitment, such security will ordinarily be
valued at such exercise price. Where the Fund has paid for a stand-by
commitment, its cost will be reflected as unrealized depreciation for the period
during which the commitment is held.
There is no assurance that stand-by commitments will be available to the
Fund nor does the Fund assume that such commitments would continue to be
available under all market conditions.
Third Party Puts. The Fund may also purchase long-term fixed rate bonds
that have been coupled with an option granted by a third party financial
institution allowing the Fund at specified intervals to tender (or "put") the
bonds to the institution and receive the face value thereof (plus accrued
interest). These third party puts are available in several different forms, may
be represented by custodial receipts or trust certificates and may be combined
with other features such as interest rate swaps. The Fund receives a short-term
rate of interest (which is periodically reset), and the interest rate
differential between that rate and the fixed rate on the bond is retained by the
financial institution. The financial institution granting the option does not
provide credit enhancement. In the event that there is a default in the payment
of principal or interest, or downgrading of a bond to below investment grade, or
a loss of the bond's tax-exempt status, the put option will terminate
automatically. The risk to the Fund in this case will be that of holding a
long-term bond which would tend to lengthen the weighted average maturity of the
Fund's portfolio.
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Participation Interests. The Fund may purchase from banks participation
interests in all or part of specific holdings of Municipal Obligations. Each
participation is backed by an irrevocable letter of credit or guarantee of the
selling bank that the Sub-Adviser has determined meets the prescribed quality
standards of the Fund. Thus either the credit of the issuer of the Municipal
Obligation or the selling bank, or both, will meet the quality standards of the
Fund. The Fund has the right to sell the participation back to the bank after
seven days' notice for the full principal amount of the Fund's interest in the
Municipal Obligation plus accrued interest, but only (a) as required to provide
liquidity to the Fund, (b) to maintain a high quality investment portfolio or
(c) upon a default under the terms of the Municipal Obligation. The selling bank
will receive a fee from the Fund in connection with the arrangement.
INVESTMENT RESTRICTIONS
The following restrictions are applicable to the Fund. The Fund may not:
(1) with respect to 75% of its total assets, purchase more than 10% of
the voting securities of any one issuer or invest more than 5% of the value
of such assets in the securities or instruments of any one issuer, except
securities or instruments issued or guaranteed by the U.S. Government, its
agencies or instrumentalities.
(2) purchase securities or instruments which would cause 25% or more
of the market value of its total assets at the time of such purchase to be
invested in securities or instruments of one or more issuers having their
principal business activities in the same industry, provided that there is
no limit with respect to investments in the U.S. Government, its agencies
and instrumentalities.
(3) borrow money, except that the Fund may borrow from banks up to 10%
of the current value of its total net assets for temporary or emergency
purposes. The Fund will make no purchase if its outstanding borrowings
exceed 5% of its total assets.
(4) make loans, except that the Fund may (a) lend its portfolio
securities, (b) enter into repurchase agreements with respect to its
portfolio securities, and (c) purchase the types of debt instruments
described in this Prospectus or the SAI.
For purposes of investment restriction number (1), the Fund considers a
Municipal Obligation to be issued by the governmental entity (or entities) whose
assets and revenues back the Municipal Obligation. For a Municipal Obligation
backed only by the assets and revenues of a nongovernmental user, such user is
deemed to be the issuer; such issuers, to the extent their principal business
activities are in the same industry, are also subject to investment restriction
(2). For purposes of investment restriction (2), public utilities are not deemed
to be a single industry but are separated by industrial categories, such as
telephone or gas utilities.
The foregoing investment restrictions and those described in the SAI as
fundamental are policies of the Fund which may be changed only when permitted by
law and approved by the holders of a majority of the Fund's outstanding voting
securities as described under "Other Information -- Voting."
Additionally, as a non-fundamental policy, the Fund may not invest more
than 15% of the aggregate value of its net assets in investments which are
illiquid, or not readily marketable (including repurchase agreements having
maturities of more than seven calendar days and variable and floating rate
demand and master demand notes not requiring receipt of the principal note
amount within seven days' notice). If a percentage restriction on investment
policies or the investment or use of assets set forth in this Prospectus are
adhered to at the time a transaction is effected, later changes in percentage
resulting from changing values will not be considered a violation.
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RISKS OF INVESTING IN THE FUND
The price per share of the Fund will fluctuate with changes in the value of
the investments held by the Fund and shareholders can lose money on their
investment. Shareholders should expect the value of their shares to fluctuate
with changes in the value of the securities owned by the Fund. There is, of
course, no assurance that the Fund will achieve its investment objective or be
successful in preventing or minimizing the risk of loss that is inherent in
investing in particular types of investment products. In an attempt to minimize
that risk, the Sub-Adviser monitors developments in the economy, the securities
markets, and with each particular issuer. Also, as noted earlier, the Fund is
managed within certain limitations that restrict the amount of its investment in
any single issuer.
Debt Securities. The debt securities in which the Fund will primarily
invest have risks related to changes in interest rates, to their maturity and to
their credit ratings. The values of debt securities held by the Fund will tend
to vary inversely with changes in current interest rates. Thus, the value of the
debt securities held by the Fund will generally decrease if current interest
rates rise and will increase if current interest rates decline. It is also
generally true that the risk of principal fluctuation for debt securities is
greater the longer is their remaining term to maturity. Thus, the securities
held by the Fund, although they typically have a higher yield, will tend to
carry more risk of principal fluctuation than securities with shorter
maturities. Finally, the lower the credit rating of debt securities, the higher
is the risk of default for payment of principal and/or interest. Thus,
securities rated AAA or Aaa by S&P or Moody's will generally carry less risk of
default than securities rated BBB or Baa by S&P or Moody's. In particular,
securities rated BBB or Baa may have speculative characteristics. Although they
are considered to have adequate capacity to pay principal and interest when due,
certain protective elements are lacking so that unfavorable economic
developments may negatively affect their capacity to pay. Although securities
rated BBB or Baa typically pay higher yields than more highly rated securities,
they also have greater potential price variability.
Foreign Securities. The Fund may invest in dollar-denominated debt
obligations of foreign issuers. Investing in the securities of issuers in any
foreign country involves special risks and considerations not typically
associated with investing in securities of U.S. issuers. These include
differences in accounting, auditing and financial reporting standards; generally
higher commission rates on foreign portfolio transactions; the possibility of
nationalization, expropriation or confiscatory taxation; adverse changes in
investment or exchange control regulations (which may include suspension of the
ability to transfer currency from a country); and political instability which
could affect U.S. investments in foreign countries. Additionally, foreign
securities and dividends and interest payable on those securities may be subject
to foreign taxes, including taxes withheld from payments on those securities.
Foreign securities often trade with less frequency and volume than domestic
securities and, therefore, may exhibit greater price volatility. Additional
costs associated with an investment in foreign securities may include higher
custodial fees than apply to domestic custodial arrangements. The Fund's
objective may be affected either unfavorably or favorably by indigenous economic
and political developments.
Through the Fund's flexible policies, the Sub-Adviser endeavors to avoid
unfavorable consequences and to take advantage of favorable developments in
particular nations where, from time to time, it may place the Fund's
investments. See the SAI for further information about foreign securities.
Zero Coupon And Pay-In-Kind Securities. Zero coupon bonds (which do not pay
interest until maturity) and pay-in-kind securities (which pay interest in the
form of additional securities) may be more speculative and may fluctuate more in
value than securities which pay income periodically and in cash. In addition,
although the Fund receives no periodic cash payments from such investments,
applicable tax rules require the Fund to accrue and pay out its income from such
securities annually as income dividends and require stockholders to pay tax on
such dividends.
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Municipal Lease Obligations. Municipal lease obligations have special risks
not normally associated with municipal bonds. These obligations frequently
contain "non-appropriation" clauses that provide that the governmental issuer of
the obligation has no obligation to make future payments under the lease or
contract unless money is appropriated for such purposes by the legislative body
on a yearly or other periodic basis. For more information on risks of municipal
lease investments, see the SAI.
Risks Of Options Transactions. The purchase and writing of options involves
certain risks. During the option period, the covered call writer has, in return
for the premium on the option, given up the opportunity to profit from a price
increase in the underlying securities above the exercise price, but, as long as
its obligation as a writer continues, has retained the risk of loss should the
price of the underlying security decline. The writer of an option has no control
over the time when it may be required to fulfill its obligation as a writer of
the option. Once an option writer has received an exercise notice, it cannot
effect a closing purchase transaction in order to terminate its obligation under
the option and must deliver the underlying securities at the exercise price. If
a put or call option purchased by the Fund is not sold when it has remaining
value, and if the market price of the underlying security, in the case of a put,
remains equal to or greater than the exercise price, or in the case of a call,
remains less than or equal to the exercise price, the Fund will lose its entire
investment in the option. Also, where a put or call option on a particular
security is purchased to hedge against price movements in a related security,
the price of the put or call option may move more or less than the price of the
related security. There can be no assurance that a liquid market will exist when
the Fund seeks to close out an option position. Furthermore, if trading
restrictions or suspensions are imposed on the options market, the Fund may be
unable to close out a position. If the Fund cannot effect a closing transaction,
it will not be able to sell the underlying security while the previously written
option remains outstanding, even if it might otherwise be advantageous to do so.
Risks Of Futures And Related Options Transactions. There are several risks
associated with the use of futures contracts and options on futures contracts.
While the Fund's use of futures contracts and related options for hedging may
protect a Fund against adverse movements in the general level of interest rates
or securities prices, such transactions could also preclude the opportunity to
benefit from favorable movements in the level of interest rates or securities
prices. There can be no guarantee that the Sub-Adviser's forecasts about market
value interest rates and other applicable factors will be correct or that there
will be a correlation between price movements in the hedging vehicle and in the
securities being hedged. The skills required to invest successfully in futures
and options may differ from the skills required to manage other assets in the
Fund's portfolio. An incorrect forecast or imperfect correlation could result in
a loss on both the hedged securities in the Fund and the hedging vehicle so that
the Fund's return might have been better had hedging not been attempted.
There can be no assurance that a liquid market will exist at a time when
the Fund seeks to close out a futures contract or futures option position. Most
futures exchanges and boards of trade limit the amount of fluctuation permitted
in futures contract prices during a single day; once the daily limit has been
reached on a particular contract, no trades may be made that day at a price
beyond that limit. In addition, certain of these instruments are relatively new
and without a significant trading history. As a result, there is no assurance
that an active secondary market will develop or continue to exist. Lack of a
liquid market for any reason may prevent the Fund from liquidating an
unfavorable position and the Fund would remain obligated to meet margin
requirements until the position is closed. The potential risk to the Fund from a
futures transaction is unlimited.
The Fund will only enter into futures contracts or futures options which
are standardized and traded on a U.S. or foreign exchange or board of trade, or
similar entity, or are quoted on an automated quotation system.
The Fund may trade futures contracts and options on futures contracts on
U.S. domestic markets and on exchanges located outside of the United States.
Foreign markets, however, may have greater risk potential than domestic markets.
Unlike trading on domestic commodity exchanges, trading on foreign commodity
exchanges is
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not regulated by the Commodity Futures Trading Commission and may be subject to
greater risk than trading on domestic exchanges. For example, some foreign
exchanges are principal markets so that no common clearing facility exists and a
trader may look only to the broker for performance of the contract. In addition,
any profits that a Fund might realize in trading could be eliminated by adverse
changes in the exchange rate of the currency in which the transaction is
denominated, or the Fund could incur losses as a result of changes in the
exchange rate. Transactions on foreign exchanges may include both commodities
that are traded on domestic exchanges or boards of trade and those that are not.
MANAGEMENT OF THE FUND
The business and affairs of each Fund are managed under the direction of
the Board of Directors. The Directors are Leslie H. Garner, Jr., James H. Speed,
Jr., Frederick E. Turnage, Lucy Hancock Bode and J. Franklin Martin. Additional
information about the Directors, as well as the Company's executive officers,
may be found in the SAI under the heading "Management -- Directors and
Officers."
THE ADVISER: CENTURA BANK
Centura Bank, 131 North Church Street, Rocky Mount, North Carolina 27802,
is a member bank of the Federal Reserve System. Centura Bank and its parent,
Centura Banks, Inc., were formed in 1990 through a merger of two other Rocky
Mount, North Carolina bank holding companies and their subsidiary banks. The
Adviser has served as investment adviser to Centura Funds, Inc. since the
Company's commencement of operations in 1994. The Adviser also, since 1991,
managed several common and collective trust funds that were later converted into
various of the Funds.
The Adviser provides overall management for the Company and the Fund. For
the management services it provides the Fund, the Adviser receives fees from the
Fund, payable monthly at an annual rate of 0.60% based on the Fund's average
daily net assets. Out of its fees from the Fund, the Adviser pays the fees of
the Sub-Adviser. The Adviser also serves as Custodian for the Funds' assets, for
which it receives additional fees.
THE SUB-ADVISER
Sovereign Advisers, 6302 Fairview Road, Suite 450, Charlotte, North
Carolina 28210, serves as Sub-Adviser and is responsible for day-to-day
management of the Fund's portfolio and placement of orders for its portfolio
transactions. Fees paid to the Sub-Adviser by the Adviser for these services are
paid monthly at an annual rate of 0.30% based on the Fund's average daily net
assets.
Jeffrey R. Hines serves as portfolio manager for the Fund. Mr. Hines has
more than 17 years experience in the management of fixed income and equity
portfolios, and provides services to a wide spectrum of individual and
institutional clients including corporations, banks, hospitals, public bodies,
foundations, insurance companies and universities. Prior to joining Sovereign in
January 1994, he served as Senior Portfolio Manager for a Chicago-based
investment management firm with more than $1.3 billion in institutional client
portfolios (1992-1994) and Chief Portfolio Manager for Dana Investment Advisors
(1990-1992). Former Chief Investment Officer of a government agency, Mr. Hines
was responsible for the issuance of more than $200 million of municipal bonds as
well as all investment decisions on the agency's cash reserves. Mr. Hines
graduated from the University of Colorado and is a Chartered Financial Analyst.
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THE DISTRIBUTOR
Centura Funds Distributor, Inc., 3435 Stelzer Road, Columbus, Ohio 43219,
acts as the Fund's Distributor. The Distributor is an affiliate of the Funds'
Administrator, BISYS, was formed specifically to distribute the Funds.
THE ADMINISTRATOR AND SPONSOR
BISYS Fund Services Limited Partnership d/b/a BISYS Fund Services
("BISYS"), 3435 Stelzer Road, Columbus, Ohio 43219, acts as Sponsor and
Administrator of the Funds. BISYS is a subsidiary of BISYS Group, Inc., which is
headquartered in Little Falls, New Jersey and supports more than 5,000 financial
institutions and corporate clients through two strategic business units. BISYS
Information Services Group provides image and data processing outsourcing, and
pricing analysis to more than 600 banks nationwide. BISYS Investment Services
Group designs, administers and distributes over 60 families of proprietary
mutual funds consisting of more than 365 portfolios, and provides 401(k)
marketing support, administration, and recordkeeping services in partnership
with banking institutions and investment management companies.
Pursuant to an Administration Agreement with the Company, BISYS provides
certain management and administrative services necessary for the Fund's
operations including: (a) general supervision of the operation of the Fund
including coordination of the services performed by the Adviser, Sub-Adviser,
custodian, independent accountants and legal counsel; (b) regulatory compliance,
including the compilation of information for documents such as reports to, and
filings with, the SEC and state securities commissions, and preparation of proxy
statements and shareholder reports for the Fund; (c) general supervision
relative to the compilation of data required for the preparation of periodic
reports distributed to the Company's officers and Board of Directors; and (d)
furnishing office space and certain facilities required for conducting the
business of the Fund. For these services, BISYS receives from the Fund a fee,
payable monthly, at the annual rate of 0.15% of the Fund's average daily net
assets.
Pursuant to a Transfer Agency Agreement, BISYS Fund Services, Inc. ("BFSI")
serves as the Fund's transfer agent. Additionally, pursuant to a Fund Accounting
Agreement, BFSI provides assistance in calculating the Fund's net asset values
and provides other accounting services for the Fund. The Transfer Agency
Agreement provides for a per account fee and reimbursement for out-of-pocket
expenses in connection with shareholder servicing. The Fund Accounting Agreement
provides for the Fund to pay $2,500 per month plus out-of-pocket expenses.
OTHER EXPENSES
The Fund bears all costs of its operations other than expenses specifically
the responsibility of the Administrator, the Adviser, the Sub-Adviser, or other
service providers. In addition to fees paid to service providers described
above, the costs borne by the Fund, some of which may vary among the classes, as
noted above, include: legal and accounting expenses; Directors' fees and
expenses; insurance premiums; custodian and transfer agent fees and expenses;
expenses incurred in acquiring or disposing of the Fund's portfolio securities;
expenses of registering the Fund's shares for sale with the SEC and of
satisfying requirements of various state securities commissions; expenses of
maintaining the Fund's legal existence and of shareholders' meetings; and
expenses of preparing and distributing reports, proxy statements and
prospectuses to existing shareholders. The Fund bears its own expenses
associated with its establishment as a portfolio of the Company. Company
expenses directly attributable to the Fund or a class are charged to the Fund or
that class; other Company expenses are allocated proportionately among all of
the Funds and classes in the Company in relation to the net assets of each Fund
and class.
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MINIMUM PURCHASE REQUIREMENTS
The minimum initial investment in the Fund is $1,000, except that the
minimum investment requirement for an IRA or other qualified retirement plan is
$250. Any subsequent investments must be at least $250, except for an IRA or
qualified retirement plan investment. All initial investments should be
accompanied by a completed Purchase Application. A Purchase Application may be
obtained by calling Fund Services at 1-800-44CENTURA (442-3688). However, a
separate application is required for IRA and other qualified retirement plan
investments. The Fund reserves the right to reject purchase orders.
PRICING AND PURCHASE OF FUND SHARES
The Fund offers its Class C shares at their net asset value next determined
after a purchase order has been received. All consideration received by the Fund
for the purchase of Class C shares is invested in full and fractional Class C
shares of the Fund. Certificates for shares are not issued. BISYS maintains
records of each shareholder's holdings of Fund shares, and each shareholder
receives a monthly statement of transactions, holdings and dividends. The Fund
reserves the right to reject any purchase.
EXCHANGE OF FUND SHARES
The Fund offers two convenient ways to exchange Class C shares in the Fund
for Class C shares of another Fund in the Company. Before engaging in an
exchange transaction, a shareholder should obtain and read carefully the
information in the Prospectus describing the Fund into which the exchange will
occur. A Class C shareholder may not exchange shares of one Fund for Class C
shares of another Fund unless the latter Fund's Class C shares have satisfied
applicable requirements for sale in the state of the shareholder's residence.
There is no minimum amount required for exchanges, provided the investor has
satisfied the $1,000 minimum investment requirement for the Fund into which he
or she is exchanging, and no service fee is imposed for an exchange. The Company
may terminate or amend the terms of the exchange privilege at any time upon 60
days notice to shareholders.
A new account opened by exchange must be established with the same name(s),
address and social security number as the existing account. All exchanges will
be made based on the respective net asset values of the applicable Funds next
determined following receipt of the request by the Fund in good order.
An exchange is taxable as a sale of a security on which a gain or loss may
be recognized. Shareholders should receive written confirmation of the exchange
within a few days of the completion of the transaction.
Exchange By Mail. To exchange Fund shares by mail, shareholders should
simply send a letter of instruction to the Fund. The letter of instruction must
include: (a) the investor's account number; (b) the class of shares to be
exchanged; (c) the Fund from and the Fund into which the exchange is to be made;
(d) the dollar or share amount to be exchanged; and (e) the signatures of all
registered owners or authorized parties.
Exchange By Telephone. To exchange Fund shares by telephone or to ask any
questions, shareholders may call the Fund at 1-800-44CENTURA (442-3688). Please
be prepared to give the telephone representative the following information: (a)
the account number, social security number and account registration; (b) the
class of shares to be exchanged; (c) the name of the Fund from which and the
Fund into which the exchange is to be made; and (d) the dollar or share amount
to be exchanged. Telephone exchanges are provided automatically to each
shareholder unless otherwise specifically indicated on the Purchase Application.
The Fund employs procedures, including recording telephone calls, testing a
caller's identity, and sending written confirmation of telephone transactions,
designed to give reasonable assurance that instructions communicated by
telephone are
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genuine, and to discourage fraud. To the extent that the Fund does not follow
such procedures, it may be liable for losses due to unauthorized or fraudulent
telephone instructions. The Fund will not be liable for acting upon instructions
communicated by telephone that it reasonably believes to be genuine. The Fund
reserves the right to suspend or terminate the privilege of exchanging by mail
or by telephone at any time. Telephone Redemption and Telephone Exchange will be
suspended for a period of 10 days following a telephonic address change.
REDEMPTION OF FUND SHARES
Shareholders may redeem their shares, in whole or in part, on any business
day. If a shareholder holds shares in more than one class of the Fund, any
request for redemption must specify the class from which shares are to be
redeemed. In the event a shareholder fails to make such a specification or if
there are insufficient shares of the specified class to satisfy the redemption
order, the redemption order will be delayed until the Fund's transfer agent
receives further instructions from the shareholder.
Class C shares will be redeemed at the net asset value next determined
after a redemption request in good order has been received by the Fund. See
Pricing and Purchase of Fund Shares.
Where the shares have been purchased by check, the redemption request will
be held until the purchasing check has cleared, which may take up to 15 days.
Shareholders may avoid this delay by investing through wire transfers of Federal
funds. During the period prior to the time the shares are redeemed, dividends on
the shares will continue to accrue and be payable and the shareholder will be
entitled to exercise all other beneficial rights of ownership.
Once the shares are redeemed, the Fund will ordinarily send the proceeds by
check to the shareholder at the address of record on the next business day. The
Fund may, however, take up to seven days to make payment although this will not
be the customary practice. Also, if the New York Stock Exchange is closed (or
when trading is restricted) for any reason other than the customary weekend or
holiday closing or if an emergency condition as determined by the SEC merits
such action, the Fund may suspend redemptions or postpone payment dates. A
redemption is a transaction on which gain or loss may be recognized for tax
purposes.
REDEMPTION METHODS
To ensure acceptance of a redemption request, it is important that
shareholders follow the procedures described below. Although the Fund has no
present intention to do so, the Fund reserves the right to refuse or to limit
the frequency of any telephone or wire redemptions. Of course, it may be
difficult to place orders by telephone during periods of severe market or
economic change, and a shareholder should consider alternative methods of
communications, such as couriers. The Fund's services and their provisions may
be modified or terminated at any time by the Fund. If the Fund terminates any
particular service, it will do so only after giving written notice to
shareholders. Redemption by mail will always be available to shareholders.
Requests in "proper order" must include the following documentation: (a) a
letter of instruction, if required, signed by all registered owners of the
shares in the exact names in which they are registered; (b) any required
signature guarantees (see "Signature Guarantees" below); and (c) other
supporting legal documents, if required, in the case of estate, trusts,
guardianships, custodianships, corporations, pension and profit sharing plans
and other organizations.
A shareholder may redeem shares using any of the following methods:
Through An Authorized Broker, Investment Adviser Or Service Organization.
The shareholder should contact his or her broker, investment adviser or Service
Organization and provide instructions to redeem shares. Such organizations are
responsible for prompt transmission of orders. The broker will contact the Fund
and place a redemption trade. The broker may charge a fee for this service.
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By Mail. Shareholders may redeem shares by sending a letter directly to the
Fund. To be accepted, a letter requesting redemption must include: (a) the Fund
name, class of shares and account registration from which shares are being
redeemed; (b) the account number; (c) the amount to be redeemed; (d) the
signatures of all registered owners; and (e) a signature guarantee by any
eligible guarantor institution including members of national securities
exchanges, commercial banks or trust companies, broker-dealers, credit unions
and savings associations. Corporations, partnerships, trusts or other legal
entities will be required to submit additional documentation.
By Telephone. Shareholders may redeem shares by calling the Fund toll free
at 1-800-44CENTURA (442-3688). Be prepared to give the telephone representative
the following information: (a) the account number, social security number and
account registration; (b) the name of the class (if applicable) and the Fund
from which shares are being redeemed; and (c) the amount to be redeemed.
Telephone redemptions are available unless otherwise indicated on the Purchase
Application or on the Optional Services Form. The Fund employs procedures,
including recording telephone calls, testing a caller's identity, and sending
written confirmation of telephone transactions, designed to give reasonable
assurance that instructions communicated by telephone are genuine, and to
discourage fraud. To the extent that the Fund does not follow such procedures,
it may be liable for losses due to unauthorized or fraudulent telephone
instructions. The Fund will not be liable for acting upon instructions
communicated by telephone that it reasonably believes to be genuine. Telephone
Redemption and Telephone Exchange will be suspended for a period of 10 days
following a telephonic address change.
By Wire. Shareholders may redeem shares by contacting the Fund by mail or
telephone and instructing the Fund to send a wire transmission to the
shareholder's bank.
The shareholder's instructions should include: (a) the account number,
social security number and account registration; (b) the name of the class and
the Fund from which shares are being redeemed; and (c) the amount to be
redeemed. Wire redemptions can be made unless otherwise indicated on the
shareholder's Purchase Application, and a copy is attached of a void check on an
account where proceeds are to be wired. The bank may charge a fee for receiving
a wire payment on behalf of its customer.
Systematic Withdrawal Plan. An owner of $12,000 or more of shares of the
Fund may elect to have periodic redemptions made from this account to be paid on
a monthly, quarterly, semiannual or annual basis. The maximum withdrawal per
year is 12% of the account value at the time of the election. A sufficient
number of shares to make the scheduled redemption will normally be redeemed on
the date selected by the shareholder. Depending on the size of the payment
requested and fluctuation in the net asset value, if any, of the shares
redeemed, redemptions for the purpose of making such payments may reduce or even
exhaust the account. A shareholder may request that these payments be sent to a
predesignated bank or other designated party. Capital gains and dividend
distributions paid to the account will automatically be reinvested at net asset
value on the distribution payment date.
Redemption Of Small Accounts. Due to the disproportionately higher cost of
servicing small accounts, the Fund reserves the right to redeem, on not less
than 30 days' notice, a Fund account that has been reduced by a shareholder (not
by market action) below $1,000. If during the 30-day notice period the
shareholder purchases sufficient shares to bring the value of the account to
$1,000, the account will not be redeemed.
Redemption In Kind. All redemptions of shares of the Fund shall be made in
cash, except that the commitment to redeem shares in cash extends only to
redemption requests made by each shareholder during any 90-day period of up to
the lesser of $250,000 or 1% of the net asset value of the Fund at the beginning
of such period. This commitment is irrevocable without the prior approval of the
SEC. In the case of redemption requests by shareholders in excess of such
amounts, the Board of Directors reserves the right to have the Fund make
payment, in whole or in part, in securities or other assets, in case of an
emergency or any time a cash distribution
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would impair the liquidity of the Fund to the detriment of the existing
shareholders. In this event, the securities would be valued generally in the
same manner as the securities of the Fund are regularly valued. If the recipient
were to sell such securities, he or she would incur brokerage charges.
Signature Guarantees. To protect shareholder accounts, the Fund and the
Administrator from fraud, signature guarantees are required to enable the Fund
to verify the identity of the person who has authorized a redemption by mail
from an account. Signature guarantees are required for (1) redemptions where the
proceeds are to be sent to someone other than the registered shareholder(s) and
the registered address, (2) a redemption of $25,000 or more, and (3) share
transfer requests. Signature guarantees may be obtained from certain eligible
financial institutions, including but not limited to, the following: banks,
trust companies, credit unions, securities brokers and dealers, savings and loan
associations and participants in the Securities and Transfer Association
Medallion Program ("STAMP"), the Stock Exchange Medallion Program ("SEMP") or
the New York Stock Exchange Medallion Signature Program ("MSP"). Shareholders
may contact the Fund at 1-800-442-3688 for further details.
PORTFOLIO TRANSACTIONS
Pursuant to the Sub-Advisory Agreement, the Sub-Adviser places orders for
the purchase and sale of portfolio investments for the Fund's account with
brokers or dealers it selects in its discretion.
In effecting purchases and sales of portfolio securities for the account of
a Fund, the Sub-Adviser will seek the best execution of the Fund's orders.
Purchases and sales of portfolio debt securities for the Fund are generally
placed by the Sub-Adviser with primary market makers for these securities on a
net basis, without any brokerage commission being paid by the Fund. Trading
does, however, involve transaction costs. Transactions with dealers serving as
primary market makers reflect the spread between the bid and asked prices. The
Fund may purchase securities during an underwriting, which will include an
underwriting fee paid to the underwriter. Purchases and sales of common stocks
are generally placed by the Sub-Adviser with broker-dealers which, in the
judgment of the Sub-Adviser, provide prompt and reliable execution at favorable
security prices and reasonable commission rates. Broker-dealers are selected on
the basis of a variety of factors such as reputation, capital strength, size and
difficulty of order, sale of Fund shares and research provided to the
Sub-Adviser. The Sub-Adviser may cause the Fund to pay commissions higher than
another broker-dealer would have charged if the Sub-Adviser believes the
commission paid is reasonable in relation to the value of the brokerage and
research services received by the Sub-Adviser.
The Fund may buy and sell securities to take advantage of investment
opportunities when such transactions are consistent with the Fund's investment
objectives and policies and when the Sub-Adviser believes such transactions may
improve a Fund's overall investment return. These transactions involve costs in
the form of spreads or brokerage commissions.
Consistent with the Rules of Fair Practice of the National Association of
Securities Dealers, Inc. and subject to seeking the most favorable price and
execution available and such other policies as the Directors may determine, the
Sub-Adviser may consider sales of shares of the Fund as a factor in the
selection of broker-dealers to execute portfolio transactions for the Fund.
FUND SHARE VALUATION
The net asset value per share for each class of shares of the Fund is
calculated at 4:00 p.m. (Eastern time), Monday through Friday, on each day the
New York Stock Exchange is open for trading, which excludes the following
customary business holidays: New Year's Day, Martin Luther King, Jr. Day,
Presidents' Day, Good
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Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving Day and
Christmas Day except days on which there are not sufficient changes in the value
of the Fund's portfolio securities that the Fund's net asset value might be
materially affected, or days during which no Shares are tendered for redemption
and no orders to purchase Shares are received. The net asset value per share of
each class of shares of the Fund is computed by dividing the value of net assets
of each class (i.e., the value of the assets less the liabilities) by the total
number of such class' outstanding shares. All expenses, including fees paid to
the Adviser, the Sub-Adviser and the Administrator, are accrued daily and taken
into account for the purpose of determining the net asset value.
Bonds and other fixed-income securities are valued by using market
quotations and may be valued on the basis of prices provided by a pricing
service approved by the Board of Directors. Securities listed on an exchange are
valued on the basis of the last sale on the security's primary exchange prior to
the time the valuation is made. If there has been no sale since the immediately
previous valuation, then the current bid price is used. Portfolio securities
which are primarily traded on foreign exchanges may be valued with the
assistance of a pricing service and are generally valued at the preceding
closing values of such securities on their respective exchanges, except that
when an occurrence subsequent to the time a foreign security is valued is likely
to have changed such value, then the fair value of those securities will be
determined by consideration of other factors by or under the direction of the
Board of Directors. Over-the-counter securities are valued on the basis of the
bid price at the close of business on each business day. Securities for which
market quotations are not readily available are valued at fair value as
determined in good faith by or at the direction of the Board of Directors.
Securities with remaining maturities of 60 days or less are valued at amortized
cost.
DIVIDENDS, DISTRIBUTIONS, AND FEDERAL INCOME TAXATION
The Fund intends to qualify annually to elect to be treated as a regulated
investment company pursuant to the provisions of Subchapter M of the Internal
Revenue Code of 1986, as amended (the "Code"). To qualify, the Fund must meet
certain income, distribution and diversification requirements. In any year in
which the Fund qualifies as a regulated investment company and timely
distributes all of its taxable income and substantially all of its net
tax-exempt interest income, the Fund generally will not pay any U.S. federal
income or excise tax.
The Fund intends to distribute to its shareholders substantially all of its
investment company taxable income (which includes, among other items, dividends
and interest and the excess, if any, of net short-term capital gains over net
long-term capital losses). The Fund will declare dividends from its investment
company taxable income (other than the capital gain component thereof) daily and
pay them out monthly. The Fund intends to distribute, at least annually,
substantially all net realized and short-term capital gain. In determining
amounts of capital gains to be distributed, any capital loss carryovers from
prior years will be applied against capital gains.
The amount declared each day as a dividend may be based on projections of
estimated monthly net investment income and may differ from the actual
investment income determined in accordance with generally accepted accounting
principles. An adjustment will be made to the dividend each month to account for
any difference between the projected and actual monthly investment income.
Distributions will be paid in additional Fund shares of the relevant class
based on the net asset value of shares of that class at the close of business of
the payment date of the distribution, unless the shareholder elects in writing,
not less than five full business days prior to the record date, to receive such
distributions in cash. Dividends declared in, and attributable to, the preceding
month will be paid within five business days after the end of each month. Shares
purchased will begin earning dividends on the day after the purchase order is
executed, and shares redeemed will earn dividends through the day the redemption
is executed. Net investment income for a Saturday, Sunday or holiday will be
declared as a dividend on the previous business day.
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Distributions of investment company taxable income (regardless of whether
derived from dividends, interest or short-term capital gains) will be taxable to
shareholders as ordinary income. If a portion of the Fund's income consists of
dividends paid by U.S. corporations, a portion of the dividends paid by the Fund
may qualify for the deduction for dividends received by corporations.
Distributions of net long-term capital gains (in excess of net short-term
capital losses) designated by the Fund as capital gain dividends will be taxable
as long-term capital gains, regardless of how long a shareholder has held the
Fund shares. Distributions are taxable in the same manner whether received in
additional shares or in cash.
A distribution will be treated as paid on December 31 of the calendar year
if it is declared by the Fund during October, November, or December of that year
to shareholders of record in such a month and paid by the Fund during January of
the following calendar year. Such distributions will be taxable to shareholders
in the calendar year in which the distributions are declared, rather than the
calendar year in which the distributions are received.
Any gain or loss realized by a shareholder upon the sale or other
disposition of Fund shares, or upon receipt of a distribution in complete
liquidation of the Fund, generally will be a capital gain or loss which will be
long-term or short-term generally depending upon the shareholder's holding
period for the shares.
If a shareholder elects to receive distributions in cash, and checks (1)
are returned and marked as "undeliverable" or (2) remain uncashed for six
months, the shareholder's cash election will be changed automatically and future
dividend and capital gains contributions will be reinvested in the Fund at the
per share net asset value determined as of date of payment of the distribution.
In addition, any undeliverable check or check that remain uncashed for six
months will be canceled and will be reinvested in the Fund at the per share net
asset value determined as of the date of cancellation.
The timing of a shareholder's investment could have undesirable tax
consequences. If a shareholder opens a new account or buys more shares for his
or her current account just before a distribution is made, the shareholder would
receive a portion of his or her investment back as a taxable distribution.
The Fund may be required to withhold federal income tax of 31% ("backup
withholding") of the distributions and the proceeds of redemptions payable to
shareholders who fail to provide a correct taxpayer identification number or to
make required certifications, or where the Fund or shareholder has been notified
by the Internal Revenue Service that the shareholder is subject to backup
withholding. Corporate shareholders and certain other shareholders specified in
the Code are exempt from backup withholding. Backup withholding is not an
additional tax. Any amounts withheld may be credited against the shareholder's
U.S. federal income tax liability.
Further information relating to tax consequences is contained in the SAI.
Shareholders will be notified annually by the Company as to the federal tax
status of distributions made by the Fund. Depending on the residence of the
shareholder for tax purposes, distributions also may be subject to state and
local taxes, including withholding taxes. Foreign shareholders may also be
subject to special withholding requirements. Special tax treatment, including a
penalty on certain pre-retirement distributions, is accorded to accounts
maintained as IRAs. Shareholders should consult their own tax advisers as to the
federal, state and local tax consequences of ownership of shares of the Fund in
their particular circumstances.
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OTHER INFORMATION
CAPITALIZATION
Centura Funds, Inc. ("Company") was organized as a Maryland corporation on
March 1, 1994 and currently consists of seven separately managed portfolios. The
Fund was established as a new portfolio of the Company on February 18, 1999. The
Board of Directors may establish additional portfolios in the future. The
capitalization of the Company consists solely of 1.05 billion shares of common
stock with a par value of $0.001 per share. When issued, shares of the Fund are
fully paid, non-assessable and freely transferable.
This Prospectus relates to Class C shares of the Fund. The Fund also offers
Class A and Class B shares. Class A shares are offered with a front-end sales
charge (unless waived), and a contingent deferred sales charge is imposed
(unless waived) on redemptions of Class B shares within five years of purchase.
Because of differences in expenses, the performance of each class will typically
be different. Information about Class A and Class B shares may be obtained from
your sales representative or by calling the Fund at (800) 442-3688.
VOTING
Shareholders have the right to vote in the election of Directors and on any
and all matters on which, by law or under the provisions of the Company's
Articles of Incorporation, they may be entitled to vote. The Company is not
required to hold regular annual meetings of the Fund's shareholders and does not
intend to do so. The Fund's shareholders vote separately on items affecting only
the Fund, and shareholders of each class of the Fund vote separately on matters
affecting only that class.
The Articles of Incorporation provide that the holders of not less than
two-thirds of the outstanding shares of the Company may remove a person serving
as Director either by declaration in writing or at a meeting called for such
purpose. The Directors are required to call a meeting for the purpose of
considering the removal of a person serving as Director if requested in writing
to do so by the holders of not less than 10% of the outstanding shares of the
Company. See "Other Information -- Voting Rights" in the SAI.
Shares entitle their holders to one vote per share (with proportionate
voting for fractional shares). As used in this Prospectus, the phrase "vote of a
majority of the outstanding shares" of the Fund, a class or the Company, as
applicable, means the vote of the lesser of: (1) 67% of the shares of the Fund
(a class or the Company) present at a meeting if the holders of more than 50% of
the outstanding shares are present in person or by proxy; or (2) more than 50%
of the outstanding shares of the Fund (a class or the Company).
PERFORMANCE INFORMATION
The performance of the Fund may be compared to various widely recognized
indexes of market performance. The indexes are unmanaged and thus reflect no
management fees. They also do not reflect the transaction costs that would be
incurred by an investor to acquire the included securities. Because the
securities reflected in an index will typically differ in many respects from
those held by the Fund, various factors that can affect performance may affect
the Fund in different ways than an index to which it is compared. Any
performance information should be considered in light of the Fund's investment
objectives and policies, characteristics and quality of the Fund and the market
conditions during the time period indicated, and should not be considered to be
representative of what may be achieved in the future. For a description of the
methods used to determine yield and total return for the Fund, see the SAI.
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Indexes to which the Fund's performance may be compared may include:
- Lehman Brothers Intermediate Government Index -- A
widely-recognized unmanaged index generally representative of
intermediate government bonds.
- Lehman Brothers Government/Corporate Bond Index -- A
widely-recognized unmanaged index generally representative of
intermediate government and corporate bonds.
- Lipper Intermediate Investment Grade Debt Universe -- A
widely-recognized index that tracks the performance of mutual funds
which invest at least 65% of their assets in investment grade bonds
having maturities between 5 and 10 years.
When performance records are developed by the Fund, they may, from time to
time, include the yield and total return for shares (including each class, as
applicable) in advertisements or reports to shareholders or prospective
investors. The methods used to calculate the yield and total return of the Fund
are mandated by the SEC. In general, the performance of the classes of the Fund
will differ due to (a) differences in the level of class specific expenses,
including service and distribution fees and (b) the fact that total return
figures for Class A shares will reflect the deduction of the maximum front-end
sales charge applicable for the Fund while the total return figures for Class B
shares will reflect the maximum CDSC for the particular Fund. Performance
figures for Class C shares will reflect the absence of any service and
distribution fee, front-end sales charge or CDSC. Due to these differences in
fees and/or expenses borne by Class A, Class B and Class C shares, yield and
total return on Class A and Class B shares can be expected to be lower than the
yield and total return on Class C shares for the same period.
Quotations of "yield" will be based on the investment income per share
during a particular 30-day (or one month) period (including dividends and
interest), less expenses accrued during the period ("net investment income"),
and will be computed by dividing net investment income by the maximum public
offering price per share (for each class, as applicable) on the last day of the
period.
Quotations of yield reflect the Fund's (and its classes') performance only
during the particular period on which the calculations are based. Yields will
vary based on changes in market conditions, the level of interest rates and the
level of the particular Fund's expenses, including class-specific expenses, and
no reported performance figure should be considered an indication of performance
which may be expected in the future. Quotations of average annual total return
will be expressed in terms of the average annual compounded rate of return of a
hypothetical investment in shares of the Fund (or a class) over periods of 1, 5
and 10 years (up to the life of the Fund), reflect the deduction of a
proportional share of Fund and class-specific expenses, as applicable, on an
annual basis, and assume that all dividends and distributions are reinvested
when paid.
YEAR 2000
The investment services industry is evaluating the capability of existing
application software programs and operating systems to accommodate the date
value for the year 2000. Many existing applications software products in the
marketplace were designed only to accommodate a two-digit date position, which
represents the year (e.g., "95" is stored on the system and represents the year
1995). If the year 1999 is the maximum date value these systems are able to
accurately process, the improper identification of the year 2000 could result in
a computer system failure or miscalculations causing a disruption of operations.
The Funds' principal service providers are taking steps the Funds believe are
reasonably designed to address the year 2000 issues with respect to the computer
systems those providers operate. However, this is an ongoing process and testing
and other steps are scheduled to be completed in 1999. Nevertheless, the
inability of service providers to successfully address year
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2000 issues could result in interruptions in the Fund's business and have
material adverse impact on the Fund's operations.
With respect to securities in which the Fund invests, Year 2000 compliance
is considered as a factor in evaluating the Fund's investments, to the extent
such information is available.
ACCOUNT SERVICES
All transactions in shares of the Fund will be reflected in a statement for
each shareholder. In those cases where a Service Organization or its nominee is
shareholder of record of shares purchased for its customer, the Fund has been
advised that the statement may be transmitted to the customer at the discretion
of the Service Organization.
BISYS Fund Services, Inc. provides fund accounting functions for the Fund,
and provides personnel and facilities to perform shareholder servicing and
transfer agency-related services for the Company.
SHAREHOLDER INQUIRIES
All shareholder inquiries should be directed to Centura Funds, P.O. Box
182485, Columbus, Ohio 43218-2485.
General and Account Information: (800) 44CENTURA (442-3688).
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APPENDIX
DESCRIPTION OF BOND RATINGS
DESCRIPTION OF MOODY'S BOND RATINGS:
Excerpts from Moody's description of its bond ratings are listed as
follows: Aaa -- judged to be the best quality and they carry the smallest degree
of investment risk; Aa -- judged to be of high quality by all
standards -- together with the Aaa group, they comprise what are generally known
as high grade bonds; A -- possess many favorable investment attributes and are
to be considered as "upper medium grade obligations"; Baa -- considered to be
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; Ba -- judged to
have speculative elements, their future cannot be considered as well assured;
B -- generally lack characteristics of the desirable investment; 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 -- speculative in a high
degree, often in default; C -- lowest rated class of bonds, regarded as having
extremely poor prospects.
Moody's also supplies numerical indicators 1, 2 and 3 to rating categories.
The modifier 1 indicates that the security is in the higher end of its rating
category; the modifier 2 indicates a mid-range ranking; and modifier 3 indicates
a ranking toward the lower end of the category.
DESCRIPTION OF S&P'S BOND RATINGS:
Excerpts from S&P's description of its bond ratings are listed as follows:
AAA -- highest grade obligations, in which capacity to pay interest and repay
principal is extremely strong; AA -- has a very strong capacity to pay interest
and repay principal, and differs from AAA issues only in a small degree; A --
has a strong capacity to pay interest and repay principal, although they are
somewhat more susceptible to the adverse effects of changes in circumstances and
economic conditions than debt in higher rated categories; BBB -- 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. This group is the lowest which qualifies for commercial bank
investment. BB, B, CCC, CC, C -- predominantly speculative with respect to
capacity to pay interest and repay principal in accordance with terms of the
obligations; BB indicates the highest grade and C the lowest within the
speculative rating categories. D -- interest or principal payments are in
default.
S&P applies indicators "+" no character, and "-" to its rating categories.
The indicators show relative standing within the major rating categories.
DESCRIPTION OF MOODY'S RATINGS OF SHORT-TERM MUNICIPAL OBLIGATIONS:
Moody's ratings for state and municipal short-term obligations will be
designated Moody's Investment Grade or MIG. Such ratings recognize the
differences between short-term credit and long-term risk. Short-term ratings on
issues with demand features (variable rate demand obligations) are
differentiated by the use of the VMIG symbol to reflect such characteristics as
payment upon periodic demand rather than fixed maturity dates and payments
relying on external liquidity. Ratings categories for securities in these groups
are as follows: MIG 1/VMIG 1 -- 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 -- denotes high
quality, margins of protection are ample although not as large as in the
preceding group; MIG 3/VMIG 3 --
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denotes high quality, all security elements are accounted for but there is
lacking the undeniable strength of the preceding grades; MIG 4/VMIG 4 -- denotes
adequate quality, protection commonly regarded as required of an investment
security is present, but there is specific risk; SQ -- denotes speculative
quality, instruments in this category lack margins of protection.
DESCRIPTION OF MOODY'S COMMERCIAL PAPER RATINGS:
Excerpts from Moody's commercial paper ratings are listed as follows:
PRIME-1 -- issuers (or supporting institutions) have a superior ability for
repayment of senior short-term debt obligations; PRIME-2 -- issuers (or
supporting institutions) have a strong ability for repayment of senior
short-term debt obligations; PRIME-3 -- issuers (or supporting institutions)
have an acceptable ability for repayment of senior short-term debt obligations;
NOT PRIME -- issuers do not fall within any of the Prime categories.
DESCRIPTION OF S&P'S RATINGS FOR CORPORATE AND MUNICIPAL BONDS:
Investment grade ratings: AAA -- the highest rating assigned by S&P,
capacity to pay interest and repay principal is extremely strong; AA -- has a
very strong capacity to pay interest and repay principal and differs from the
highest rated issues only in a small degree; A -- has 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 -- 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.
Speculative grade ratings: BB, B, CCC, CC, C -- debt rated in these
categories is regarded as having predominantly speculative characteristics with
respect to capacity to pay interest and repay principal -- while such debt will
likely have some quality and protective characteristics, these are outweighed by
large uncertainties or major risk exposures to adverse conditions;
CI -- reserved for income bonds on which no interest is being paid; D -- in
default, and payment of interest and/or repayment of principal is in arrears.
Plus (+) OR minus (-) -- the ratings from "AA" to "CCC" may be modified by the
addition of a plus or minus sign to show relative standing within the major
rating categories. Description of S&P's rating for municipal notes and
short-term municipal demand obligations:
Rating categories are as follows: SP-1 -- has a very strong or strong
capacity to pay principal and interest -- those issues determined to possess
overwhelming safety characteristics will be given a plus (+) designation; SP-2
-- has a satisfactory capacity to pay principal and interest; SP-3 -- issues
carrying this designation have a speculative capacity to pay principal and
interest.
DESCRIPTION OF S&P'S RATINGS FOR SHORT-TERM CORPORATE DEMAND OBLIGATIONS AND
COMMERCIAL PAPER:
An S&P commercial paper rating is a current assessment of the likelihood of
timely repayment of debt having an original maturity of no more than 365 days.
Excerpts from S&P's description of its commercial paper ratings are listed as
follows: A-1 -- the degree of safety regarding timely payment is strong -- those
issues determined to possess extremely strong safety characteristics will be
denoted with a plus (+) designation; A-2 -- capacity for timely payment is
satisfactory -- however, the relative degree of safety is not as high as for
issues designated "A-1;" A-3 -- has adequate capacity for timely payment --
however, is more vulnerable to the adverse effects of changes in circumstances
than obligations carrying the higher designations; B -- regarded as having only
speculative capacity for timely payment; C -- a doubtful capacity for payment;
D -- in payment default -- the "D" rating category is used when interest
payments or principal payments are not made on the
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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.
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CENTURA LOGO
Address for:
GENERAL SHAREHOLDER INQUIRIES
Centura Funds, Inc.
P.O. Box 182485
Columbus, Ohio 43219-2485
INVESTMENT ADVISER AND CUSTODIAN
Centura Bank
131 North Church Street
Rocky Mount, North Carolina 27802
SUB-ADVISER
Sovereign Advisers
6302 Fairview Road, Suite 450
Charlotte, North Carolina 28210
ADMINISTRATOR AND SPONSOR
BISYS Fund Services.
3435 Stelzer Road
Columbus, Ohio 43219
DISTRIBUTOR
Centura Funds Distributor, Inc.
125 West 55th Street
New York, New York 10019
COUNSEL
Dechert Price & Rhoads
1775 Eye Street, N.W.
Washington, D.C. 20006-2401
CENTURA LOGO
CENTURA QUALITY
INCOME FUND
(A SERIES OF CENTURA FUNDS, INC.)
PROSPECTUS
CLASS C SHARES
CENTURA BANK
ADVISER
SOVEREIGN ADVISERS
SUB-ADVISER
BISYS FUND SERVICES
ADMINISTRATOR AND SPONSOR
CENTURA FUNDS DISTRIBUTOR, INC.
DISTRIBUTOR
APRIL 24, 1999
<PAGE> 71
CENTURA FUNDS, INC.
3435 STELZER ROAD
COLUMBUS, OHIO 43219
GENERAL AND ACCOUNT INFORMATION
(800) 442-3688
STATEMENT OF ADDITIONAL INFORMATION
CLASS A SHARES AND CLASS B SHARES
This Statement of Additional Information ("SAI") describes the seven funds
(the "Funds") advised by Centura Bank (the "Adviser"). The Funds are:
-- Centura Mid Cap Equity Fund
-- Centura Large Cap Equity Fund
-- Centura Southeast Equity Fund
-- Centura Federal Securities Income Fund
-- Centura North Carolina Tax-Free Bond Fund
-- Centura Money Market Fund
-- Centura Quality Income Fund
Each Fund has distinct investment objectives and policies. Shares of the Funds
are sold to the public by the Distributor as an investment vehicle for
individuals, institutions, corporations and fiduciaries, including customers of
the Adviser or its affiliates.
The Company is offering an indefinite number of shares of each class of each
Fund. The Money Market Fund offers Class A shares but does not offer Class B
shares. Each Fund, including the Money Market Fund, also offers Class C shares,
available only to accounts managed by the Adviser's Trust Department, and
non-profit institutions with a minimum investment in the Funds of at least
$100,000. Class C shares have no front-end sales charge or contingent deferred
sales charge. See "Other Information -- Capitalization" in the prospectus.
This SAI is not a prospectus and is authorized for distribution only when
preceded or accompanied by the prospectuses for Centura Money Market Fund, dated
April 29, 1998, for Centura Quality Income Fund, dated April 24, 1999, and for
the other Funds dated August 1, 1998 (collectively, the "Prospectus"). This SAI
contains additional and more detailed information than that set forth in the
Prospectus and should be read in conjunction with the Prospectus. The Prospectus
may be obtained without charge by writing or calling the Funds at the address
and information numbers printed above.
April 24, 1999
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TABLE OF CONTENTS
PAGE
INVESTMENT POLICIES.......................................................
Bank Obligations......................................................
Commercial Paper......................................................
Convertible Securities................................................
Corporate Debt Securities.............................................
Repurchase Agreements.................................................
Variable and Floating Rate Demand and Master Demand Notes.............
Loans of Portfolio Securities.........................................
Foreign Securities....................................................
Forward Foreign Currency Exchange Contracts...........................
Interest Rate Futures Contracts.......................................
Stock Index Futures Contracts.........................................
Option Writing and Purchasing.........................................
Options on Futures Contracts..........................................
Risks of Futures and Options Investments..............................
Limitations on Futures Contracts and Options on Futures Contracts.....
North Carolina Municipal Obligations..................................
Municipal Lease Obligations...........................................
Securities of Other Investment Companies..............................
INVESTMENT RESTRICTIONS...................................................
MANAGEMENT................................................................
Directors and Officers................................................
Distribution of Fund Shares...........................................
Administrative Services...............................................
Service Organizations.................................................
DETERMINATION OF NET ASSET VALUE..........................................
PORTFOLIO TRANSACTIONS....................................................
Portfolio Turnover....................................................
TAXATION..................................................................
Centura North Carolina Tax-Free Bond Fund.............................
OTHER INFORMATION.........................................................
Capitalization........................................................
Voting Rights.........................................................
Custodian, Transfer Agent and Dividend Disbursing Agent...............
Independent Accountants...............................................
Counsel...............................................................
Registration Statement................................................
Financial Statements..................................................
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INVESTMENT POLICIES
The Prospectus discusses the investment objectives of the Funds and the policies
to be employed to achieve those objectives. This section contains supplemental
information concerning certain types of securities and other instruments in
which the Funds may invest, the investment policies and portfolio strategies
that the Funds may utilize, and certain risks attendant to such investments,
policies and strategies.
References herein to "Adviser" include any sub-adviser, if applicable.
BANK OBLIGATIONS (ALL FUNDS). These obligations include negotiable certificates
of deposit and bankers' acceptances. A description of the banks the obligations
of which the Funds may purchase are set forth in the Prospectus. A certificate
of deposit is a short-term, interest-bearing negotiable certificate issued by a
commercial bank against funds deposited in the bank. A bankers' acceptance is a
short-term draft drawn on a commercial bank by a borrower, usually in connection
with an international commercial transaction. The borrower is liable for payment
as is the bank, which unconditionally guarantees to pay the draft at its face
amount on the maturity date.
COMMERCIAL PAPER (ALL FUNDS). Commercial paper includes short-term unsecured
promissory notes, variable rate demand notes and variable rate master demand
notes issued by domestic and foreign bank holding companies, corporations and
financial institutions and similar taxable instruments issued by government
agencies and instrumentalities. All commercial paper purchased by a Fund must
meet the minimum rating criteria for that Fund.
CONVERTIBLE SECURITIES (CENTURA MID CAP EQUITY FUND, CENTURA LARGE CAP EQUITY
FUND, CENTURA SOUTHEAST EQUITY FUND AND CENTURA QUALITY INCOME FUND).
Convertible securities give the holder the right to exchange the security for a
specific number of shares of common stock. Convertible securities include
convertible
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preferred stocks, convertible bonds, notes and debentures, and other securities.
Convertible securities typically involve less credit risk than common stock of
the same issuer because convertible securities are "senior" to common stock --
i.e., they have a prior claim against the issuer's assets. Convertible
securities generally pay lower dividends or interest than non-convertible
securities of similar quality. They may also reflect changes in the value of the
underlying common stock.
CORPORATE DEBT SECURITIES (ALL FUNDS). Fund investments in these securities are
limited to corporate debt securities (corporate bonds, debentures, notes and
similar corporate debt instruments) which meet the rating criteria established
for each Fund.
After purchase by a Fund, a security may cease to be rated or its rating may be
reduced below the minimum required for purchase by the Fund. Neither event will
require a sale of such security by the Fund. However, the Adviser will consider
such event in its determination of whether the Fund should continue to hold the
security. To the extent the ratings given by Moody's Investors Service, Inc.
("Moody's"), Standard & Poor's Corporation ("S&P") or another rating agency may
change as a result of changes in such organizations or their rating systems, the
Funds will attempt to use comparable ratings as standards for investments in
accordance with the investment policies contained in the Prospectus and in this
SAI.
REPURCHASE AGREEMENTS (ALL FUNDS). The Funds may invest in securities subject to
repurchase agreements with U.S. banks or broker-dealers. Such agreements may be
considered to be loans by the Funds for purposes of the Investment Company Act
of 1940, as amended (the "1940 Act"). A repurchase agreement is a transaction in
which the seller of a security commits itself at the time of the sale to
repurchase that security from the buyer at a mutually agreed-upon time and
price. The repurchase price exceeds the sale price, reflecting an agreed-upon
interest rate effective for the period the buyer owns the security subject to
repurchase. The agreed-upon rate is unrelated to the interest rate on that
security. The Adviser will monitor the value of the underlying security at the
time the transaction is entered into and at all times during the term of the
repurchase agreement to insure that the value of the security always equals or
exceeds the repurchase price. In the event of default by the seller under the
repurchase agreement, the Funds may have problems in exercising their rights to
the underlying securities and may incur costs and experience time delays in
connection with the disposition of such securities.
VARIABLE AND FLOATING RATE DEMAND AND MASTER DEMAND NOTES (ALL FUNDS). The Funds
may, from time to time, buy variable rate demand notes issued by corporations,
bank holding companies and financial institutions and similar taxable and
tax-exempt instruments issued by government agencies and instrumentalities.
These securities will typically have a maturity in the 5 to 20 year range but
carry with them the right of the holder to put the securities to a remarketing
agent or other entity on short notice, typically seven days or less. The
obligation of the issuer of the put to repurchase the securities is backed up by
a letter of credit or other obligation issued by a financial institution. The
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purchase price is ordinarily par plus accrued and unpaid interest. Ordinarily,
the remarketing agent will adjust the interest rate every seven days (or at
other intervals corresponding to the notice period for the put), in order to
maintain the interest rate at the prevailing rate for securities with a
seven-day maturity.
The Funds may also buy variable rate master demand notes. The terms of these
obligations permit the investment of fluctuating amounts by the Funds at varying
rates of interest pursuant to direct arrangements between a Fund, as lender, and
the borrower. They permit weekly, and in some instances, daily, changes in the
amounts borrowed. The Funds have the right to increase the amount under the note
at any time up to the full amount provided by the note agreement, or to decrease
the amount, and the borrower may prepay up to the full amount of the note
without penalty. The notes may or may not be backed by bank letters of credit.
Because the notes are direct lending arrangements between the lender and the
borrower, it is not generally contemplated that they will be traded, and there
is no secondary market for them, although they are redeemable (and thus,
immediately repayable by the borrower) at principal amount, plus accrued
interest, at any time. The Funds have no limitations on the type of issuer from
whom the notes will be purchased. However, in connection with such purchase and
on an ongoing basis, the Adviser will consider the earning power, cash flow and
other liquidity ratios of the issuer, and its ability to pay principal and
interest on demand, including a situation in which all holders of such notes
make demand simultaneously. While master demand notes, as such, are not
typically rated by credit rating agencies, if not so rated, the Funds may, under
their minimum rating standards, invest in them only if at the time of an
investment the issuer meets the criteria set forth in the Prospectus for other
comparable debt obligations.
LOANS OF PORTFOLIO SECURITIES (ALL FUNDS). The Funds may lend their portfolio
securities to brokers, dealers and financial institutions, provided: (1) the
loan is secured continuously by collateral consisting of U.S. Government
securities or cash or letters of credit maintained on a daily mark-to-market
basis in an amount at least equal to the current market value of the securities
loaned; (2) the Funds may at any time call the loan and obtain the return of the
securities loaned within five business days; (3) the Funds will receive any
interest or dividends paid on the loaned securities; and (4) the aggregate
market value of securities loaned will not at any time exceed 5% of the total
assets of a particular Fund.
The Funds will earn income for lending their securities because cash collateral
pursuant to these loans will be invested in short-term money market instruments.
In connection with lending securities, the Funds may pay reasonable finders,
administrative and custodial fees. Loans of securities involve a risk that the
borrower may fail to return the securities or may fail to provide additional
collateral.
FOREIGN SECURITIES (CENTURA MID CAP EQUITY FUND, CENTURA LARGE CAP EQUITY FUND
CENTURA SOUTHEAST EQUITY FUND AND CENTURA QUALITY BOND FUND). As described in
the Prospectus, changes in foreign exchange rates will affect the value of
securities denominated or quoted in currencies other than the U.S. dollar.
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Since Centura Mid Cap Equity Fund, Centura Large Cap Equity Fund and Centura
Southeast Equity Fund may invest in securities denominated in currencies other
than the U.S. dollar, and since those Funds may temporarily hold funds in bank
deposits or other money market investments denominated in foreign currencies,
the Funds may be affected favorably or unfavorably by exchange control
regulations or changes in the exchange rate between such currencies and the
dollar. Changes in foreign currency exchange rates will influence values of
securities in the Funds' portfolios, from the perspective of U.S. investors.
Changes in foreign currency exchange rates may also affect the value of
dividends and interest earned, gains and losses realized on the sale of
securities, and net investment income and gains, if any, to be distributed to
shareholders by the Funds. The rate of exchange between the U.S. dollar and
other currencies is determined by the forces of supply and demand in the foreign
exchange markets. These forces are affected by the international balance of
payments and other economic and financial conditions, government intervention,
speculation and other factors.
FORWARD FOREIGN CURRENCY EXCHANGE CONTRACTS (CENTURA MID CAP EQUITY FUND,
CENTURA LARGE CAP EQUITY FUND AND CENTURA SOUTHEAST EQUITY FUND). Centura Mid
Cap Equity Fund, Centura Large Cap Equity Fund and Centura Southeast Equity Fund
may enter into forward foreign currency exchange contracts in order to protect
against uncertainty in the level of future foreign exchange rates. A forward
foreign currency exchange contract involves an obligation to purchase or sell a
specific currency at a future date, which may be any fixed number of days from
the date of the contract agreed upon by the parties, at a price set at the time
of the contract. These contracts are entered into in the interbank market
conducted between currency traders (usually large commercial banks) and their
customers. Forward foreign currency exchange contracts may be bought or sold to
protect the Funds against a possible loss resulting from an adverse change in
the relationship between foreign currencies and the U.S. dollar, or between
foreign currencies. Although such contracts are intended to minimize the risk of
loss due to a decline in the value of the hedged currency, at the same time,
they tend to limit any potential gain which might result should the value of
such currency increase.
INTEREST RATE FUTURES CONTRACTS (CENTURA FEDERAL SECURITIES INCOME FUND, CENTURA
NORTH CAROLINA TAX FREE BOND FUND AND CENTURA QUALITY BOND FUND). These Funds
may purchase and sell interest rate futures contracts ("futures contracts") as a
hedge against changes in interest rates. A futures contract is an agreement
between two parties to buy and sell a security for a set price on a future date.
Futures contracts are traded on designated "contracts markets" which, through
their clearing corporations, guarantee performance of the contracts. Currently,
there are futures contracts based on securities such as long-term U.S. Treasury
bonds, U.S. Treasury notes, GNMA Certificates and three-month U.S. Treasury
bills. For municipal securities, there is the Bond Buyer Municipal Bond Index.
Generally, if market interest rates increase, the value of outstanding debt
securities declines (and vice versa). Entering into a futures contract for the
sale of securities has an effect similar to the actual sale of securities,
although sale of the futures contract might be accomplished more easily and
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quickly. For example, if a Fund holds long-term U.S. Government securities and
the Adviser anticipates a rise in long-term interest rates, the Fund could, in
lieu of disposing of its portfolio securities, enter into futures contracts for
the sale of similar long-term securities. If rates increased and the value of
the Fund's portfolio securities declined, the value of the Fund's futures
contracts would increase, thereby protecting the Fund by preventing net asset
value from declining as much as it otherwise would have. Similarly, entering
into futures contracts for the purchase of securities has an effect similar to
actual purchase of the underlying securities, but permits the continued holding
of securities other than the underlying securities. For example, if the Adviser
expects long-term interest rates to decline, the Fund might enter into futures
contracts for the purchase of long-term securities, so that it could gain rapid
market exposure that may offset anticipated increases in the cost of securities
it intends to purchase, while continuing to hold higher-yielding short-term
securities or waiting for the long-term market to stabilize.
STOCK INDEX FUTURES CONTRACTS (CENTURA MID CAP EQUITY FUND, CENTURA LARGE CAP
EQUITY FUND AND CENTURA SOUTHEAST EQUITY FUND). These Funds may enter into stock
index futures contracts in order to protect the value of their common stock
investments. A stock index futures contract is an agreement in which one party
agrees to deliver to the other 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 the last trading day of the contract and the price at which the
agreement is made. As the aggregate market value of the stocks in the index
changes, the value of the index also will change. In the event that the index
level rises above the level at which the stock index futures contract was sold,
the seller of the stock index futures contract will realize a loss determined by
the difference between the purchase level and the index level at the time of
expiration of the stock index futures contract, and the purchaser will realize a
gain in that amount. In the event the index level falls below the level at which
the stock index futures contract was sold, the seller will recognize a gain
determined by the difference between the two index levels at the expiration of
the stock index futures contract, and the purchaser will realize a loss. Stock
index futures contracts expire on a fixed date, currently one to seven months
from the date of the contract, and are settled upon expiration of the contract.
Centura Mid Cap Equity Fund, Centura Large Cap Equity Fund and Centura Southeast
Equity Fund will utilize stock index futures contracts only for the purpose of
attempting to protect the value of their common stock portfolios in the event of
a decline in stock prices and, therefore, usually will be sellers of stock index
futures contracts. This risk management strategy is an alternative to selling
securities in the portfolio and investing in money market instruments. Also,
stock index futures contracts may be purchased to protect a Fund against an
increase in prices of stocks which that Fund intends to purchase. If the Fund is
unable to invest its cash (or cash equivalents) in stock in an orderly fashion,
the Fund could purchase a stock index futures contract which may be used to
offset any increase in the price of the stock. However, it is possible that the
market may decline instead, resulting in a loss on the stock index futures
contract. If the Fund then concludes not to invest in stock at that time, or if
the price of the securities to be purchased remains constant or increases, the
Fund will realize a loss on the stock index futures contract that is not offset
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by a reduction in the price of securities purchased. These Funds also may buy or
sell stock index futures contracts to close out existing futures positions.
OPTION WRITING AND PURCHASING (ALL FUNDS EXCEPT CENTURA MONEY MARKET FUND). A
Fund may write (or sell) put and call options on the securities that the Fund is
authorized to buy or already holds in its portfolio. These option contracts may
be listed for trading on a national securities exchange or traded
over-the-counter. A Fund may also purchase put and call options. A Fund will not
write covered calls on more than 25% of its portfolio, and a Fund will not write
covered calls with strike prices lower than the underlying securities' cost
basis on more than 25% of its total portfolio. A Fund may not invest more than
5% of its total assets in option purchases.
A call option gives the purchaser the right to buy, and the writer the
obligation to sell, the underlying security at the agreed upon exercise (or
"strike") price during the option period. A put option gives the purchaser the
right to sell, and the writer the obligation to buy, the underlying security at
the strike price during the option period. Purchasers of options pay an amount,
known as a premium, to the option writer in exchange for the right under the
option contract.
A Fund may sell "covered" put and call options as a means of hedging the price
risk of securities in the Fund's portfolio. The sale of a call option against an
amount of cash equal to the put's potential liability constitutes a "covered
put." When a Fund sells an option, if the underlying securities do not increase
(in the case of a call option) or decrease (in the case of a put option) to a
price level that would make the exercise of the option profitable to the holder
of the option, the option will generally expire without being exercised and the
Fund will realize as profit the premium paid for such option. When a call option
of which a Fund is the writer is exercised, the option holder purchases the
underlying security at the strike price and the Fund does not participate in any
increase in the price of such securities above the strike price. When a put
option of which a Fund is the writer is exercised, the Fund will be required to
purchase the underlying securities at the strike price, which may be in excess
of the market value of such securities. At the time a Fund writes a put option
or a call option on a security it does not hold in its portfolio in the amount
required under the option, it will establish and maintain a segregated account
with its custodian consisting solely of cash, U.S. Government securities and
other liquid high grade debt obligations equal to its liability under the
option.
Over-the-counter options ("OTC options") differ from exchange-traded options in
several respects. They are transacted directly with dealers and not with a
clearing corporation, and there is a risk of non-performance by the dealer. OTC
options are available for a greater variety of securities and for a wider range
of expiration dates and exercise prices than exchange-traded options. Because
OTC options are not traded on an exchange, pricing is normally done by reference
to information from a market marker. This information is carefully monitored by
the Adviser and verified in appropriate cases. OTC options transactions will be
made by a Fund only with recognized U.S. Government securities dealers. OTC
options are subject to the Funds' 15% limit on investments in securities which
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are illiquid or not readily marketable (see "Investment Restrictions"), provided
that OTC option transactions by a Fund with a primary U.S. Government securities
dealer which has given the Fund an absolute right to repurchase according to a
"repurchase formula" will not be subject to such 15% limit.
It may be a Fund's policy, in order to avoid the exercise of an option sold by
it, to cancel its obligation under the option by entering into a closing
purchase transaction, if available, unless it is determined to be in the Fund's
interest to sell (in the case of a call option) or to purchase (in the case of a
put option) the underlying securities. A closing purchase transaction consists
of a Fund purchasing an option having the same terms as the option sold by the
Fund and has the effect of canceling the Fund's position as a seller. The
premium which a Fund will pay in executing a closing purchase transaction may be
higher than the premium received when the option was sold, depending in large
part upon the relative price of the underlying security at the time of each
transaction. To the extent options sold by a Fund are exercised and the Fund
either delivers portfolio securities to the holder of a call option or
liquidates securities in its portfolio as a source of funds to purchase
securities put to the Fund, the Fund's portfolio turnover rate may increase,
resulting in a possible increase in short-term capital gains and a possible
decrease in long-term capital gains.
OPTIONS ON FUTURES CONTRACTS (ALL FUNDS EXCEPT CENTURA MONEY MARKET FUND). A
Fund may purchase and write put and call options on futures contracts that are
traded on a U.S. exchange or board of trade and enter into related closing
transactions to attempt to gain additional protection against the effects of
interest rate, currency or equity market fluctuations. There can be no assurance
that such closing transactions will be available at all times. In return for the
premium paid, such an option gives the purchaser the right to assume a position
in a futures contract at any time during the option period for a specified
exercise price.
A Fund may purchase put options on futures contracts in lieu of, and for the
same purpose as, the sale of a futures contract. It also may purchase such put
options in order to hedge a long position in the underlying futures contract.
The purchase of call options on futures contracts is intended to serve the same
purpose as the actual purchase of the futures contracts. A Fund may purchase
call options on futures contracts in anticipation of a market advance when it is
not fully invested.
A Fund may write a call option on a futures contract in order to hedge against a
decline in the prices of the index or debt securities underlying the futures
contracts. If the price of the futures contract at expiration is below the
exercise price, the Fund would retain the option premium, which would offset, in
part, any decline in the value of its portfolio securities.
The writing of a put option on a futures contract is similar to the purchase of
the futures contracts, except that, if market price declines, a Fund would pay
more than the market price for the underlying securities or index units. The net
cost to that Fund would be reduced, however, by the premium received on the sale
of the put, less any transactions costs.
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RISKS OF FUTURES AND OPTIONS INVESTMENTS (ALL FUNDS EXCEPT CENTURA MONEY MARKET
FUND). A Fund will incur brokerage fees in connection with its futures and
options transactions, and it will be required to segregate funds for the benefit
of brokers as margin to guarantee performance of its futures and options
contracts. In addition, while such contracts will be entered into to reduce
certain risks, trading in these contracts entails certain other risks. Thus,
while a Fund may benefit from the use of futures contracts and related options,
unanticipated changes in interest rates may result in a poorer overall
performance for that Fund than if it had not entered into any such contracts.
Additionally, the skills required to invest successfully in futures and options
may differ from skills required for managing other assets in the Fund's
portfolio.
LIMITATIONS ON FUTURES CONTRACTS AND OPTIONS ON FUTURES CONTRACTS (ALL FUNDS
EXCEPT CENTURA MONEY MARKET FUND). Each Fund will use financial futures
contracts and related options only for "bona fide hedging" purposes, as such
term is defined in applicable regulations of the CFTC, or, with respect to
positions in financial futures and related options that do not qualify as "bona
fide hedging" positions, will enter such non-hedging positions only to the
extent that aggregate initial margin deposits plus premiums paid by it for open
futures option positions, less the amount by which any such positions are
"in-the-money," would not exceed 5% of the Fund's total assets. Futures
contracts and related put options written by a Fund will be offset by assets
held in a segregated custodial account sufficient to satisfy the Fund's
obligations under such contracts and options.
NORTH CAROLINA MUNICIPAL OBLIGATIONS (CENTURA NORTH CAROLINA TAX-FREE BOND FUND
AND CENTURA QUALITY BOND FUND). The ability of Centura North Carolina Tax-Free
Bond Fund to achieve its investment objective depends on the ability of issuers
of North Carolina Municipal Obligations to meet their continuing obligations for
the payment of principal and interest.
North Carolina Municipal Obligations are debt securities issued by the state of
North Carolina, its political subdivisions, and the districts, authorities,
agencies and instrumentalities of the state and its political subdivisions, the
interest on which is exempt from regular federal and North Carolina income
taxes.
North Carolina municipal bonds are issued for various public purposes, including
the construction of housing, pollution abatement facilities, health care and
prison facilities, and educational facilities.
Unlike other types of investments, municipal securities have traditionally not
been subject to registration with, or other regulation by, the Securities and
Exchange Commission ("SEC"). However, there have been proposals which could lead
to future regulations of these securities by the SEC.
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MUNICIPAL LEASE OBLIGATIONS (CENTURA NORTH CAROLINA TAX-FREE BOND FUND AND
CENTURA QUALITY BOND FUND). Municipal lease obligations are municipal securities
that may be supported by a lease or an installment purchase contract issued by
state and local government authorities to acquire funds to obtain the use of a
wide variety of equipment and facilities such as fire and sanitation vehicles,
computer equipment and other capital assets. These obligations, which may be
secured or unsecured, are not general obligations and have evolved to make it
possible for state and local government authorities to obtain the use of
property and equipment without meeting constitutional and statutory requirements
for the issuance of debt. Thus, municipal lease obligations have special risks
not normally associated with municipal bonds. These obligations frequently
contain "non-appropriation" clauses that provide that the governmental issuer of
the obligation has no obligation to make future payments under the lease or
contract unless money is appropriated for such purposes by the legislative body
on a yearly or other periodic basis. In addition to the "non-appropriation"
risk, many municipal lease obligations have not yet developed the depth of
marketability associated with municipal bonds; moreover, although the
obligations may be secured by the leased equipment, the disposition of the
equipment in the event of foreclosure might prove difficult. In order to limit
certain of these risks, a Fund will limit its investments in municipal lease
obligations that are illiquid, together with all other illiquid securities in
its portfolio, to not more than 15% of its assets. The liquidity of municipal
lease obligations purchased by a Fund will be determined pursuant to guidelines
approved by the Board of Directors. Factors considered in making such
determinations may include; the frequency of trades and quotes for the
obligation; the number of dealers willing to purchase or sell the security and
the number of other potential buyers; the willingness of dealers to undertake to
make a market; the obligation's rating; and, if the security is unrated, the
factors generally considered by a rating agency.
SECURITIES OF OTHER INVESTMENT COMPANIES (ALL FUNDS). Each Fund may invest in
securities issued by the other investment companies. Each of these Funds
currently intends to limit its investments so that, as determined immediately
after a securities purchase is made: (a) not more than 5% of the value of its
total assets will be invested in the securities of any one investment company;
(b) not more than 10% of the value of its total assets will be invested in the
aggregate in securities of investment companies as a group; (c) not more than 3%
of the outstanding voting stock of any one investment company will be owned by
any of the Funds; and (d) not more than 10% of the outstanding voting stock of
any one investment company will be owned in the aggregate by the Funds. As a
shareholder of another investment company, a Fund would bear, along with other
shareholders, its pro rata portion of that company's expenses, including
advisory fees. These expenses would be in addition to the advisory and other
expenses that the Fund bears directly in connection with its own operations.
Investment companies in which a Fund may invest may also impose a sales or
distribution charge in connection with the purchase or redemption of their
shares and other types of commissions or charges. Such charges will be payable
by the Funds and, therefore, will be borne indirectly by Shareholders.
<PAGE> 82
REAL ESTATE INVESTMENT TRUSTS (ALL FUNDS EXCEPT CENTURA NORTH CAROLINA TAX-FREE
BOND FUND AND CENTURA MONEY MARKET FUND). A Fund may invest to a limited extent
in equity or debt real estate investment trusts ("REITs"). Equity REITs are
trusts that sell shares to investors and use the proceeds to invest in real
estate or interests in real estate. Debt REITs invest in obligations secured by
mortgages on real property or interest in real property. A REIT may focus on
particular types of projects, such as apartment complexes or shopping centers,
or on particular geographic regions, or both. An investment in a REIT may be
subject to certain risks similar to those associated with direct ownership of
real estate, including: declines in the value of real estate; risks related to
general and local economic conditions, overbuilding and competition; increases
in property taxes and operating expenses; and variations in rental income. Also,
REITs may not be diversified. A REIT may fail to qualify for pass-through tax
treatment of its income under the Internal Revenue Code and may also fail to
maintain its exemption from registration under the Investment Company Act of
1940. Also, REITs (particularly equity REITs) may be dependent upon management
skill and face risks of failing to obtain adequate financing on favorable terms.
INVESTMENT RESTRICTIONS
The following restrictions are fundamental policies of each Fund, and except as
otherwise indicated, may not be changed with respect to a Fund without the
approval of a majority of the outstanding voting securities of that Fund which,
as defined in the Investment Company Act of 1940 ("1940 Act"), means the lesser
of (1) 67% of the shares of such Fund present at a meeting if the holders of
more than 50% of the outstanding shares of such Fund are present in person or by
proxy, or (2) more than 50% of the outstanding voting shares of such Fund.
Each Fund (other than Centura Money Market Fund), except as indicated, may not:
(1) with respect to 75% of its total assets, purchase more than 10% of the
voting securities of any one issuer or invest more than 5% of the value of
such assets in the securities or instruments of any one issuer, except
securities or instruments issued or guaranteed by the U.S. Government, its
agencies or instrumentalities;
(2) Borrow money except that a Fund may borrow from banks up to 10% of the
current value of its total net assets for temporary or emergency purposes;
a Fund will make no purchases if its outstanding borrowings exceed 5% of
its total assets;
(3) Invest in real estate, provided that a Fund may invest in readily
marketable securities (except limited partnership interests) of issuers
that deal in real estate and securities secured by real estate or interests
therein and a Fund may hold and sell real estate (a) used principally for
its own office space or (b) acquired as a result of a Fund's ownership of
securities;
(4) Engage in the business of underwriting securities of other issuers,
except to the extent that the purchase of securities directly from the
issuer (either alone or as one of a group of bidders) or the disposal of an
<PAGE> 83
investment position may technically cause it to be considered an
underwriter as that term is defined under the Securities Act of 1933;
(5) Make loans, except that a Fund may (a) lend its portfolio securities,
(b) enter into repurchase agreements and (c) purchase the types of debt
instruments described in the Prospectus or the SAI;
(6) Purchase securities or instruments which would cause 25% or more of the
market value of the Fund's total assets at the time of such purchase to be
invested in securities or instruments of one or more issuers having their
principal business activities in the same industry, provided that there is
no limit with respect to investments in the U.S. Government, its agencies
and instrumentalities;
(7) Issue any senior securities, except as appropriate to evidence
indebtedness which it is permitted to incur, and provided that collateral
arrangements with respect to forward contracts, futures contracts or
options, including deposits of initial and variation margin, are not
considered to be the issuance of a senior security for purposes of this
restriction; or
(8) Purchase or sell commodity contracts, except that the Fund may invest
in futures contracts and in options related to such contracts (for purposes
of this restriction, forward foreign currency exchange contracts are not
deemed to be commodities).
For restriction number 1, above, with respect to Centura North Carolina Tax-Free
Bond Fund, the state of North Carolina and each of its political subdivisions,
as well as each district, authority, agency or instrumentality of North Carolina
or of its political subdivisions will be deemed to be a separate issuer, and all
indebtedness of any issuer will be deemed to be a single class of securities.
Securities backed only by the assets of a non-governmental user will be deemed
to be issued by that user. Restriction number 6, above, will prevent Centura
North Carolina Tax-Free Bond Fund from investing 25% or more of its total assets
in industrial building revenue bonds issued to finance facilities for
non-governmental issuers in any one industry, but this restriction does not
apply to any other tax-free Municipal Obligations. For purposes of investment
restriction number (1), the Centura Quality Income Fund considers a Municipal
Obligation to be issued by the government entity (or entities) whose assets and
revenues back the Municipal Obligation. For a Municipal Obligation backed only
by the assets and revenues of a nongovernmental user, such user is deemed to be
the issuer; such issuers to the extent their principal business activities are
in the same industry, are also subject to investment restriction (2). For
purposes of investment restriction number 6, public utilities are not deemed to
be a single industry but are separated by industrial categories, such as
telephone or gas utilities. For purposes of restriction number 7, with respect
to its futures transactions and writing of options (other than fully covered
call options), a Fund will maintain a segregated account for the period of its
obligation under such contract or option consisting of cash, U.S. Government
securities and other liquid high grade debt obligations in an amount equal to
its obligations under such contracts or options.
<PAGE> 84
With respect to Centura Money Market Fund, only:
(1) The Fund has elected to be qualified as a diversified series of an
open-end investment company.
(2) The Fund may not purchase securities or instruments which would cause
25% or more of the market value of its total assets at the time of such
purchase to be invested in securities or instruments of one or more issuers
having their principal business activities in the same industry, provided
that there is no limit with respect to investments in the U.S. Government,
its agencies and instrumentalities (including repurchase agreements with
respect to such investments) and provided also that the Fund may invest
more than 25% of its assets in instruments issued by domestic banks.
(3) The Fund may not borrow money, except as permitted under the Investment
Company Act to 1940, as amended, and as interpreted from time to time by
regulatory authority having jurisdiction, from time to time.
(4) The Fund may not make loans to other persons, except (i) loans of
portfolio securities, and (ii) to the extent that entry into repurchase
agreements and the purchase of debt instruments or interests in
indebtedness in accordance with the Fund's investment objective and
policies may be deemed to be loans.
(5) The Fund may not issue senior securities, except as permitted under the
Investment Company Act of 1940, as amended, and as interpreted or modified
by regulatory authority having jurisdiction, from time to time.
(6) The Fund may not engage in the business of underwriting securities
issued by others, except to the extent that the Fund may be deemed to be an
underwriter in connection with the disposition of portfolio securities.
(7) The Fund may not purchase or sell real estate, which term does not
include securities of companies that deal in real estate or mortgages or
investment secured by real estate or interests therein, except that the
Fund reserves freedom of action to hold and to sell real estate acquired as
a result of the Fund's ownership of securities.
(8) The Fund may not purchase physical commodities or contracts relating to
physical commodities.
The following policies apply to each of the Funds other than Centura Money
Market Fund and Centura Quality Income Fund. These are non-fundamental and
may be changed by the Board of Directors without shareholder approval. These
policies provide that a Fund, except as otherwise specified, may not:
<PAGE> 85
(a) Invest in companies for the purpose of exercising control or
management;
(b) Knowingly purchase securities of other investment companies, except (i)
in connection with a merger, consolidation, acquisition, or reorganization;
and (ii) the equity and fixed income funds may invest up to 10% of their
net assets in shares of other investment companies;
(c) Purchase securities on margin, except that a Fund may obtain such
short-term credits as may be necessary for the clearance of purchases and
sales of securities;
(d) Mortgage, pledge, or hypothecate any of its assets, except that a Fund
may pledge not more than 15% of the current value of the Fund's total net
assets;
(e) Purchase or retain the securities of any issuer, if those individual
officers and Directors of the Company, the Adviser, the Administrator, or
the Distributor, each owning beneficially more than 1/2 of 1% of the
securities of such issuer, together own more than 5% of the securities of
such issuer;
(f) Invest more than 5% of its net assets in warrants which are unattached
to securities; included within that amount, no more than 2% of the value of
the Fund's net assets, may be warrants which are not listed on the New York
or American Stock Exchanges;
(g) Write, purchase or sell puts, calls or combinations thereof, except as
described in the Prospectus or SAI;
(h) Invest more than 5% of the current value of its total assets in the
securities of companies which, including predecessors, have a record of
less than three years' continuous operation;
(i) Invest more than 15% of the value of its net assets in investments
which are illiquid or not readily marketable (including repurchase
agreements having maturities of more than seven calendar days and variable
and floating rate demand and master demand notes not requiring receipt of
the principal note amount within seven days' notice); or
(j) Invest in oil, gas or other mineral exploration or development
programs, although it may invest in issuers that own or invest in such
programs.
MANAGEMENT
DIRECTORS AND OFFICERS
The principal occupations of the Directors and executive officers of the Company
for the past five years are listed below. Directors deemed to be "interested
persons" of the Company for purposes of the 1940 Act are indicated by an
asterisk.
<PAGE> 86
POSITION WITH
NAME, ADDRESS AND AGE COMPANY PRINCIPAL OCCUPATION
Leslie H. Garner, Jr. Director President, Cornell College.
Cornell College
600 First Street West
Mount Vernon, IA 52314-1098
Age: 45
James H. Speed, Jr. Director Hardee's Food Systems, Inc.
1233 Hardee's Blvd -- Vice President
Rocky Mount, NC 27802 Controller (1991-present);
Age: 43 Deloitte & Touche -- Senior
Audit Manager (1979-1991).
Frederick E. Turnage Director Attorney.
149 North Franklin St.
Rocky Mount, NC 27628
Age: 60
*Lucy Hancock Bode Director Lobbyist.
P.O. Box 6338
Raleigh, NC 27628
Age: 44
*J. Franklin Martin Director President of LandCraft
LandCraft Properties Properties (1978-present).
227 W. Trade Street
Suite 2730
Charlotte, NC 28202
Age: 51
George R. Landreth President BISYS -- Senior Vice
Age: President of Client
Services (1993-present).
Ellen Stoutamire(1) Secretary BISYS --Registration and
Age: 48 Compliance Officer
(1995-present);
Attorney -- private
practice (1990-1995).
Joel Engle(1) Assistant Treasurer BISYS-- Vice President
Age: 33 and Principal (1998-present); The
Financial Officer Northern Trust Company --
Vice President (1995-98);
previously, Ernst & Young
LLP Investment Company
Services Group - Audit
Manager.
(1) Address is 3435 Stelzer Road, Columbus, Ohio 43219.
<PAGE> 87
Directors of the Company who are not directors, officers or employees of the
Adviser or the Administrator receive from the Company an annual retainer of
$3000 (plus $750 for serving on the Board's Audit Committee) and a fee of $750
for each Board of Directors and Board committee meeting of the Company attended
and are reimbursed for all out-of-pocket expenses relating to attendance at such
meetings. Directors who are directors, officers or employees of the Adviser or
the Administrator do not receive compensation from the Company. The table below
sets forth the compensation received by each Director from the Company for the
fiscal year ended April 30, 1998.
<TABLE>
<CAPTION>
PENSION OR TOTAL
RETIREMENT COMPENSATION
AGGREGATE BENEFITS ACCRUED ESTIMATED ANNUAL FROM FUND AND
NAME OF PERSON, COMPENDATION AS A PART OF FUND BENEFITS UPON FUND CONMPLEX
POSITION FROM FUND EXPENSES RETIREMENT PAID TO DIRECTORS
- --------------- ------------ ----------------- --------------- -----------------
<S> <C> <C> <C> <C>
Leslie H. Garner, Jr $5,700 -0- -0- $5,700
James H. Speed, Jr. $5,200 -0- -0- $5,200
Frederick E. Turnage $5,700 -0- -0- $5,700
Lucy Hancock Bode $5,200 -0- -0- $5,200
J. Franklin Martin $5,200 -0- -0- $5,200
</TABLE>
As of June 25, 1998, the Officers and Directors of the Company, as a group, own
less than 1% of the outstanding shares of the Funds.
As of June 25, 1998, the following individuals owned 5% or more of the Class A
and Class B shares of the Funds:
CENTURA MID CAP EQUITY FUND
CLASS A OWNED SHARES OWNED PERCENTAGE OWNED
- ------------- ------------ ----------------
None
CLASS B OWNED SHARES OWNED PERCENTAGE OWNED
- ------------- ------------ ----------------
None
<PAGE> 88
CENTURA SOUTHEAST EQUITY FUND
CLASS A OWNED SHARES OWNED PERCENTAGE OWNED
- ------------- ------------ ----------------
None
CLASS B OWNED SHARES OWNED PERCENTAGE OWNED
- ------------- ------------ ----------------
None
CENTURA FEDERAL SECURITIES INCOME FUND
CLASS A OWNED SHARES OWNED PERCENTAGE OWNED
- ------------- ------------ ----------------
Centura Bank 8,453,153 16.62%
Trust Department
131 N. Church Street
Rocky Mount, NC 27801
Joel S. Kestler 2,826.236 5.50%
421 Wedgewood Street
Charleston, SC 27858
Henry Forman 6,430.352 18.52%
203 Williamsburg Drive
Greenville, NC 27858
Donaldson Lufkin Jenrette 3,754.573 7.31%
Securities Corporation Inc.
P.O. Box 2052
Jersey City, NJ 07303-9998
Lufkin Jenrette 3,644.586 7.10%
Securities Corporation Inc.
P.O. Box 2052
Jersey City, NJ 07303-9998
Donaldson Lufkin Jenrette 2,900.583 5.65%
Securities Corporation Inc.
P.O. Box 2052
Jersey City, NJ 07303-9998
CLASS B OWNED SHARES OWNED PERCENTAGE OWNED
- ------------- ------------ ----------------
Donaldson Lufkin Jenrette 1,620.229 13.28%
Securities Corporation Inc.
P.O. Box 2052
Jersey City, NJ 07303-9998
<PAGE> 89
CLASS A OWNED SHARES OWNED PERCENTAGE OWNED
- ------------- ------------ ----------------
Donaldson Lufkin Jenrette 2,034.950 16.67%
Securities Corporation Inc.
P.O. Box 2052
Jersey City, NJ 07303-9998
Donaldson Lufkin Jenrette 1,607.987 8.75%
Securities Corporation Inc.
P.O. Box 2052
Jersey City, NJ 07303-9998
Donaldson Lufkin Jenrette 657.871 5.39%
Donaldson Lufkin Jenrette 611.644 5.01%
Securities Corporation Inc.
P.O. Box 2052
Jersey City, NJ 07303-9998
BISYS Fund Services, Inc. 1,006.844 8.25%
3435 Stelzer Rd
Columbus, OH 43219
CENTURA NORTH CAROLINA TAX-FREE BOND FUND
CLASS A OWNED SHARES OWNED PERCENTAGE OWNED
- ------------- ------------ ----------------
Donaldson Lufkin Jenrette 74,406.671 16.10%
Securities Corporation Inc.
P.O. Box 2052
Jersey City, NJ 07303-9998
Donaldson Lufkin Jenrette 30,423.232 6.58%
Securities Corporation Inc.
P.O. Box 2052
Jersey City, NJ 07303-9998
Donaldson Lufkin Jenrette 245,782.926 53.17%**
Securities Corporation Inc.
P.O. Box 2052
Jersey City, NJ 07303-9998
**Disclaims beneficial ownership.
CLASS B OWNED SHARES OWNED PERCENTAGE OWNED
- ------------- ------------ ----------------
Donaldson Lufkin Jenrette 3,551.931 7.09%
Securities Corporation Inc.
P.O. Box 2052
Jersey City, NJ 07303-9998
<PAGE> 90
CLASS A OWNED SHARES OWNED PERCENTAGE OWNED
- ------------- ------------ ----------------
Donaldson Lufkin Jenrette 3,451.700 6.89%
Securities Corporation Inc.
P.O. Box 2052
Jersey City, NJ 07303-9998
Donaldson Lufkin Jenrette 9,973.433 19.92%
Securities Corporation Inc.
P.O. Box 2052
Jersey City, NJ 07303-9998
Donaldson Lufkin Jenrette 5,876.568 11.74%
Securities Corporation Inc.
P.O. Box 2052
Jersey City, NJ 07303-9998
Donaldson Lufkin Jenrette 5,317.811 10.62%
Securities Corporation Inc.
P.O. Box 2052
Jersey City, NJ 07303-9998
Donaldson Lufkin Jenrette 4,804.243 9.59%
Securities Corporation Inc.
P.O. Box 2052
Jersey City, NJ 07303-9998
CENTURA LARGE CAP EQUITY FUND
CLASS A OWNED SHARES OWNED PERCENTAGE OWNED
- ------------- ------------ ----------------
Donaldson Lufkin Jenrette 7,135.514 5.51%
Securities Corporation Inc.
P.O. Box 2052
Jersey City, NJ 07303-9998
CLASS B OWNED SHARES OWNED PERCENTAGE OWNED
- ------------- ------------ ----------------
Donaldson Lufkin Jenrette 15,943.600 8.24%
Securities Corporation Inc.
P.O. Box 2052
Jersey City, NJ 07303-9998
CENTURA MONEY MARKET FUND
CLASS A OWNED SHARES OWNED PERCENTAGE OWNED
- ------------- ------------ ----------------
Christian N. Siewers, Jr. 4,160.140 74.01%*
105 Candle Court
Rocky Mount, NC 27804
<PAGE> 91
CLASS A OWNED SHARES OWNED PERCENTAGE OWNED
- ------------- ------------ ----------------
Kristi L. Morris 1,200.760 21.36%
732 Westwood Drive
Rocky Mount, NC 27803
*Disclaims beneficial ownership.
INVESTMENT ADVISER
Centura Bank (the "Adviser") 131 North Church Street, Rocky Mountain, North
Carolina 27802, serves as investment adviser to the Funds. For these services,
the Adviser receives from each Fund a fee at an annual rate based on each Fund's
average daily net assets. The rates for each Fund are 0.70% for Centura Mid Cap
Equity Fund, 0.70% for Centura Large Cap Equity Fund, 0.30% for Centura Federal
Securities Income Fund, 0.35% for Centura North Carolina Tax-Free Bond Fund,
0.70% for Centura Southeast Equity Fund, 0.60% for Centura Quality Income Fund
and 0.30% for Centura Money Market Fund.
Under the terms of the Investment Advisory Agreement for the Funds between the
Company and the Adviser ("Agreement"), the investment advisory services of the
Adviser to the Funds are not exclusive. The Adviser is free to, and does, render
investment advisory services to others.
The Agreement will continue in effect with respect to each Fund for a period
more than two years from the date of its execution, only as long as such
continuance is approved at least annually (i) by vote of the holders of a
majority of the outstanding voting securities of each Fund or by the Board of
Directors and (ii) by a majority of the Directors who are not parties to the
Agreement or "interested persons" (as defined in the 1940 Act) of any such
party. With respect to all the Funds other than Centura Large Cap Equity Fund,
Centura Southeast Equity Fund, Centura Quality Income Fund and Centura Money
Market Fund, the Agreement was approved by the Board of Directors, including a
majority of the Directors who are not parties to the Agreement or interested
persons of any such parties, at a meeting called for the purpose of voting on
the Agreement, held on April 26, 1994, and by the sole shareholder of the Funds
on April 26, 1994.
With respect to Centura Large Cap Equity Fund, Centura Southeast Equity Fund,
Centura Quality Income Fund and Centura Money Market Fund, respectively, the
Agreement was approved by the Board of Directors, including a majority of the
Directors who are not parties to the Agreement or interested persons of any such
parties, at meetings called for such purpose held on July 24, 1996 (for Large
Cap Equity Fund), January 29, 1997 (for Southeast Equity Fund), January 27, 1999
(for Centura Quality Income Fund) and April 27, 1998 (for Centura Money Market
Fund) and by the sole shareholder of each such Fund on July 24, 1996 (for Large
Cap Equity Fund), January 29, 1997 (for Southeast Equity Fund), January 27, 1999
(for Centura Bond Fund) and June 1, 1998 (for Centura Money Market Fund). This
<PAGE> 92
Agreement, as it relates to all Centura Funds (except Centura Quality Income
Fund and Centura Money Market Fund), was re-approved at the April 27, 1998
Board of Directors Meeting. The Agreement may be terminated at any time without
penalty by vote of the Directors (with respect to the Company or a Fund) or,
with respect to any Fund, by vote of the Directors or the shareholders of
that Fund, or by the Adviser, on 60 days written notice by either party to the
Agreement and will terminate automatically if assigned.
For the fiscal year ended April 30, 1998, the Adviser received Advisory fees in
the amount of $1,362,369, $442,170, $191,290, $382,159 and $140,332 from the Mid
Cap Equity Fund, Large Cap Equity Fund, Southeast Equity Fund, Federal
Securities Income Fund and the North Carolina Tax-Free Bond Fund, respectively.
For the year ended April 30, 1998, the Advisor waived fees in the amount of
$214,769, $25,157 and $100,237 for the Large Cap Equity Fund, Southeast Equity
Fund and the North Carolina Tax-Free Bond Fund, respectively. (As of the fiscal
year ended April 30, 1998, the Quality Bond Fund and Money Market Fund had not
yet commenced operations.) For the fiscal year ended April 30, 1997, the Adviser
received $1,127,435 from the Mid Cap Equity Fund and $358,174 from the Federal
Securities Income Fund in advisory fees. The Adviser was entitled to $140,821
from the North Carolina Tax-Free Bond Fund and $217,106 from the Large Cap
Equity Fund, but waived $100,587 and $105,451, respectively. For the fiscal year
ended April 30, 1996, the Adviser received the following in advisory fees:
$802,888 from the Mid Cap Equity Fund, $312,098 from the Federal Securities
Income Fund and was entitled to $138,274 from the North Carolina Tax-Free Bond
Fund but waived $99,774.
SUB-ADVISER
Sovereign Advisers, 6302 Fairview Road, Suite 450, Charlotte, North Carolina
28210, serves as sub-adviser to Centura Quality Income Fund. For its services to
that Fund, it receives a fee from the Adviser at an annual rate of 0.30% based
on the Fund's average daily net assets. The Sub-Advisory Agreement contains
provisions similar to the Investment Advisory Agreement regarding
non-exclusivity and conditions for continuation and termination provided that
the Adviser may also terminate the Sub-Advisory Agreement. The Sub-Advisory
Agreement is effective as of May 3, 1999 and its continuation beyond May 3, 2001
is subject to conditions similar to those described above for the Investment
Advisory Agreement.
DISTRIBUTION OF FUND SHARES
Centura Funds Distributor, Inc. (the "Distributor") serves as principal
underwriter for the shares of the Funds pursuant to a Distribution Contract. The
Distribution Contract provides that the Distributor will use its best efforts to
maintain a broad distribution of the Funds' shares among bona fide investors and
may enter into selling group agreements with responsible dealers and dealer
managers as well as sell the Funds' shares to individual investors. The
Distributor is not obligated to sell any specific amount of shares.
<PAGE> 93
Service and distribution plans (the "Plans") have been adopted by each of the
Funds. The Plan for each Fund provides for different rates of fee payment with
respect to Class A shares and Class B shares, as described in the Prospectus. No
Plan has been adopted for Class C shares of any Fund, and the Plan applies only
to Class A shares of Centura Money Market Fund. Pursuant to the Plans, the Funds
may pay directly or reimburse the Distributor monthly in amounts described in
the Prospectus for costs and expenses of marketing the shares, or classes of
shares, of the Funds. The Board of Directors has concluded that there is a
reasonable likelihood that the Plans will benefit the Funds and their
shareholders.
Each Plan provides that it may not be amended to increase materially the costs
which the Funds or a class of shares may bear pursuant to the Plan without
shareholder approval and that other material amendments of the Plans must be
approved by the Board of Directors, and by the Directors who are neither
"interested persons" (as defined in the 1940 Act) of the Company nor have any
direct or indirect financial interest in the operation of the particular Plan or
any related agreement, by vote cast in person at a meeting called for the
purpose of considering such amendments. The selection and nomination of the
Directors of the Company have been committed to the discretion of the Directors
who are not "interested persons" of the Company. The Plans with respect to each
of the Funds except Centura Large Cap Equity Fund and Centura Southeast Equity
Fund were approved by the Board of Directors and by the Directors who are
neither "interested persons" nor have any direct or indirect financial interest
in the operation of any Plan ("Plan Director"), by vote cast in person at a
April 26, 1994 meeting called for the purpose of voting on the Plans, and by the
sole shareholder of each class of shares of each of the Funds on April 26, 1994.
The Plans for these Funds were recently re-approved at the April 27, 1998 Board
of Directors Meeting. The Plan with respect to Centura Large Cap Equity Fund,
Centura Southeast Equity Fund and Centura Money Market Fund, respectively, was
approved by the Board of Directors and by the Plan Directors by vote cast in
person at meetings held July 24, 1996, January 29, 1997 and April 27, 1998
called for the purpose of voting on that Plan, and by the sole shareholder of
each class of shares of Centura Large Cap Equity Fund and Centura Southeast
Equity Fund on July 24, 1996 and January 29, 1997. The Plan with respect to
Centura Quality Income Fund was approved by the Board of Directors and the Plan
Directors by vote cast in person at a meeting held January 27, 1999.
(Shareholder approval was not required for Centura Quality Income Fund or
Centura Money Market Fund.) The continuance of the Plans is subject to
similar annual approval by the Directors and the Plan Directors. Each Plan is
terminable with respect to a class of shares of a Fund at any time by a vote of
a majority of the Plan Directors or by vote of the holders of a majority of the
shares of the class.
For the fiscal year ended April 30, 1998, the Distributor received $56,167,
$4,374, $7,065, $2,534 and $21,661 from the Mid Cap Equity Fund, Large Cap
Equity Fund, Southeast Equity Fund, Federal Securities Income Fund and the North
Carolina Tax-Free Bond Fund, respectively pursuant to Class A Plans. However,
<PAGE> 94
the Distributor waived fees of $28,084, $2,187, $3,533, $1,267 and $10,831 for
the Mid Cap Equity Fund, Large Cap Equity Fund, Southeast Equity Fund, Federal
Securities Income Fund and the North Carolina Tax-Free Bond Fund, respectively.
The Distributor retained no portion of these payments all of which were paid as
compensation to service organizations and broker/dealers for shareholder service
and distribution activities. For the fiscal year ended April 30, 1998, the
Distributor received $137,815, $12,538, $22,936, $1,532 and $4,088 from the Mid
Cap Equity Fund, Large Cap Equity Fund, Southeast Equity Fund, Federal
Securities Income Fund and the North Carolina Tax-Free Bond Fund, respectively
pursuant to Class B Plans. However, the Distributor waived fees of $383 and
$1,022 for the Federal Securities Income Fund and the North Carolina Tax-Free
Bond Fund, respectively. (As of the fiscal year ended April 30, 1998, the
Quality Bond Fund and Money Market Fund had not yet commenced operations.) All
expenditures for Class B Shares were for compensation to the Distributor for its
services as Underwriter of the Funds.
For the fiscal year ended April 30, 1997 the following fees with respect to
Class A shares were received by the Distributor: $36,184 for the Mid Cap Equity
Fund, $2,690 for the Federal Securities Income Fund and $19,193 for the North
Carolina Tax-Free Bond Fund. For the period from October 1, 1996 (commencement
of operations) through April 30, 1997, the Distributor received $525 in fees
relating to the Class A shares of the Large Cap Equity Fund. For the fiscal year
ended April 30, 1997 the following fees with respect to Class B shares were
received by the Distributor: $80,683 for the Mid Cap Equity Fund; $1,931 for the
Federal Securities Income Fund; and $4,199 for the North Carolina Tax-Free Bond
Fund. For the period from October 1, 1996 (commencement of operations) through
April 30, 1997, the Distributor received $710 in fees relating to Class B shares
of the Large Cap Equity Fund. All expenditures for Class B Shares were for
compensation to the Distributor for its services as underwriter of the Funds.
For the fiscal year ended April 30, 1996 the following fees with respect to
Class A shares were received by the Distributor: $7,215 for the Mid Cap Equity
Fund, $888 for the Federal Securities Income Fund and $5,259 for the North
Carolina Tax-Free Bond Fund. For the fiscal year ended April 30, 1996 the
following fees with respect to Class B shares were received by the Distributor:
$33,942 for the Mid Cap Equity Fund, $1,696 for the Federal Securities Income
Fund and $3,168 for the North Carolina Tax-Free Bond Fund. All expenditures for
Class B Shares were for compensation to the Distributor for its services as
Underwriter of the Funds.
ADMINISTRATIVE SERVICES
BISYS Fund Services Limited Partnership d/b/a BISYS Fund Services ("BISYS") is
the Sponsor and Administrator of the Funds and provides administrative services
necessary for the operation of the Funds, including among other things, (i)
preparation of shareholder reports and communications, (ii) regulatory
compliance, such as reports to and filings with the Securities and Exchange
Commission ("SEC") and state securities commissions and (iii) general
supervision of the operation of the Funds, including coordination of the
<PAGE> 95
services performed by the Funds' Adviser, Sub-Adviser, Distributor, custodians,
independent accountants, legal counsel and others. In addition, BISYS furnishes
office space and facilities required for conducting the business of the Funds
and pays the compensation of the Funds' officers, employees and Directors
affiliated with BISYS. For these services, BISYS receives from each Fund a fee,
payable monthly, at the annual rate of 0.15% of each Fund's average daily net
assets.
BISYS is a subsidiary of BISYS Group, Inc, which is headquartered in Little
Falls, New Jersey and supports more than 5,000 financial institutions and
corporate clients through two strategic business units. BISYS Information
Services Group provides image and data processing outsourcing, and pricing
analysis to more than 600 banks nationwide. BISYS Investment Services Group
designs, administers and distributes over 30 families of proprietary mutual
funds consisting of more than 365 portfolios, and provides 401(k) marketing
support, administration, and recordkeeping services in partnership with banking
institutions and investment management companies. At a meeting held on July 24,
1996, the Directors reviewed and approved an Administration Agreement with
BISYS, a Transfer Agency Agreement and a Fund Accounting Agreement with BISYS
Fund Services, Inc. Both BISYS companies have their principal place of business
at 3435 Stelzer Road, Columbus, Ohio 43219.
For fiscal year ended April 30, 1998, BISYS received administration fees of
$291,936, $94,751, $40,991, $191,079 and $60,117 for the Mid Cap Equity Fund,
the Large Cap Equity Fund, the Southeast Equity Fund, the Federal Securities
Income Fund and the North Carolina Tax-Free Bond Fund, respectively. For the
same period, BISYS waived fees of $40,456, $5,391 and $42,883 for the Large Cap
Equity Fund, the Southeast Equity Fund and the North Carolina Tax-Free Bond
Fund, respectively. (As of the fiscal year ended April 30, 1998, the Quality
Bond Fund and the Money Market Fund had not yet commenced operations.)
Prior to January 1, 1997, Furman Selz LLC ("Furman Selz") served as Sponsor and
Administrator of the Funds. For the fiscal year ended April 30, 1997, BISYS and
Furman Selz received a total of $241,593 and $179,087 in administrative services
fees from the Mid Cap Equity Fund and the Federal Securities Income Fund,
respectively. For the fiscal year ended April 30, 1997, Furman Selz and BISYS
earned $60,352 in administrative services fees from the North Carolina Tax-Free
Bond Fund of which $43,051 was waived. For the period from October 1, 1996
(commencement of operations) through April 30, 1997, Furman Selz and BISYS
earned $46,523 in administrative services fees from the Large Cap Equity Fund of
which $23,882 was waived.
For the fiscal year ended April 30, 1996, Furman Selz, the Administrator for
that fiscal period, was entitled to the following administrative services fees:
<PAGE> 96
FURMAN SELZ FURMAN SELZ
ENTITLED WAIVED
----------- -----------
Centura Mid Cap Equity Fund $172,047 $ 0
Centura Federal Securities Income Fund $156,049 $ 0
Centura North Carolina Tax-Free Bond Fund $ 59,260 $42,761
The Administration Agreement for each was approved by the Board of Directors,
including a majority of the Directors who are not parties to the Agreement or
interested persons of such parties, at meetings held July 24, 1996 and January
29, 1997 and April 27, 1998. The Administration Agreement is terminable with
respect to a Fund or the Company without penalty, at any time, by vote of a
majority of the Directors or, with respect to a Fund, by vote of the holders of
a majority of the shares of the Fund, each upon not more than 90 days written
notice to the Administrator, and upon 90 days notice, by the Administrator.
SERVICE ORGANIZATIONS
The Company may also contract with banks, trust companies, broker-dealers (other
than BISYS) or other financial organizations ("Service Organizations") to
provide certain administrative services for the Funds. Services provided by
Service Organizations may include among other things: providing necessary
personnel and facilities to establish and maintain certain shareholder accounts
and records; assisting in processing purchase and redemption transactions;
arranging for the wiring of funds; transmitting and receiving funds in
connection with client orders to purchase or redeem shares; verifying and
guaranteeing client signatures in connection with redemption orders, transfers
among and changes in client-designating accounts; providing periodic statements
showing a client's account balance and, to the extent practicable, integrating
such information with other client transactions; furnishing periodic and annual
statements and confirmations of all purchases and redemptions of shares in a
client's account; transmitting proxy statements, annual reports, and updating
prospectuses and other communications from the Funds to clients; and providing
such other services as the Funds or a client reasonably may request, to the
extent permitted by applicable statute, rule or regulation. Neither BISYS nor
the Adviser will be a Service Organization or receive fees for servicing.
Some Service Organizations may impose additional or different conditions on
their clients, such as requiring their clients to invest more than the minimum
initial or subsequent investments specified by the Funds or charging a direct
fee for servicing. If imposed, these fees would be in addition to any amounts
that might be paid to the Service Organization by the Funds. Each Service
Organization has agreed to transmit to its clients a schedule of any such fees.
Shareholders using Service Organizations are urged to consult them regarding any
such fees or conditions.
The Glass-Steagall Act and other applicable laws, among other things, prohibit
banks from engaging in the business of underwriting, selling or distributing
securities. There currently is no precedent prohibiting banks from performing
administrative and shareholder servicing functions as Service Organizations.
However, judicial or administrative decisions or interpretations of such laws,
as well as changes in either Federal or state statutes or regulations relating
to the permissible activities of banks and their subsidiaries or affiliates,
<PAGE> 97
could prevent a bank from continuing to perform all or a part of its servicing
activities. In addition, state securities laws on this issue may differ from the
interpretations of federal law expressed herein and banks and financial
institutions may be required to register as dealers pursuant to state law. If a
bank were prohibited from so acting, its shareholder clients would be permitted
to remain shareholders of the Funds and alternative means for continuing the
servicing of such shareholders would be sought. In that event, changes in the
operation of the Funds might occur and a shareholder serviced by such a bank
might no longer be able to avail itself of any services then being provided by
the bank. It is not expected that shareholders would suffer any adverse
financial consequences as a result of any of these occurrences.
DETERMINATION OF NET ASSET VALUE
The Funds value their portfolio securities in accordance with the procedures
described in the Prospectus.
PORTFOLIO TRANSACTIONS
Investment decisions for the Funds and for the other investment advisory clients
of the Adviser and Sub-Adviser are made with a view to achieving their
respective investment objectives. Investment decisions are the product of many
factors in addition to basic suitability for the particular client involved.
Thus, a particular security may be bought or sold for certain clients even
though it could have been bought or sold for other clients at the same time.
Likewise, a particular security may be bought for one or more clients when one
or more clients are selling the security. In some instances, one client may sell
a particular security to another client. It also sometimes happens that two or
more clients simultaneously purchase or sell the same security, in which event
each day's transactions in such security are, insofar as possible, averaged as
to price and allocated between such clients in a manner which in the Adviser's
or Sub-Adviser's opinion is equitable to each and in accordance with the amount
being purchased or sold by each. There may be circumstances when purchases or
sales of portfolio securities for one or more clients will have an adverse
effect on other clients.
The Funds have no obligation to deal with any dealer or group of dealers in the
execution of transactions in portfolio securities. Subject to policies
established by the Company's Board of Directors, the Adviser (Sub-Adviser for
Centura Quality Income Fund) is primarily responsible for portfolio decisions
and the placing of portfolio transactions. In placing orders, it is the policy
of the Funds to obtain the best results taking into account the broker-dealer's
general execution and operational facilities, the type of transaction involved
and other factors such as the dealer's risk in positioning the securities.
While the Adviser and Sub-Adviser generally seek reasonably competitive
spreads or commissions, the Funds will not necessarily be paying the lowest
spread or commission available.
Purchases and sales of securities will often be principal transactions in the
case of debt securities and equity securities traded otherwise than on an
exchange. The purchase or sale of equity securities will frequently involve the
<PAGE> 98
payment of a commission to a broker-dealer who effects the transaction on behalf
of a Fund. Debt securities normally will be purchased or sold from or to issuers
directly or to dealers serving as market makers for the securities at a net
price. Generally, money market securities are traded on a net basis and do not
involve brokerage commissions. Under the 1940 Act, persons affiliated with the
Funds, the Adviser, Sub-Adviser or BISYS are prohibited from dealing with the
Funds as a principal in the purchase and sale of securities unless a permissive
order allowing such transactions is obtained from the SEC.
The Adviser or Sub-Adviser may, in circumstances in which two or more
broker-dealers are in a position to offer comparable results, give preference to
a dealer that has provided statistical or other research services to the Adviser
or Sub-Adviser. By allocating transactions in this manner, the Adviser or
Sub-Adviser can supplement its research and analysis with the views and
information of securities firms. These items, which in some cases may also be
purchased for cash, include such matters as general economic and securities
market reviews, industry and company reviews, evaluations of securities and
recommendations as to the purchase and sale of securities. Some of these
services are of value to the Adviser or Sub-Adviser in advising various of its
clients (including the Funds), although not all of these services are
necessarily useful and of value in managing the Funds. The advisory fees paid by
the Funds are not reduced because the Adviser or Sub-Adviser and their
affiliates receive such services.
As permitted by Section 28(e) of the Securities Exchange Act of 1934 (the
"Act"), the Adviser or Sub-Adviser may cause a Fund to pay a broker-dealer that
provides "brokerage and research services" (as defined in the Act) to the
Adviser an amount of disclosed commission for effecting a securities transaction
for the Fund in excess of the commission which another broker-dealer would have
charged for effecting that transaction.
Consistent with the Rules of Fair Practice of the National Association of
Securities Dealers, Inc. and subject to seeking the most favorable price and
execution available and such other policies as the Directors may determine, the
Adviser or Sub-Adviser may consider sales of shares of the Funds as a factor in
the selection of broker-dealers to execute portfolio transactions for the Funds.
For the fiscal year ended April 30, 1998, the Mid Cap Equity Fund and the Large
Cap Equity Fund paid brokerage commissions of $388,152 and $94,016,
respectively. For the period from May 2, 1997 (commencement of operations)
through April 30, 1998, the Large Cap Equity Fund paid brokerage commissions of
$12,775. Of these amounts, none were paid to any affiliated brokers. For the
fiscal year ended April 30, 1997, $344,359 was paid in brokerage commissions by
the Mid Cap Equity Fund. For the period from October 1, 1996 (commencement of
operations) through April 30, 1997, $44,399 was paid in brokerage commissions by
the Large Cap Equity Fund. Of these amounts, none were paid to any affiliated
brokers. For the fiscal year ended April 30, 1996, $192,075 was paid in
brokerage commissions by the Mid Cap Equity Fund. Of this amount, none was paid
to any affiliated brokers. None of the other Funds paid any brokerage
commissions for such periods.
<PAGE> 99
PORTFOLIO TURNOVER
Changes may be made in the portfolio consistent with the investment objectives
and policies of the Funds whenever such changes are believed to be in the best
interests of the Funds and their shareholders. It is anticipated that the annual
portfolio turnover rate for a Fund normally will not exceed 100%. The portfolio
turnover rate is calculated by dividing the lesser of purchases or sales of
portfolio securities by the average monthly value of the Fund's portfolio
securities. For purposes of this calculation, portfolio securities exclude all
securities having a maturity when purchased of one year or less. The portfolio
turnover rate for the fiscal year ended April 30, 1998 was 49%, 39%, 121% and
29% for the Mid Cap Equity Fund, the Large Cap Equity Fund, the Federal
Securities Income Fund and the North Carolina Tax-Free Bond Fund, respectively.
For the period from May 2, 1997 (commencement of operations) through April 30,
1997, the portfolio turnover rate was 71% for the Southeast Equity Fund. (As of
the fiscal year ended April 30, 1998, the Quality Bond Fund and the Money Market
Fund had not yet commenced operations.) The portfolio turnover rate for the
fiscal year ended April 30, 1997 was 67%, 26%, and 34% for the Mid Cap Equity
Fund, the Federal Securities Income Fund and the North Carolina Tax-Free Bond
Fund, respectively. For the period from October 1, 1996 (commencement of
operations) through April 30, 1997, the portfolio turnover rate was 24% for the
Large Cap Equity Fund.
TAXATION
The Funds intend to qualify and elect annually to be treated as regulated
investment companies under Subchapter M of the Internal Revenue Code of 1986, as
amended (the "Code"). To qualify as a regulated investment company, a Fund must
for each taxable year (a) distribute to shareholders at least 90% of its
investment company taxable income (which includes, among other items, dividends,
taxable interest and the excess of net short-term capital gains over net
long-term capital losses); (b) derive at least 90% of its gross income from
dividends, interest, payments with respect to securities loans and gains from
the sale or other disposition of stock, securities or foreign currencies or
other income derived with respect to its business of investing in such stock,
securities or currencies; and (c) diversify its holdings so that, at the end of
each quarter of the taxable year, (i) at least 50% of the market value of the
Fund's assets is represented by cash and cash items (including receivables),
U.S. Government securities, the securities of other regulated investment
companies and other securities, with such other securities of any one issuer
limited for the purposes of this calculation to an amount not greater than 5% of
the value of the Fund's total assets and not greater than 10% of the outstanding
voting securities of such issuer, and (ii) not more than 25% of the value of its
total assets is invested in the securities of any one issuer (other than U.S.
Government securities or the securities of other regulated investment companies,
or of any two or more issuers which the Fund controls and which are engaged in
the same or similar or related trades or businesses). In addition, a Fund
earning tax-exempt interest must, in each year, distribute at least 90% of its
net tax-exempt income. By meeting these requirements, a Fund generally will not
<PAGE> 100
be subject to Federal income tax on its investment company taxable income and
net capital gains which are distributed to shareholders. If the Funds do not
meet all of these Code requirements, they will be taxed as ordinary corporations
and their distributions will be taxed to shareholders as ordinary income.
Amounts, other than tax-exempt interest, not distributed on a timely basis in
accordance with a calendar year distribution requirement are subject to a
nondeductible 4% excise tax. To prevent imposition of the excise tax, each Fund
must distribute for each calendar year an amount equal to the sum of (1) at
least 98% of its ordinary income (excluding any capital gains or losses) for the
calendar year, (2) at least 98% of the excess of its capital gains over capital
losses (adjusted for certain ordinary losses) for the one-year period ending
October 31 of such year, and (3) all ordinary income and capital gain net income
(adjusted for certain ordinary losses) for previous years that were not
distributed during such years. A distribution, including an "exempt-interest
dividend," will be treated as paid on December 31 of a calendar year if it is
declared by a Fund during October, November or December of that year to
shareholders of record on a date in such a month and paid by the Fund during
January of the following year. Such distributions will be reportable by
shareholders in the calendar year in which the distributions are declared,
rather than the calendar year in which the distributions are received.
Distributions of investment company taxable income generally are taxable to
shareholders as ordinary income. Distributions from certain of the Funds may be
eligible for the dividends-received deduction available to corporations.
Distributions of net capital gains (the excess of net long-term capital gains
over short-term capital losses), if any, designated by a Fund as capital gain
dividends will generally be taxable to shareholders as long-term capital gains,
regardless of how long a shareholder has held Fund shares. All distributions are
taxable to the shareholder in the same manner whether reinvested in additional
shares or received in cash. Shareholders will be notified annually as to the
Federal tax status of distributions.
Distributions by a Fund reduce the net asset value of the Fund's shares. Should
a distribution reduce the net asset value below a stockholder's cost basis, such
distribution, nevertheless, would be taxable to the shareholder as ordinary
income or capital gain as described above, even though, from an investment
standpoint, it may constitute a partial return of capital. In particular,
investors should be careful to consider the tax implications of buying shares
just prior to a distribution by the Funds. The price of shares purchased at that
time includes the amount of the forthcoming distribution. Those purchasing just
prior to a distribution will receive a distribution which will nevertheless
generally be taxable to them.
Upon the taxable disposition (including a sale or redemption) of shares of a
Fund, a shareholder may realize a gain or loss depending upon his basis in his
shares. Such gain or loss generally will be treated as capital gain or loss if
the shares are capital assets in the shareholder's hands. Such gain or loss will
be long-term or short-term, generally depending upon the shareholder's holding
period for the shares. However, a loss realized by a shareholder on the
disposition of Fund shares with respect to which capital gain dividends have
<PAGE> 101
been paid will, to the extent of such capital gain dividends, be treated as
long-term capital loss if such shares have been held by the shareholder for six
months or less. A loss realized on the redemption, sale or exchange of Fund
shares will be disallowed to the extent an exempt-interest dividend was received
with respect to those shares if the shares have been held by the shareholder for
six months or less. Further, a loss realized on a disposition will be disallowed
to the extent the shares disposed of are replaced (whether by reinvestment of
distributions or otherwise) within a period of 61 days beginning 30 days before
and ending 30 days after the shares are disposed of. In such a case, the basis
of the shares acquired will be adjusted to reflect the disallowed loss.
Shareholders receiving distributions in the form of additional shares will have
a cost basis for Federal income tax purposes in each share received equal to the
net asset value of a share of the Funds on the reinvestment date.
Under certain circumstances, the sales charge incurred in acquiring shares of a
Fund may not be taken into account in determining the gain or loss on the
disposition of those shares. This rule applies where shares of a Fund are
exchanged within 90 days after the date they were purchased and new shares of a
Fund are acquired without a sales charge or at a reduced sales charge. In that
case, the gain or loss recognized on the exchange will be determined by
excluding from the tax basis of the shares exchanged all or a portion of the
sales charge incurred in acquiring those shares. This exclusion applies to the
extent that the otherwise applicable sales charge with respect to the newly
acquired shares is reduced as a result of having incurred the sales charge
initially. Instead, the portion of the sales charge affected by this rule will
be treated as a sales charge paid for the new shares.
Certain of the options, futures contracts, and forward foreign currency exchange
contracts that several of the Funds may invest in are so-called "section 1256
contracts." With certain exceptions, gains or losses on section 1256 contracts
generally are considered 60% long-term and 40% short-term capital gains or
losses ("60/40"). Also, section 1256 contracts held by a Fund at the end of each
taxable year (and, generally, for purposes of the 4% excise tax, on October 31
of each year) are "marked-to-market" with the result that unrealized gains or
losses are treated as though they were realized and the resulting gain or loss
is treated as 60/40 gain or loss.
Generally, the hedging transactions undertaken by a Fund may result in
"straddles" for Federal income tax purposes. The straddle rules may affect the
character of gains (or losses) realized by a Fund. In addition, losses realized
by a Fund on a position that is part of a straddle may be deferred under the
straddle rules, rather than being taken into account in calculating the taxable
income for the taxable year in which such losses are realized. Because only a
few regulations implementing the straddle rules have been promulgated, the tax
consequences to a Fund of hedging transactions are not entirely clear. Hedging
transactions may increase the amount of short-term capital gain realized by a
Fund which is taxed as ordinary income when distributed to stockholders.
A Fund may make one or more of the elections available under the Code which are
applicable to straddles. If a Fund makes any of the elections, the amount,
character and timing of the recognition of gains or losses from the affected
<PAGE> 102
straddle positions will be determined under rules that vary according to the
election(s) made. The rules applicable under certain of the elections may
operate to accelerate the recognition of gains or losses from the affected
straddle positions.
Because application of the straddle rules may affect the character of gains or
losses, defer losses and/or accelerate the recognition of gains or losses from
the affected straddle positions, the amount which must be distributed to
shareholders, and which will be taxed to shareholders as ordinary income or
long-term capital gain, may be increased or decreased substantially as compared
to a fund that did not engage in such hedging transactions.
Recently enacted rules may affect the timing and character of gain if a Fund
engages in transactions that reduce or eliminate its risk of loss with respect
to appreciated financial positions. If a Fund enters into certain transactions
in property while holding substantially identical property, the Fund would be
treated as if it had sold and immediately repurchased the property and would be
taxed on any gain (but not loss) from the constructive sale. The character of
gain from a constructive sale would depend upon the Fund's holding period in the
property. Loss from a constructive sale would be recognized when the property
was subsequently disposed of, and its character would depend on the Fund's
holding period and the application of various loss deferral provisions of the
Code.
Certain requirements that must be met under the Code in order for a Fund to
qualify as a regulated investment company may limit the extent to which a Fund
will be able to engage in transactions in options, futures, forward contracts
and similar instruments.
Certain of the debt securities acquired by a Fund may be treated as debt
securities that were originally issued at a discount. Original issue discount
can generally be defined as the difference between the price at which a security
was issued and its stated redemption price at maturity. Although no cash income
is actually received by the Fund, original issue discount on a taxable debt
security earned in a given year generally is treated for Federal income tax
purposes as interest and, therefore, such income would be subject to the
distribution requirements of the Code. Original issue discount on an obligation,
the interest from which is exempt from Federal income tax, generally will
constitute tax-exempt interest income.
Some of the debt securities may be purchased by a Fund at a discount which
exceeds the original issue discount on such debt securities, if any. This
additional discount represents market discount for Federal income tax purposes.
The gain realized on the disposition of any debt security, including a
tax-exempt debt security, having market discount will be treated as ordinary
income to the extent it does not exceed the accrued market discount on such debt
security. Generally, market discount accrues on a daily basis for each day the
debt security is held by the Fund at a constant rate over the time remaining to
the debt security's maturity or, at the election of the Fund, at a constant
yield to maturity which takes into account the semi-annual compounding of
interest.
<PAGE> 103
Under the Code, gains or losses attributable to fluctuations in exchange rates
which occur between the time a Fund accrues income or other receivables or
accrues expenses or other liabilities denominated in a foreign currency, and the
time the Fund actually collects such receivables or pays such liabilities,
generally are treated as ordinary income or ordinary loss. Similarly, on
disposition of debt securities denominated in a foreign currency and on
disposition of certain options and forward and futures contracts, gains or
losses attributable to fluctuations in the value of foreign currency between the
date of acquisition of the security or contract and the date of disposition also
are treated as ordinary gain or loss. These gains or losses, referred to under
the Code as "section 988" gains or losses, may increase, decrease, or eliminate
the amount of a Fund's investment company taxable income to be distributed to
its shareholders as ordinary income.
Some Funds may invest in stocks of foreign companies that are classified under
the Code as passive foreign investment companies ("PFICs"). In general, a
foreign company is classified as a PFIC under the Code if at least one-half of
its assets constitute investment-type assets or 75% or more of its gross income
is investment-type income. Under the PFIC rules, an "excess distribution"
received with respect to PFIC stock is treated as having been realized ratably
over the period during which the Fund held the PFIC stock. A Fund itself will be
subject to tax on the portion, if any, of the excess distribution that is
allocated to the Fund's holding period in prior taxable years (and an interest
factor will be added to the tax, as if the tax had actually been payable in such
prior taxable years) even though the Fund distributes the corresponding income
to stockholders. Excess distributions include any gain from the sale of PFIC
stock as well as certain distributions from a PFIC. All excess distributions are
taxable as ordinary income.
A Fund may be able to elect alternative tax treatment with respect to PFIC
stock. Under an election that currently may be available, a Fund generally would
be required to include in its gross income its share of the earnings of a PFIC
on a current basis, regardless of whether any distributions are received from
the PFIC. If this election is made, the special rules, discussed above, relating
to the taxation of excess distributions, would not apply. In addition, another
election may be available that would involve marking to market the Fund's PFIC
shares at the end of each taxable year, with the result that unrealized gains
are treated as though they were realized and reported as ordinary income. Any
mark-to-market losses and any loss from an actual disposition of PFIC shares
would be deductible as ordinary losses to the extent of any net mark-to-market
gains included in income in prior years. Each Fund's intention to qualify
annually as a regulated investment company may limit its elections with respect
to PFIC stock.
Income received by a Fund from sources within foreign countries may be subject
to withholding and other similar income taxes imposed by the foreign country. If
more than 50% of the value of a Fund's total assets at the close of its taxable
year consists of securities of foreign governments and corporations, the Fund
will be eligible and intends to elect to "pass-through" to its shareholders the
amount of such foreign taxes paid by the Fund. Pursuant to this election, a
<PAGE> 104
shareholder would be required to include in gross income (in addition to taxable
dividends actually received) his pro rata share of the foreign taxes paid by a
Fund, and would be entitled either to deduct (as an itemized deduction) his pro
rata share of foreign taxes in computing his taxable income or to use it as a
foreign tax credit against his U.S. Federal income tax liability, subject to
limitations. No deduction for foreign taxes may be claimed by a shareholder who
does not itemize deductions, but such a shareholder may be eligible to claim the
foreign tax credit (see below). Each shareholder will be notified within 60 days
after the close of a Fund's taxable year whether the foreign taxes paid by a
Fund will "pass-through" for that year and, if so, such notification will
designate (a) the shareholder's portion of the foreign taxes paid to each such
country and (b) the portion of the dividend which represents income derived from
foreign sources.
Generally, a credit for foreign taxes is subject to the limitation that it may
not exceed the shareholder's U.S. tax attributable to his total foreign source
taxable income. For this purpose, if a Fund makes the election described in the
preceding paragraph, the source of the Fund's income flows through to its
shareholders. With respect to a Fund, gains from the sale of securities will be
treated as derived from U.S. sources and certain currency fluctuations gains,
including fluctuation gains from foreign currency-denominated debt securities,
receivables and payables, will be treated as ordinary income derived from U.S.
sources. The limitation on the foreign tax credit is applied separately to
foreign source passive income (as defined for purposes of the foreign tax
credit) including foreign source passive income of a Fund. The foreign tax
credit may offset only 90% of the alternative minimum tax imposed on
corporations and individuals, and foreign taxes generally may not be deducted in
computing alternative minimum taxable income. The ability to claim foreign tax
credits also is subject to holding period requirements.
The Funds are required to report to the Internal Revenue Service ("IRS") all
distributions except in the case of certain exempt shareholders. All such
distributions generally are subject to withholding of Federal income tax at a
rate of 31% ("backup withholding") in the case of non-exempt shareholders if (1)
the shareholder fails to furnish the Funds with and to certify the shareholder's
correct taxpayer identification number or social security number, (2) the IRS
notifies the Funds or a shareholder that the shareholder has failed to report
properly certain interest and dividend income to the IRS and to respond to
notices to that effect, or (3) when required to do so, the shareholder fails to
certify that he is not subject to backup withholding. If the withholding
provisions are applicable, any such distributions, whether reinvested in
additional shares or taken in cash, will be reduced by the amounts required to
be withheld. Backup withholding is not an additional tax. Any amount withheld
may be credited against the shareholder's U.S. Federal income tax liability.
Investors may wish to consult their tax advisors about the applicability of the
backup withholding provisions.
The foregoing discussion relates only to Federal income tax law as applicable to
U.S. persons (i.e., U.S. citizens and residents and U.S. corporations,
partnerships, trusts and estates). Distributions by the Funds also may be
subject to state and local taxes and their treatment under state and local
<PAGE> 105
income tax laws may differ from the Federal income tax treatment. Distributions
of a Fund which are derived from interest on obligations of the U.S. Government
and certain of its agencies and instrumentalities may be exempt from state and
local taxes in certain states. Shareholders should consult their tax advisors
with respect to particular questions of Federal, state and local taxation.
Shareholders who are not U.S. persons should consult their tax advisors
regarding U.S. and foreign tax consequences of ownership of shares of the Funds
including the likelihood that distributions to them would be subject to
withholding of U.S. tax at a rate of 30% (or at a lower rate under a tax
treaty).
CENTURA NORTH CAROLINA TAX-FREE BOND FUND. The Fund intends to manage its
portfolio so that it will be eligible to pay "exempt-interest dividends" to
shareholders. The Fund will so qualify if, at the close of each quarter of its
taxable year, at least 50% of the value of its total assets consists of state,
municipal, and certain other securities, the interest on which is exempt from
the regular Federal income tax. To the extent that the Fund's dividends
distributed to shareholders are derived from such interest income and are
designated as exempt-interest dividends by the Fund, they will be excludable
from a shareholder's gross income for Federal income tax purposes.
Exempt-interest dividends, however, must be taken into account by shareholders
in determining whether their total incomes are large enough to result in
taxation of up to one-half (85% for taxable years beginning after 1993) of their
social security benefits and certain railroad retirement benefits. The Fund will
inform shareholders annually as to the portion of the distributions from the
Fund which constitute exempt-interest dividends. In addition, for corporate
shareholders of the Fund, exempt-interest dividends may comprise part or all of
an adjustment to alternative minimum taxable income for purposes of the
alternative minimum tax and the environmental tax under sections 55 and 59A.
Exempt-interest dividends that are attributable to certain private activity
bonds, while not subject to the regular Federal income tax, may constitute an
item of tax preference for purposes of the alternative minimum tax.
To the extent that the Fund's dividends are derived from its investment company
taxable income (which includes interest on its temporary taxable investments and
the excess of net short-term capital gain over net long-term capital loss), they
are considered ordinary (taxable) income for Federal income tax purposes. Such
dividends will not qualify for the dividends-received deduction for
corporations. Distributions, if any, of net capital gains (the excess of net
long-term capital gain over net short-term capital loss) designated by a Fund as
capital gain dividends are taxable to shareholders as long-term capital gain
regardless of the length of time the shareholder has owned shares of the Fund.
Upon redemption, sale or exchange of shares of the Fund, a shareholder will
realize a taxable gain or loss, depending on whether the gross proceeds are more
or less than the shareholder's tax basis for the shares.
The discussion above provides additional detail about the income tax
consequences of disposing of Fund shares.
<PAGE> 106
Deductions for interest expense incurred to acquire or carry shares of the Fund
may be subject to limitations that reduce, defer, or eliminate such deductions.
This includes limitations on deducting interest on indebtedness properly
allocable to investment property (which may include shares of the Fund). In
addition, a shareholder may not deduct a portion of interest on indebtedness
incurred or continued to purchase or carry shares of an investment company (such
as this Fund) paying exempt-interest dividends. Such disallowance would be in an
amount which bears the same ratio to the total of such interest as the
exempt-interest dividends bear to the total dividends, excluding net capital
gain dividends received by the shareholder. Under rules issued by the IRS for
determining when borrowed funds are considered used for the purposes of
purchasing or carrying particular assets, the purchase of shares may be
considered to have been made with borrowed funds even though the borrowed funds
are not directly traceable to the purchase of shares.
North Carolina law exempts from income taxation dividends received from a
regulated investment company in proportion to the income of the regulated
investment company that is attributable to interest on bonds or securities of
the U.S. government or any agency or instrumentality thereof or on bonds of the
State of North Carolina or any county, municipality or political subdivision
thereof, including any agency, board, authority or commission of any of the
above.
Opinions relating to the validity of municipal securities and the exemption of
interest thereon from Federal income tax are rendered by bond counsel to the
issuers. The Fund, the Adviser and their affiliates, and the Fund's counsel make
no review of proceedings relating to the issuance of state or municipal
securities or the bases of such opinions.
Persons who may be "substantial users" (or "related persons" of substantial
users) of facilities financed by private activity bonds should consult their tax
advisers before purchasing shares of Centura North Carolina Tax-Free Bond Fund
since the acquisition of shares of the Fund may result in adverse tax
consequences to them. In addition, all shareholders of the Fund should consult
their tax advisers about the tax consequences to them of their investments in
the Fund.
Changes in the tax law, including provisions relating to tax-exempt income,
frequently come under consideration. If such changes are enacted, the tax
consequences arising from an investment in Centura North Carolina Tax-Free Bond
Fund may be affected. Since the Funds do not undertake to furnish tax advice, it
is important for shareholders to consult their tax advisers regularly about the
tax consequences to them of investing in one or more of the Funds.
OTHER INFORMATION
CAPITALIZATION
The Company is a Maryland corporation established under Articles of
Incorporation dated March 1, 1994 and currently consists of seven separately
managed portfolios, each of which offers three classes of shares, except that
Centura Money Market Fund offers only two classes of shares. The capitalization
<PAGE> 107
of the Company consists solely of one billion fifty million (1,050,000,000)
shares of common stock with a par value of $0.001 per share. The Board of
Directors may establish additional Funds (with different investment objectives
and fundamental policies), or additional classes of shares, at any time in the
future. Establishment and offering of additional Funds or classes will not alter
the rights of the Company's shareholders. When issued, shares are fully paid,
non-assessable, redeemable and freely transferable. Shares do not have
preemptive rights or subscription rights. In any liquidation of a Fund or class,
each shareholder is entitled to receive his pro rata share of the net assets of
that Fund or class.
VOTING RIGHTS
Under the Articles of Incorporation, the Company is not required to hold annual
meetings of each Fund's shareholders to elect Directors or for other purposes.
It is not anticipated that the Company will hold shareholders' meetings unless
required by law or the Articles of Incorporation. In this regard, the Company
will be required to hold a meeting to elect Directors to fill any existing
vacancies on the Board if, at any time, fewer than a majority of the Directors
have been elected by the shareholders of the Company. In addition, the Articles
of Incorporation provide that the holders of not less than a majority of the
outstanding shares of the Company may remove persons serving as Director.
Each Fund may vote separately on matters affecting only that Fund, and each
class of shares of each Fund may vote separately on matters affecting only that
class or affecting that class differently from other classes.
The Company's shares do not have cumulative voting rights, so that the holders
of more than 50% of the outstanding shares may elect the entire Board of
Directors, in which case the holders of the remaining shares would not be able
to elect any Directors.
CUSTODIAN, TRANSFER AGENT AND DIVIDEND DISBURSING AGENT
Centura Bank, 131 North Church Street, Rocky Mount, North Carolina 27802, acts
as custodian of the Company's assets. For the year ended April 30, 1998, Centura
Bank earned custodian fees and out-of-pocket expenses of $44,842, $15,560,
$26,313 and $11,932 for the Mid Cap Equity Fund, Large Cap Equity Fund, Federal
Securities Income Fund and North Carolina Tax-Free Bond Fund, respectively. For
the period from May 2, 1997 (commencement of operations) to April 30, 1998,
custodian expenses incurred by the Southeast Equity Fund were $12,766. (As of
the fiscal year ended April 30, 1998, the Quality Bond Fund and the Money Market
Fund had not yet commenced operations.) For the periods ended April 30, 1996 and
April 30, 1997, respectively, the custodian earned fees of $28,109 and $59,019
for the Mid Cap Equity Fund; $24,580 and $31,324 for the Federal Securities
Income Fund; and $12,503 and $15,400 for the North Carolina Tax-Free Bond Fund,
respectively. For the period from October 1, 1996 (commencement of operations)
to April 30, 1997 the custodian earned fees of $23,036 for the Large Cap Equity
Fund.
<PAGE> 108
BISYS Fund Services, Inc. ("BFSI") serves as the Company's transfer agent
pursuant to a Transfer Agency Agreement. For the fiscal year ended April 30,
1998 BFSI received fees for transfer agency services of $102,555, $10,165,
$16,220 and $10,627 for the Mid Cap Equity Fund, the Large Cap Equity Fund, the
Federal Securities Income Fund and the North Carolina Tax-Free Bond Fund,
respectively. (As of the fiscal year ended April 30, 1998, the Quality Bond Fund
and the Money Market Fund had not yet commenced operations.) For the period from
May 2, 1997 (commencement of operations) to April 30, 1998, BFSI received fees
for transfer agency services of $18,453 for the Southeast Equity Fund. For its
services rendered during the fiscal year ended April 30, 1997, BFSI and Furman
Selz LLC ("Furman Selz"), the Company's transfer agent prior to January 1, 1997,
earned $101,541, $13,117 and $11,109 in transfer agent fees for the Mid Cap
Equity Fund, the Federal Securities Income Fund and the North Carolina Tax-Free
Bond Fund, respectively. For the period from October 1, 1996 (commencement of
operations) through April 30, 1997, BFSI and Furman Selz earned $16,260 in
transfer agent fees for the Large Cap Equity Fund. For the fiscal year ended
April 30, 1996, the Company's prior transfer agent, Furman Selz, earned transfer
agent fees of $38,623 for the Mid Cap Equity Fund, $7,326 for the Federal
Securities Income Fund and $6,452 for the North Carolina Tax-Free Bond Fund.
Pursuant to a Fund Accounting Agreement, each Fund compensates BFSI $2,500 per
month for providing fund accounting services for the Funds. For the fiscal year
ended April 30, 1998 BFSI received fees for fund accounting services of $32,519,
$31,269, $38,031 and $35,374 for the Mid Cap Equity Fund, the Large Cap Equity
Fund, the Federal Securities Income Fund and the North Carolina Tax-Free Bond
Fund, respectively. For the period from May 2, 1997 (commencement of operations)
to April 30, 1998, BFSI received fees for fund accounting services of $34,581
for the Southeast Equity Fund. (As of the fiscal year ended April 30, 1998, the
Quality Bond Fund and the Money Market Fund had not yet commenced operations.)
For the fiscal year ended April 30, 1997, BFSI and Furman Selz, the Company's
prior fund accounting servicer, earned $28,792, $31,735, and $39,742 in fund
accounting fees for the Mid Cap Equity Fund, the Federal Securities Income Fund
and the North Carolina Tax-Free Bond Fund, respectively. For the period from
October 1, 1996 (commencement of operations) through April 30, 1997, BFSI and
Furman Selz earned $19,212 in fund accounting fees for the Large Cap Equity
Fund. For the fiscal year ended April 30, 1996, the Fund's prior accounting
agent, Furman Selz, earned the following fees for their fund accounting
services: $32,848 for the Mid Cap Equity Fund, $33,981 for the Federal
Securities Income Fund and $41,369 for the North Carolina Tax-Free Bond Fund.
YIELD AND PERFORMANCE INFORMATION
The Funds may, from time to time, include their yield, effective yield, tax
equivalent yield and average annual total return in advertisements or reports to
shareholders or prospective investors.
<PAGE> 109
CENTURA MONEY MARKET FUND
The current yield is the net annualized yield based on a specific 7
calendar-days calculated at simple interest rates. Current yield is calculated
by determining the net change, exclusive of capital changes, in the value of a
hypothetical pre-existing account having a balance of one share at the beginning
of the period and dividing such change by the value of the account at the
beginning of the base period to obtain the base-period return. The base-period
return is then annualized by multiplying it by 365/7; the resultant product
equals net annualized current yield. The current yield figure is stated to the
nearest hundredth of one percent.
The effective yield is the net annualized yield for a specified 7 calendar-days
assuming a reinvestment in Fund shares of all dividends during the period, i.e.,
compounding. Effective yield is calculated by using the same base-period return
used in the calculation of current yield except that the base-period return is
compounded by adding 1, raising the sum to a power equal to 365 divided by 7,
and subtracting 1 from the result according to the following formula:
Effective Yield -- [(Base Period Return + 1)365/7] -- 1.
As described above, current yield and effective yield are based on historical
earnings, show the performance of a hypothetical investment and are not intended
to indicate future performance. Current yield and effective yield will vary
based on changes in market conditions and the level of Fund expenses.
OTHER CENTURA FUNDS
Quotations of yield for each class of shares of the Funds will be based on the
investment income per share earned during a particular 30-day period, less
expenses accrued with respect to that class during a period ("net investment
income"), and will be computed by dividing net investment income for the class
by the maximum offering price per share of that class on the last day of the
period, according to the following formula:
YIELD = 2[(a-b + 1)#6-1]/cd
where a = dividends and interest earned during the period, b = expenses accrued
for the period (net of any reimbursements), c = the average daily number of
shares of the class outstanding during the period that were entitled to receive
dividends, and d = the maximum offering price per share of the class on the last
day of the period; the # indicates that the following single character is an
exponent.
The 30-day yield for the period ended October 31, 1998 was as follows: 4.42% and
3.26% for the Class A shares of the Federal Securities Income Fund and the North
Carolina Tax-Free Bond Fund, respectively, and 3.92% and 2.76% for the Class B
shares of the Federal Securities Income Fund and the North Carolina Tax-Free
Bond Fund, respectively.
<PAGE> 110
Quotations of tax-equivalent yield for each class of shares of Centura North
Carolina Tax-Free Bond Fund will be calculated according to the following
formula:
TAX EQUIVALENT YIELD = (E) / l-p
E = tax-exempt yield p = stated income tax rate
Quotations of average annual total return will be expressed in terms of the
average annual compounded rate of return of a hypothetical investment in each
class of shares of a Fund over periods of 1, 5 and 10 years (up to the life of
the Fund), calculated pursuant to the following formula:
P (1 + T)#n = ERV
(where P = a hypothetical initial payment of $1,000, T = the average annual
total return for the class, n = the number of years, and ERV = the ending
redeemable value of a hypothetical $1,000 payment made at the beginning of the
period). All total return figures will reflect the deduction of the maximum
sales charge and a proportional share of Fund and class-specific expenses (net
of certain reimbursed expenses) on an annual basis, and will assume that all
dividends and distributions are reinvested when paid; the # indicates that the
following single character is an exponent. Quotations of yield and total return
will reflect only the performance of a hypothetical investment in a class of
shares of the Funds during the particular time period shown. Yield and total
return for the Funds will vary based on changes in the market conditions and the
level of the Fund's (and classes') expenses, and no reported performance figure
should be considered an indication of performance which may be expected in the
future.
<PAGE> 111
PERFORMANCE INFORMATION
TOTAL RETURN SUMMARY
THE CENTURA FUNDS (A CLASS)
PERIOD ENDED MAY 31, 1998
NO LOAD TOTAL RETURN
<TABLE>
<CAPTION>
AGGREGATE RETURNS AVERAGE ANNUAL RETURNS
------------------------ ----------------------------------
INCEPTION SINCE
FUND DATE YEAR TO DATE QUARTERLY INCEPTION 1 YEAR 3 YEAR 5 YEAR 10 YEAR
---- --------- ------------ --------- --------- ------ ------ ------ -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Centura Mid Cap Equity Fund............ 12/31/90 9.01% 3.26% 19.43% 24.85% 26.13% 18.81% NA
Centura Large Cap Equity Fund.......... 12/31/90 3.62% 0.25% 15.70% 21.10% 22.43% 16.31% NA
Centura Southeast Equity Fund.......... 01/01/95 7.93% 3.11% 24.24% 33.61% 23.95% -- --
Centura Federal Securities Fund........ 12/31/90 2.56% 1.49% 6.18% 8.28% 5.84% 5.17% NA
Centura North Carolina Tax-Free Fund... 01/31/91 1.74% 0.97% 5.21% 7.77% 5.64% 4.88% NA
</TABLE>
SUBJECT TO SALES LOAD
<TABLE>
<CAPTION>
AGGREGATE RETURNS AVERAGE ANNUAL RETURNS
------------------------ ----------------------------------
INCEPTION SINCE
FUND DATE YEAR TO DATE QUARTERLY INCEPTION 1 YEAR 3 YEAR 5 YEAR 10 YEAR
---- --------- ------------ --------- --------- ------ ------ ------ -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Centura Mid Cap Equity Fund.............. 12/31/90 4.12% (1.39)% 18.68% 19.25% 24.21% 17.71% NA
Centura Large Cap Equity Fund............ 12/31/90 (1.05)% (4.29)% 14.98% 15.70% 20.54% 15.23% NA
Centura Southeast Equity Fund............ 01/01/95 3.06% (1.55)% 22.55% 27.57% 22.06% -- --
Centura Federal Securities Fund.......... 12/31/90 (0.27)% (1.31)% 5.79% 5.32% 4.86% 4.59% NA
Centura North Carolina Tax-Free Fund..... 01/31/91 (1.01)% (1.85)% 4.82% 4.76% 4.66% 4.30% NA
</TABLE>
SALES LOAD
----------
The Centura Mid Cap Equity Fund............................. 4.50%
The Centura Large Cap Equity Fund........................... 4.50%
The Centura Southeast Equity Fund........................... 4.50%
The Centura Federal Securities Fund......................... 2.75%
The Centura North Carolina Tax-Free Fund.................... 2.75%
The performance data quoted represents past performance and is not an
indication of future results as yields fluctuate daily.
Centura Funds Distributor, Inc. is the Distributor for The Centura Group of
Funds.
<PAGE> 112
TOTAL RETURN SUMMARY
THE CENTURA FUNDS (B CLASS)
PERIOD ENDED MAY 31, 1998
NO CDSC TOTAL RETURN
<TABLE>
<CAPTION>
AGGREGATE RETURNS AVERAGE ANNUAL RETURNS
------------------------ ------------------------
INCEPTION SINCE
FUND DATE YEAR TO DATE QUARTERLY INCEPTION 1 YEAR 3 YEAR 5 YEAR 10 YEAR
- ---- --------- ------------ --------- --------- ------ ------ ------ -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Centura Mid Cap Equity Fund........... 12/31/90 8.64% 3.02% 18.74% 23.83% 25.18% 18.01% NA
Centura Large Cap Equity Fund......... 12/31/90 3.34% 0.07% 15.05% 20.27% 21.64% 15.63% NA
Centura Southeast Equity Fund......... 01/01/95 7.54% 2.90% 23.51% 32.45% 23.16% -- --
Centura Federal Securities Fund....... 12/31/90 2.36% 1.27% 5.56% 7.65% 5.17% 4.51% NA
Centura North Carolina Tax-Free Fund.. 01/31/91 1.63% 0.85% 4.65% 7.24% 5.01% 4.27% NA
</TABLE>
CDSC TOTAL RETURN
<TABLE>
<CAPTION>
AGGREGATE RETURNS AVERAGE ANNUAL RETURNS
------------------------ ------------------------
INCEPTION SINCE
FUND DATE YEAR TO DATE QUARTERLY INCEPTION 1 YEAR 3 YEAR 5 YEAR 10 YEAR
- ---- --------- ------------ --------- --------- ------ ------ ------ -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Centura Mid Cap Equity Fund........... 12/31/90 3.64% (1.98)% 18.74% 19.06% 24.54% 17.91% NA
Centura Large Cap Equity Fund......... 12/31/90 (1.66)% (4.92)% 15.05% 15.27% 20.96% 15.52% NA
Centura Southeast Equity Fund......... 01/01/95 2.54% (2.10)% 23.16% 27.45% 22.50% -- --
Centura Federal Securities Fund....... 12/31/90 (0.64)% (1.73)% 5.56% 4.65% 4.26% 4.34% NA
Centura North Carolina Tax-Free Fund.. 01/31/91 (1.37)% (2.15)% 4.65% 4.24% 4.10% 4.10% NA
</TABLE>
CONTINGENT DEFERRED SALES CHARGE:
Shares redeemed within 5 years of purchase are subject to a CDSC equal to a
percentage of the lesser of the purchase NAV or the redemption NAV. The
contingent deferred sales charge will not be imposed on increases above the
beginning NAV or shares purchased through the reinvestment of dividends or
capital gains.
<PAGE> 113
CONTINGENT DEFERRED SALES CHARGE
<TABLE>
<CAPTION>
Centura Mid Cap Equity Fund Centura Federal Securities Income Fund
Centura Large Cap Equity Fund Centura North Carolina Tax-Free Fund
Years Since Purchase Centura Southeast Equity Fund Centura Quality Income Fund
- -------------------- ------------------------------ ---------------------------------------
<S> <C> <C>
1.............. 5.0% 3.0%
2.............. 4.0% 3.0%
3.............. 3.0% 3.0%
4.............. 2.0% 2.0%
5.............. 1.0% 1.0%
6.............. 0% 0%
</TABLE>
The performance data quoted represents past performance and is not an
indication of future results as yields fluctuate daily.
Centura Funds Distributor, Inc. is the Distributor for Centura Funds.
NOTES ABOUT THE PERFORMANCE INFORMATION
(a) BACKGROUND OF THE FUNDS
From 1/1/91 to 5/31/94 (conversion date), Centura Mid Cap Equity Fund and
Centura Federal Securities Income Fund were bank collective trust funds
maintained and managed by Centura Bank, and from 2/1/91 to 5/31/94 (conversion
date), Centura North Carolina Tax-Free Bond Fund was a common trust fund
maintained and managed by Centura Bank. From 1/91 to 9/30/96 (conversion date),
Centura Large Cap Equity Fund was a common trust fund maintained and managed by
Centura Bank. From 1/1/95 to 4/30/97 (conversion date), Centura Southeast Equity
Fund was a bank common trust fund maintained and managed by Centura Bank. Bank
collective and common trust funds are not required to register as investment
companies under the Investment Company Act of 1940. Accordingly, performance
achieved by a Fund's predecessor collective or common trust fund reflects
performance prior to the Fund's commencement of operations as a series of a
registered investment company. The investment objectives, strategies and
policies of each of these Funds prior to its conversion from the bank common or
collective fund predecessor to a registered mutual fund were in all material
respects equivalent to those of its successor registered mutual fund.
(b) HOW THE PERFORMANCE INFORMATION WAS CALCULATED
Investment performance for the Funds during their maintenance as common or
collective trust funds has been calculated on a monthly basis utilizing the Bank
<PAGE> 114
Administration Institute's recommended time-weighted rate of return method to
compute the investment performance reflected in the above Schedule.
The performance figures assume the maximum sales load, reinvestment of
dividends and interest and include the cost of brokerage commissions. The
investment performance excludes taxes an investor might have incurred as a
result of taxable ordinary income and capital gains realized by the accounts.
Bank common and collective trust funds are not subject to certain expenses
normally incurred by a mutual fund, such as advisory, administrative, transfer
and fund accounting agent and 12b-1 fees. Thus, the performance figures, for
periods prior to conversion to registered funds have been adjusted, on a monthly
basis, to reflect the impact of the higher contractual expense ratios for the
registered funds at the time of the conversion.
It should be noted, however, that the bank-maintained common and collective
trust funds are not subject to the same tax and regulatory requirements,
including certain investment restrictions, applicable to registered mutual
funds. These regulatory and tax requirements could have adversely affected the
performance of the Funds' collective and common trust fund predecessors.
In connection with communicating its yields or total return to current or
prospective unit holders, the Funds also may compare these figures to the
performance of other mutual funds tracked by mutual fund rating services or to
other unmanaged indexes which may assume reinvestment of dividends but generally
do not reflect deductions for administrative and management costs.
Performance information for the Funds may be compared, in reports and
promotional literature, to: (i) the Standard & Poor's 500 Stock Index, Dow Jones
Industrial Average, or other unmanaged indices so that investors may compare the
Funds' results with those of a group of unmanaged securities widely regarded by
investors as representative of the securities markets in general; (ii) other
groups of mutual funds tracked by Lipper Analytical Services, a widely used
independent research firm which ranks mutual funds by overall performance,
investment objectives, and assets, or tracked by other services, companies,
publications, or persons who rank mutual funds on overall performance or other
criteria; and (iii) the Consumer Price Index (measure for inflation) to assess
the real rate of return from an investment in a Fund.
Investors who purchase and redeem shares of the Funds through a customer
account maintained at a Service Organization may be charged one or more of the
following types of fees as agreed upon by the Service Organization and the
investor, with respect to the customer services provided by the Service
Organization: account fees (a fixed amount per month or per year); transaction
fees (a fixed amount per transaction processed); compensating balance
requirements (a minimum dollar amount a customer must maintain in order to
obtain the services offered); or account maintenance fees (a periodic charge
based upon a percentage of the assets in the account or of the dividends paid on
those assets). Such fees will have the effect of reducing the yield and average
annual total return of the Funds for those investors.
<PAGE> 115
INDEPENDENT ACCOUNTANTS
KPMG LLP serves as the independent accountants for the Company for the fiscal
year ending April 30, 1999. KPMG LLP provides audit services, tax return
preparation and assistance and consultation in connection with review of SEC
filings.
COUNSEL
Dechert Price & Rhoads, 1775 Eye Street, N.W., Washington, D.C., 20006, passes
upon certain legal matters in connection with the shares offered by the Company
and also acts as Counsel to the Company.
REGISTRATION STATEMENT
This SAI and the Prospectus do not contain all the information included in the
Company's Registration Statement filed with the SEC under the Securities Act of
1933 with respect to the securities offered hereby, certain portions of which
have been omitted pursuant to the rules and regulations of the SEC. The
Registration Statement, including the exhibits filed therewith, may be examined
at the office of the SEC in Washington, D.C.
Statements contained herein and in the Prospectus as to the contents of any
contract or other documents referred to are not necessarily complete, and, in
each instance, reference is made to the copy of such contract or other documents
filed as an exhibit to the Registration Statement, each such statement being
qualified in all respects by such reference.
FINANCIAL STATEMENTS
The Report of Independent Accountants and financial statements of the Funds
included in their Annual Report for the period ended April 30, 1998 (the "Annual
Report") are incorporated herein by reference to such Report. Copies of such
Annual Report are available without charge upon request by writing to Centura
Funds, Inc., 3435 Stelzer Road, Columbus, Ohio 43219-8006 or telephoning (800)
442-3688. Also incorporated by reference herein are semi-annual financial
statements for the Funds (unaudited) for the period ended October 31, 1998.
The financial statements in the Annual Report incorporated by reference into
this Statement of Additional Information have been audited by McGladrey & Pullen
LLP, independent accountants, and have been so included and incorporated by
reference in reliance upon the report of said firm, which report is given upon
their authority as experts in auditing and accounting.
<PAGE> 116
CENTURA FUNDS, INC.
(THE "COMPANY")
3435 STELZER ROAD
COLUMBUS, OHIO 43219
GENERAL AND ACCOUNT INFORMATION: (800) 442-3688
CENTURA BANK
INVESTMENT ADVISER
SOVEREIGN ADVISERS
SUB-ADVISER
BISYS FUND SERVICES
ADMINISTRATOR AND SPONSOR
CENTURA FUNDS DISTRIBUTOR, INC.
DISTRIBUTOR
CENTURA FUNDS, INC.
3435 STELZER ROAD
COLUMBUS, OHIO 43219
GENERAL AND ACCOUNT INFORMATION
(800) 442-3688
STATEMENT OF ADDITIONAL INFORMATION
CLASS C SHARES
This Statement of Additional Information ("SAI") describes Class C shares of the
seven funds (the "Funds") advised by Centura Bank (the "Adviser"). The Funds
are:
-- Centura Mid Cap Equity Fund
-- Centura Large Cap Equity Fund
-- Centura Southeast Equity Fund
-- Centura Federal Securities Income Fund
-- Centura North Carolina Tax-Free Bond Fund
-- Centura Money Market Fund
-- Centura Quality Income Fund
Each Fund has distinct investment objectives and policies. Shares of the Funds
are sold to the public by the Distributor as an investment vehicle for
individuals, institutions, corporations and fiduciaries, including customers of
the Adviser or its affiliates.
The Company is offering an indefinite number of shares of each class of each
<PAGE> 117
Fund. In addition to Class C shares, Centura Money Market Fund also offers Class
A shares with no front-end sales charge. Each other Fund also offers Class A
shares, subject to a front-end sales charge (unless waived) and Class B shares
subject to a contingent deferred sales charge (unless waived) on redemptions
within five years of purchase. See "Other Information Capitalization" in the
prospectus.
This SAI is not a prospectus and is authorized for distribution only when
preceded or accompanied by the prospectuses for Centura Money Market Fund,
dated April 29, 1998, for Centura Quality Income Fund, dated April 24, 1999
and for the other Funds dated August 1, 1998 (collectively, the "Prospectus").
This SAI contains additional and more detailed information than that set forth
in the Prospectus and should be read in conjunction with the Prospectus. The
Prospectus may be obtained without charge by writing or calling the Funds at
the address and information numbers printed above.
April 24, 1999
<PAGE> 118
TABLE OF CONTENTS
PAGE
INVESTMENT POLICIES.......................................................
Bank Obligations......................................................
Commercial Paper......................................................
Convertible Securities................................................
Corporate Debt Securities.............................................
Repurchase Agreements.................................................
Repurchase Agreements.................................................
Variable and Floating Rate Demand and Master Demand Notes.............
Loans of Portfolio Securities.........................................
Foreign Securities....................................................
Forward Foreign Currency Exchange Contracts...........................
Interest Rate Futures Contracts.......................................
Stock Index Futures Contracts.........................................
Option Writing and Purchasing.........................................
Options on Futures Contracts..........................................
Risks of Futures and Options Investments..............................
Limitations on Futures Contracts and Options on Futures Contracts.....
North Carolina Municipal Obligations..................................
Securities of Other Investment Companies..............................
INVESTMENT RESTRICTIONS...................................................
MANAGEMENT................................................................
Directors and Officers................................................
Investment Adviser....................................................
Distribution of Fund Shares...........................................
Administrative Services...............................................
DETERMINATION OF NET ASSET VALUE..........................................
PORTFOLIO TRANSACTIONS....................................................
Portfolio Turnover....................................................
TAXATION..................................................................
Centura North Carolina Tax-Free Bond Fund.............................
OTHER INFORMATION.........................................................
Capitalization........................................................
Voting Rights.........................................................
Custodian, Transfer Agent and Dividend Disbursing Agent...............
Yield and Performance Information.....................................
Independent Accountants...............................................
Counsel...............................................................
Registration Statement................................................
Financial Statements..................................................
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INVESTMENT POLICIES
The Prospectus discusses the investment objectives of the Funds and the policies
to be employed to achieve those objectives. This section contains supplemental
information concerning certain types of securities and other instruments in
which the Funds may invest, the investment policies and portfolio strategies
that the Funds may utilize, and certain risks attendant to such investments,
policies and strategies.
Reference herein to "Adviser" include any sub-adviser, if applicable.
BANK OBLIGATIONS (ALL FUNDS). These obligations include negotiable certificates
of deposit and bankers' acceptances. A description of the banks the obligations
of which the Funds may purchase are set forth in the Prospectus. A certificate
of deposit is a short-term, interest-bearing negotiable certificate issued by a
commercial bank against funds deposited in the bank. A bankers' acceptance is a
short-term draft drawn on a commercial bank by a borrower, usually in connection
with an international commercial transaction. The borrower is liable for payment
as is the bank, which unconditionally guarantees to pay the draft at its face
amount on the maturity date.
<PAGE> 120
COMMERCIAL PAPER (ALL FUNDS). Commercial paper includes short-term unsecured
promissory notes, variable rate demand notes and variable rate master demand
notes issued by domestic and foreign bank holding companies, corporations and
financial institutions and similar taxable instruments issued by government
agencies and instrumentalities. All commercial paper purchased by a Fund must
meet the minimum rating criteria for that Fund.
CONVERTIBLE SECURITIES (CENTURA MID CAP EQUITY FUND, CENTURA LARGE CAP EQUITY
FUND, CENTURA SOUTHEAST EQUITY FUND AND CENTURA QUALITY BOND FUND). Convertible
securities give the holder the right to exchange the security for a specific
number of shares of common stock. Convertible securities include convertible
preferred stocks, convertible bonds, notes and debentures, and other securities.
Convertible securities typically involve less credit risk than common stock of
the same issuer because convertible securities are "senior" to common stock --
i.e., they have a prior claim against the issuer's assets. Convertible
securities generally pay lower dividends or interest than non-convertible
securities of similar quality. They may also reflect changes in the value of the
underlying common stock.
CORPORATE DEBT SECURITIES (ALL FUNDS). Fund investments in these securities are
limited to corporate debt securities (corporate bonds, debentures, notes and
similar corporate debt instruments) which meet the rating criteria established
for each Fund.
After purchase by a Fund, a security may cease to be rated or its rating may be
reduced below the minimum required for purchase by the Fund. Neither event will
require a sale of such security by the Fund. However, the Adviser will consider
such event in its determination of whether the Fund should continue to hold the
security. To the extent the ratings given by Moody's Investors Service, Inc.
("Moody's"), Standard & Poor's Corporation ("S&P") or another rating agency may
change as a result of changes in such organizations or their rating systems, the
Funds will attempt to use comparable ratings as standards for investments in
accordance with the investment policies contained in the Prospectus and in this
SAI.
REPURCHASE AGREEMENTS (ALL FUNDS). The Funds may invest in securities subject to
repurchase agreements with U.S. banks or broker-dealers. Such agreements may be
considered to be loans by the Funds for purposes of the Investment Company Act
of 1940, as amended (the "1940 Act"). A repurchase agreement is a transaction in
which the seller of a security commits itself at the time of the sale to
repurchase that security from the buyer at a mutually agreed-upon time and
price. The repurchase price exceeds the sale price, reflecting an agreed-upon
interest rate effective for the period the buyer owns the security subject to
repurchase. The agreed-upon rate is unrelated to the interest rate on that
security. The Adviser will monitor the value of the underlying security at the
time the transaction is entered into and at all times during the term of the
repurchase agreement to insure that the value of the security always equals or
exceeds the repurchase price. In the event of default by the seller under the
repurchase agreement, the Funds may have problems in exercising their rights to
the underlying securities and may incur costs and experience time delays in
connection with the disposition of such securities.
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VARIABLE AND FLOATING RATE DEMAND AND MASTER DEMAND NOTES (ALL FUNDS). The Funds
may, from time to time, buy variable rate demand notes issued by corporations,
bank holding companies and financial institutions and similar taxable and
tax-exempt instruments issued by government agencies and instrumentalities.
These securities will typically have a maturity in the 5 to 20 year range but
carry with them the right of the holder to put the securities to a remarketing
agent or other entity on short notice, typically seven days or less. The
obligation of the issuer of the put to repurchase the securities is backed up by
a letter of credit or other obligation issued by a financial institution. The
purchase price is ordinarily par plus accrued and unpaid interest. Ordinarily,
the remarketing agent will adjust the interest rate every seven days (or at
other intervals corresponding to the notice period for the put), in order to
maintain the interest rate at the prevailing rate for securities with a
seven-day maturity.
The Funds may also buy variable rate master demand notes. The terms of these
obligations permit the investment of fluctuating amounts by the Funds at varying
rates of interest pursuant to direct arrangements between a Fund, as lender, and
the borrower. They permit weekly, and in some instances, daily, changes in the
amounts borrowed. The Funds have the right to increase the amount under the note
at any time up to the full amount provided by the note agreement, or to decrease
the amount, and the borrower may prepay up to the full amount of the note
without penalty. The notes may or may not be backed by bank letters of credit.
Because the notes are direct lending arrangements between the lender and the
borrower, it is not generally contemplated that they will be traded, and there
is no secondary market for them, although they are redeemable (and thus,
immediately repayable by the borrower) at principal amount, plus accrued
interest, at any time. The Funds have no limitations on the type of issuer from
whom the notes will be purchased. However, in connection with such purchase and
on an ongoing basis, the Adviser will consider the earning power, cash flow and
other liquidity ratios of the issuer, and its ability to pay principal and
interest on demand, including a situation in which all holders of such notes
make demand simultaneously. While master demand notes, as such, are not
typically rated by credit rating agencies, if not so rated, the Funds may, under
their minimum rating standards, invest in them only if at the time of an
investment the issuer meets the criteria set forth in the Prospectus for other
comparable debt obligations.
LOANS OF PORTFOLIO SECURITIES (ALL FUNDS). The Funds may lend their portfolio
securities to brokers, dealers and financial institutions, provided: (1) the
loan is secured continuously by collateral consisting of U.S. Government
securities or cash or letters of credit maintained on a daily mark-to-market
basis in an amount at least equal to the current market value of the securities
loaned; (2) the Funds may at any time call the loan and obtain the return of the
securities loaned within five business days; (3) the Funds will receive any
interest or dividends paid on the loaned securities; and (4) the aggregate
market value of securities loaned will not at any time exceed 5% of the total
assets of a particular Fund.
<PAGE> 122
The Funds will earn income for lending their securities because cash collateral
pursuant to these loans will be invested in short-term money market instruments.
In connection with lending securities, the Funds may pay reasonable finders,
administrative and custodial fees. Loans of securities involve a risk that the
borrower may fail to return the securities or may fail to provide additional
collateral.
FOREIGN SECURITIES (CENTURA MID CAP EQUITY FUND, CENTURA LARGE CAP EQUITY FUND,
CENTURA SOUTHEAST EQUITY FUND AND CENTURA QUALITY BOND FUND). As described in
the Prospectus, changes in foreign exchange rates will affect the value of
securities denominated or quoted in currencies other than the U.S. dollar.
Since Centura Mid Cap Equity Fund, Centura Large Cap Equity Fund and Centura
Southeast Equity Fund may invest in securities denominated in currencies other
than the U.S. dollar, and since those Funds may temporarily hold funds in bank
deposits or other money market investments denominated in foreign currencies,
the Funds may be affected favorably or unfavorably by exchange control
regulations or changes in the exchange rate between such currencies and the
dollar. Changes in foreign currency exchange rates will influence values of
securities in the Funds' portfolios, from the perspective of U.S. investors.
Changes in foreign currency exchange rates may also affect the value of
dividends and interest earned, gains and losses realized on the sale of
securities, and net investment income and gains, if any, to be distributed to
shareholders by the Funds. The rate of exchange between the U.S. dollar and
other currencies is determined by the forces of supply and demand in the foreign
exchange markets. These forces are affected by the international balance of
payments and other economic and financial conditions, government intervention,
speculation and other factors.
FORWARD FOREIGN CURRENCY EXCHANGE CONTRACTS (CENTURA MID CAP EQUITY FUND,
CENTURA LARGE CAP EQUITY FUND AND CENTURA SOUTHEAST EQUITY FUND). Centura Mid
Cap Equity Fund, Centura Large Cap Equity Fund and Centura Southeast Equity Fund
may enter into forward foreign currency exchange contracts in order to protect
against uncertainty in the level of future foreign exchange rates. A forward
foreign currency exchange contract involves an obligation to purchase or sell a
specific currency at a future date, which may be any fixed number of days from
the date of the contract agreed upon by the parties, at a price set at the time
of the contract. These contracts are entered into in the interbank market
conducted between currency traders (usually large commercial banks) and their
customers. Forward foreign currency exchange contracts may be bought or sold to
protect the Funds against a possible loss resulting from an adverse change in
the relationship between foreign currencies and the U.S. dollar, or between
foreign currencies. Although such contracts are intended to minimize the risk of
loss due to a decline in the value of the hedged currency, at the same time,
they tend to limit any potential gain which might result should the value of
such currency increase.
INTEREST RATE FUTURES CONTRACTS (CENTURA FEDERAL SECURITIES INCOME FUND, CENTURA
NORTH CAROLINA TAX-FREE BOND FUND AND CENTURA QUALITY BOND FUND). These Funds
may purchase and sell interest rate futures contracts ("futures contracts") as a
hedge against changes in interest rates. A futures contract is an agreement
<PAGE> 123
between two parties to buy and sell a security for a set price on a future date.
Futures contracts are traded on designated "contracts markets" which, through
their clearing corporations, guarantee performance of the contracts. Currently,
there are futures contracts based on securities such as long-term U.S. Treasury
bonds, U.S. Treasury notes, GNMA Certificates and three-month U.S. Treasury
bills. For municipal securities, there is the Bond Buyer Municipal Bond Index.
Generally, if market interest rates increase, the value of outstanding debt
securities declines (and vice versa). Entering into a futures contract for the
sale of securities has an effect similar to the actual sale of securities,
although sale of the futures contract might be accomplished more easily and
quickly. For example, if a Fund holds long-term U.S. Government securities and
the Adviser anticipates a rise in long-term interest rates, the Fund could, in
lieu of disposing of its portfolio securities, enter into futures contracts for
the sale of similar long-term securities. If rates increased and the value of
the Fund's portfolio securities declined, the value of the Fund's futures
contracts would increase, thereby protecting the Fund by preventing net asset
value from declining as much as it otherwise would have. Similarly, entering
into futures contracts for the purchase of securities has an effect similar to
actual purchase of the underlying securities, but permits the continued holding
of securities other than the underlying securities. For example, if the Adviser
expects long-term interest rates to decline, the Fund might enter into futures
contracts for the purchase of long-term securities, so that it could gain rapid
market exposure that may offset anticipated increases in the cost of securities
it intends to purchase, while continuing to hold higher-yielding short-term
securities or waiting for the long-term market to stabilize.
STOCK INDEX FUTURES CONTRACTS (CENTURA MID CAP EQUITY FUND, CENTURA LARGE CAP
EQUITY FUND AND CENTURA SOUTHEAST EQUITY FUND). These Funds may enter into stock
index futures contracts in order to protect the value of their common stock
investments. A stock index futures contract is an agreement in which one party
agrees to deliver to the other 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 the last trading day of the contract and the price at which the
agreement is made. As the aggregate market value of the stocks in the index
changes, the value of the index also will change. In the event that the index
level rises above the level at which the stock index futures contract was sold,
the seller of the stock index futures contract will realize a loss determined by
the difference between the purchase level and the index level at the time of
expiration of the stock index futures contract, and the purchaser will realize a
gain in that amount. In the event the index level falls below the level at which
the stock index futures contract was sold, the seller will recognize a gain
determined by the difference between the two index levels at the expiration of
the stock index futures contract, and the purchaser will realize a loss. Stock
index futures contracts expire on a fixed date, currently one to seven months
from the date of the contract, and are settled upon expiration of the contract.
Centura Mid Cap Equity Fund, Centura Large Cap Equity Fund and Centura Southeast
Equity Fund will utilize stock index futures contracts only for the purpose of
attempting to protect the value of their common stock portfolios in the event of
a decline in stock prices and, therefore, usually will be sellers of stock index
<PAGE> 124
futures contracts. This risk management strategy is an alternative to selling
securities in the portfolio and investing in money market instruments. Also,
stock index futures contracts may be purchased to protect a Fund against an
increase in prices of stocks which that Fund intends to purchase. If the Fund is
unable to invest its cash (or cash equivalents) in stock in an orderly fashion,
the Fund could purchase a stock index futures contract which may be used to
offset any increase in the price of the stock. However, it is possible that the
market may decline instead, resulting in a loss on the stock index futures
contract. If the Fund then concludes not to invest in stock at that time, or if
the price of the securities to be purchased remains constant or increases, the
Fund will realize a loss on the stock index futures contract that is not offset
by a reduction in the price of securities purchased. These Funds also may buy or
sell stock index futures contracts to close out existing futures positions.
OPTION WRITING AND PURCHASING (ALL FUNDS EXCEPT CENTURA MONEY MARKET FUND). A
Fund may write (or sell) put and call options on the securities that the Fund is
authorized to buy or already holds in its portfolio. These option contracts may
be listed for trading on a national securities exchange or traded
over-the-counter. A Fund may also purchase put and call options. A Fund will not
write covered calls on more than 25% of its portfolio, and a Fund will not write
covered calls with strike prices lower than the underlying securities' cost
basis on more than 25% of its total portfolio. A Fund may not invest more than
5% of its total assets in option purchases.
A call option gives the purchaser the right to buy, and the writer the
obligation to sell, the underlying security at the agreed upon exercise (or
"strike") price during the option period. A put option gives the purchaser the
right to sell, and the writer the obligation to buy, the underlying security at
the strike price during the option period. Purchasers of options pay an amount,
known as a premium, to the option writer in exchange for the right under the
option contract.
A Fund may sell "covered" put and call options as a means of hedging the price
risk of securities in the Fund's portfolio. The sale of a call option against an
amount of cash equal to the put's potential liability constitutes a "covered
put." When a Fund sells an option, if the underlying securities do not increase
(in the case of a call option) or decrease (in the case of a put option) to a
price level that would make the exercise of the option profitable to the holder
of the option, the option will generally expire without being exercised and the
Fund will realize as profit the premium paid for such option. When a call option
of which a Fund is the writer is exercised, the option holder purchases the
underlying security at the strike price and the Fund does not participate in any
increase in the price of such securities above the strike price. When a put
option of which a Fund is the writer is exercised, the Fund will be required to
purchase the underlying securities at the strike price, which may be in excess
of the market value of such securities. At the time a Fund writes a put option
or a call option on a security it does not hold in its portfolio in the amount
required under the option, it will establish and maintain a segregated account
with its custodian consisting solely of cash, U.S. Government securities and
other liquid high grade debt obligations equal to its liability under the
option.
<PAGE> 125
Over-the-counter options ("OTC options") differ from exchange-traded options in
several respects. They are transacted directly with dealers and not with a
clearing corporation, and there is a risk of non-performance by the dealer. OTC
options are available for a greater variety of securities and for a wider range
of expiration dates and exercise prices than tradedge- traded options. Because
OTC options are not traded on an exchange, pricing is normally done by reference
to information from a market marker. This information is carefully monitored by
the Adviser and verified in appropriate cases. OTC options transactions will be
made by a Fund only with recognized U.S. Government securities dealers. OTC
options are subject to the Funds' 15% limit on investments in securities which
are illiquid or not readily marketable (see "Investment Restrictions"), provided
that OTC option transactions by a Fund with a primary U.S. Government securities
dealer which has given the Fund an absolute right to repurchase according to a
"repurchase formula" will not be subject to such 15% limit.
It may be a Fund's policy, in order to avoid the exercise of an option sold by
it, to cancel its obligation under the option by entering into a closing
purchase transaction, if available, unless it is determined to be in the Fund's
interest to sell (in the case of a call option) or to purchase (in the case of a
put option) the underlying securities. A closing purchase transaction consists
of a Fund purchasing an option having the same terms as the option sold by the
Fund and has the effect of canceling the Fund's position as a seller. The
premium which a Fund will pay in executing a closing purchase transaction may be
higher than the premium received when the option was sold, depending in large
part upon the relative price of the underlying security at the time of each
transaction. To the extent options sold by a Fund are exercised and the Fund
either delivers portfolio securities to the holder of a call option or
liquidates securities in its portfolio as a source of funds to purchase
securities put to the Fund, the Fund's portfolio turnover rate may increase,
resulting in a possible increase in short-term capital gains and a possible
decrease in long-term capital gains.
OPTIONS ON FUTURES CONTRACTS (ALL FUNDS EXCEPT CENTURA MONEY MARKET FUND). A
Fund may purchase and write put and call options on futures contracts that are
traded on a U.S. exchange or board of trade and enter into related closing
transactions to attempt to gain additional protection against the effects of
interest rate, currency or equity market fluctuations. There can be no assurance
that such closing transactions will be available at all times. In return for the
premium paid, such an option gives the purchaser the right to assume a position
in a futures contract at any time during the option period for a specified
exercise price.
A Fund may purchase put options on futures contracts in lieu of, and for the
same purpose as, the sale of a futures contract. It also may purchase such put
options in order to hedge a long position in the underlying futures contract.
The purchase of call options on futures contracts is intended to serve the same
purpose as the actual purchase of the futures contracts. A Fund may purchase
call options on futures contracts in anticipation of a market advance when it is
not fully invested.
<PAGE> 126
A Fund may write a call option on a futures contract in order to hedge against a
decline in the prices of the index or debt securities underlying the futures
contracts. If the price of the futures contract at expiration is below the
exercise price, the Fund would retain the option premium, which would offset, in
part, any decline in the value of its portfolio securities.
The writing of a put option on a futures contract is similar to the purchase of
the futures contracts, except that, if market price declines, a Fund would pay
more than the market price for the underlying securities or index units. The net
cost to that Fund would be reduced, however, by the premium received on the sale
of the put, less any transactions costs.
RISKS OF FUTURES AND OPTIONS INVESTMENTS (ALL FUNDS EXCEPT CENTURA MONEY MARKET
FUND). A Fund will incur brokerage fees in connection with its futures and
options transactions, and it will be required to segregate funds for the benefit
of brokers as margin to guarantee performance of its futures and options
contracts. In addition, while such contracts will be entered into to reduce
certain risks, trading in these contracts entails certain other risks. Thus,
while a Fund may benefit from the use of futures contracts and related options,
unanticipated changes in interest rates may result in a poorer overall
performance for that Fund than if it had not entered into any such contracts.
Additionally, the skills required to invest successfully in futures and options
may differ from skills required for managing other assets in the Fund's
portfolio.
LIMITATIONS ON FUTURES CONTRACTS AND OPTIONS ON FUTURES CONTRACTS (ALL FUNDS
EXCEPT CENTURA MONEY MARKET FUND). Each Fund will use financial futures
contracts and related options only for "bona fide hedging" purposes, as such
term is defined in applicable regulations of the CFTC, or, with respect to
positions in financial futures and related options that do not qualify as "bona
fide hedging" positions, will enter such non-hedging positions only to the
extent that aggregate initial margin deposits plus premiums paid by it for open
futures option positions, less the amount by which any such positions are
"in-the-money," would not exceed 5% of the Fund's total assets. Futures
contracts and related put options written by a Fund will be offset by assets
held in a segregated custodial account sufficient to satisfy the Fund's
obligations under such contracts and options.
NORTH CAROLINA MUNICIPAL OBLIGATIONS (CENTURA NORTH CAROLINA TAX-FREE BOND FUND
AND CENTURA QUALITY BOND FUND). The ability of Centura North Carolina Tax-Free
Bond Fund to achieve its investment objective depends on the ability of issuers
of North Carolina Municipal Obligations to meet their continuing obligations for
the payment of principal and interest.
North Carolina Municipal Obligations are debt securities issued by the state of
North Carolina, its political subdivisions, and the districts, authorities,
agencies and instrumentalities of the state and its political subdivisions, the
interest on which is exempt from regular federal and North Carolina income
taxes.
<PAGE> 127
North Carolina municipal bonds are issued for various public purposes, including
the construction of housing, pollution abatement facilities, health care and
prison facilities, and educational facilities.
Unlike other types of investments, municipal securities have traditionally not
been subject to registration with, or other regulation by, the Securities and
Exchange Commission ("SEC"). However, there have been proposals which could lead
to future regulations of these securities by the SEC.
MUNICIPAL LEASE OBLIGATIONS (CENTURA NORTH CAROLINA TAX-FREE BOND FUND AND
CENTURA QUALITY BOND FUND). Municipal lease obligations are municipal securities
that may be supported by a lease or an installment purchase contract issued by
state and local government authorities to acquire funds to obtain the use of a
wide variety of equipment and facilities such as fire and sanitation vehicles,
computer equipment and other capital assets. These obligations, which may be
secured or unsecured, are not general obligations and have evolved to make it
possible for state and local government authorities to obtain the use of
property and equipment without meeting constitutional and statutory requirements
for the issuance of debt. Thus, municipal lease obligations have special risks
not normally associated with municipal bonds. These obligations frequently
contain "non-appropriation" clauses that provide that the governmental issuer of
the obligation has no obligation to make future payments under the lease or
contract unless money is appropriated for such purposes by the legislative body
on a yearly or other periodic basis. In addition to the "non-appropriation"
risk, many municipal lease obligations have not yet developed the depth of
marketability associated with municipal bonds; moreover, although the
obligations may be secured by the leased equipment, the disposition of the
equipment in the event of foreclosure might prove difficult. In order to limit
certain of these risks, the Fund will limit its investments in municipal lease
obligations that are illiquid, together with all other illiquid securities in
its portfolio, to not more than 15% of its assets. The liquidity of municipal
lease obligations purchased by the Fund will be determined pursuant to
guidelines approved by the Board of Directors. Factors considered in making such
determinations may include; the frequency of trades and quotes for the
obligation; the number of dealers willing to purchase or sell the security and
the number of other potential buyers; the willingness of dealers to undertake to
make a market; the obligation's rating; and, if the security is unrated, the
factors generally considered by a rating agency.
SECURITIES OF OTHER INVESTMENT COMPANIES (ALL FUNDS). Each Fund may invest in
securities issued by the other investment companies. Each of these Funds
currently intends to limit its investments so that, as determined immediately
after a securities purchase is made: (a) not more than 5% of the value of its
total assets will be invested in the securities of any one investment company;
(b) not more than 10% of the value of its total assets will be invested in the
aggregate in securities of investment companies as a group; (c) not more than 3%
of the outstanding voting stock of any one investment company will be owned by
any of the Funds; and (d) not more than 10% of the outstanding voting stock of
any one investment company will be owned in the aggregate by the Funds. As a
<PAGE> 128
shareholder of another investment company, a Fund would bear, along with other
shareholders, its pro rata portion of that company's expenses, including
advisory fees. These expenses would be in addition to the advisory and other
expenses that the Fund bears directly in connection with its own operations.
Investment companies in which a Fund may invest may also impose a sales or
distribution charge in connection with the purchase or redemption of their
shares and other types of commissions or charges. Such charges will be payable
by the Funds and, therefore, will be borne indirectly by Shareholders.
REAL ESTATE INVESTMENT TRUSTS (ALL FUNDS EXCEPT CENTURA NORTH CAROLINA TAX-FREE
BOND FUND AND CENTURA MONEY MARKET FUND). A Fund may invest to a limited extent
in equity or debt real estate investment trusts ("REITs"). Equity REITs are
trusts that sell shares to investors and use the proceeds to invest in real
estate or interests in real estate. Debt REITs invest in obligations secured by
mortgages on real property or interest in real property. A REIT may focus on
particular types of projects, such as apartment complexes or shopping centers,
or on particular geographic regions, or both. An investment in a REIT may be
subject to certain risks similar to those associated with direct ownership of
real estate, including: declines in the value of real estate; risks related to
general and local economic conditions, overbuilding and competition; increases
in property taxes and operating expenses; and variations in rental income. Also,
REITs may not be diversified. A REIT may fail to qualify for pass-through tax
treatment of its income under the Internal Revenue Code and may also fail to
maintain its exemption from registration under the Investment Company Act of
1940. Also, REITs (particularly equity REITs) may be dependent upon management
skill and face risks of failing to obtain adequate financing on favorable terms.
INVESTMENT RESTRICTIONS
The following restrictions are fundamental policies of each Fund, and except as
otherwise indicated, may not be changed with respect to a Fund without the
approval of a majority of the outstanding voting securities of that Fund which,
as defined in the Investment Company Act of 1940 ("1940 Act"), means the lesser
of (1) 67% of the shares of such Fund present at a meeting if the holders of
more than 50% of the outstanding shares of such Fund are present in person or by
proxy, or (2) more than 50% of the outstanding voting shares of such Fund.
Each Fund (other than Centura Money Market Fund), except as indicated, may not:
(1) with respect to 75% of its total assets, purchase more than 10% of the
voting securities of any one issuer or invest more than 5% of the value of
such assets in the securities or instruments of any one issuer, except
securities or instruments issued or guaranteed by the U.S. Government, its
agencies or instrumentalities;
(2) Borrow money except that a Fund may borrow from banks up to 10% of the
current value of its total net assets for temporary or emergency purposes;
a Fund will make no purchase if its outstanding borrowings exceed 5% of its
total assets;
(3) Invest in real estate, provided that a Fund may invest in readily
<PAGE> 129
marketable securities (except limited partnership interests) of issuers
that deal in real estate and securities secured by real estate or interests
therein and a Fund may hold and sell real estate (a) used principally for
its own office space or (b) acquired as a result of a Fund's ownership of
securities;
(4) Engage in the business of underwriting securities of other issuers,
except to the extent that the purchase of securities directly from the
issuer (either alone or as one of a group of bidders) or the disposal of an
investment position may technically cause it to be considered an
underwriter as that term is defined under the Securities Act of 1933;
(5) Make loans, except that a Fund may (a) lend its portfolio securities,
(b) enter into repurchase agreements and (c) purchase the types of debt
instruments described in the Prospectus or the SAI;
(6) Purchase securities or instruments which would cause 25% or more of the
market value of the Fund's total assets at the time of such purchase to be
invested in securities or instruments of one or more issuers having their
principal business activities in the same industry, provided that there is
no limit with respect to investments in the U.S. Government, its agencies
and instrumentalities;
(7) Issue any senior securities, except as appropriate to evidence
indebtedness which it is permitted to incur, and provided that collateral
arrangements with respect to forward contracts, futures contracts or
options, including deposits of initial and variation margin, are not
considered to be the issuance of a senior security for purposes of this
restriction; or
(8) Purchase or sell commodity contracts, except that the Fund may invest
in futures contracts and in options related to such contracts (for purposes
of this restriction, forward foreign currency exchange contracts are not
deemed to be commodities).
For restriction number 1, above, with respect to Centura North Carolina Tax-Free
Bond Fund, the state of North Carolina and each of its political subdivisions,
as well as each district, authority, agency or instrumentality of North Carolina
or of its political subdivisions will be deemed to be a separate issuer, and all
indebtedness of any issuer will be deemed to be a single class of securities.
Securities backed only by the assets of a non-governmental user will be deemed
to be issued by that user. Restriction number 6, above, will prevent Centura
North Carolina Tax-Free Bond Fund from investing 25% or more of its total assets
in industrial building revenue bonds issued to finance facilities for
non-governmental issuers in any one industry, but this restriction does not
apply to any other tax-free Municipal Obligations. For purposes of investment
restriction number (1), Centura Quality Income Fund considers a Municipal
Obligation to be issued by the government entity (or entities) whose assets and
revenues back the Municipal Obligation. For a Municipal Obligation backed only
by the assets and revenues of a nongovernmental user, such user is deemed to be
<PAGE> 130
the issuer; such issuers to the extent their principal business activities are
in the same industry, are also subject to investment restriction (2). For
purposes of investment restriction number 6, public utilities are not deemed to
be a single industry but are separated by industrial categories, such as
telephone or gas utilities. For purposes of restriction number 7, with respect
to its futures transactions and writing of options (other than fully covered
call options), a Fund will maintain a segregated account for the period of its
obligation under such contract or option consisting of cash, U.S. Government
securities and other liquid high grade debt obligations in an amount equal to
its obligations under such contracts or options.
With respect to Centura Money Market Fund, only:
(1) The Fund has elected to be qualified as a diversified series of an
open-end investment company.
(2) The Fund may not purchase securities or instruments which would cause
25% or more of the market value of its total assets at the time of such
purchase to be invested in securities or instruments of one or more issuers
having their principal business activities in the same industry, provided
that there is no limit with respect to investments in the U.S. Government,
its agencies and instrumentalities (including repurchase agreements with
respect to such investments) and provided also that the Fund may invest more
than 25% of its assets in instruments issued by domestic banks.
(3) The Fund may not borrow money, except as permitted under the Investment
Company Act to 1940, as amended, and as interpreted from time to time by
regulatory authority having jurisdiction, from time to time.
(4) The Fund may not make loans to other persons, except (i) loans of
portfolio securities, and (ii) to the extent that entry into repurchase
agreements and the purchase of debt instruments or interests in indebtedness
in accordance with the Fund's investment objective and policies may be
deemed to be loans.
(5) The Fund may not issue senior securities, except as permitted under the
Investment Company Act of 1940, as amended, and as interpreted or modified
by regulatory authority having jurisdiction, from time to time.
(6) The Fund may not engage in the business of underwriting securities
issued by others, except to the extent that the Fund may be deemed to be an
underwriter in connection with the disposition of portfolio securities.
(7) The Fund may not purchase or sell real estate, which term does not
include securities of companies that deal in real estate or mortgages or
investment secured by real estate or interests therein, except that the Fund
reserves freedom of action to hold and to sell real estate acquired as a
result of the Fund's ownership of securities.
(8) The Fund may not purchase physical commodities or contracts relating to
physical commodities.
<PAGE> 131
The following policies apply to each of the Funds other than Centura Money
Market Fund and Centura Quality Income Fund. These are non-fundamental and may
be changed by the Board of Directors without shareholder approval. These
policies provide that a Fund, except as otherwise specified, may not:
(a) Invest in companies for the purpose of exercising control or management;
(b) Knowingly purchase securities of other investment companies, except (i) in
connection with a merger, consolidation, acquisition, or reorganization; and
(ii) the equity and fixed income funds may invest up to 10% of their net
assets in shares of other investment companies;
(c) Purchase securities on margin, except that a Fund may obtain such short-term
credits as may be necessary for the clearance of purchases and sales of
securities;
(d) Mortgage, pledge, or hypothecate any of its assets, except that a Fund may
pledge not more than 15% of the current value of the Fund's total net
assets;
(e) Purchase or retain the securities of any issuer, if those individual
officers and Directors of the Company, the Adviser, the Administrator, or
the Distributor, each owning beneficially more than 1/2 of 1% of the
securities of such issuer, together own more than 5% of the securities of
such issuer;
(f) Invest more than 5% of its net assets in warrants which are unattached to
securities; included within that amount, no more than 2% of the value of the
Fund's net assets, may be warrants which are not listed on the New York or
American Stock Exchanges;
(g) Write, purchase or sell puts, calls or combinations thereof, except as
described in the Prospectus or SAI;
(h) Invest more than 5% of the current value of its total assets in the
securities of companies which, including predecessors, have a record of less
than three years' continuous operation;
(i) Invest more than 15% of the value of its net assets in investments which are
illiquid or not readily marketable (including repurchase agreements having
maturities of more than seven calendar days and variable and floating rate
demand and master demand notes not requiring receipt of the principal note
amount within seven days' notice); or
(j) Invest in oil, gas or other mineral exploration or development programs,
although it may invest in issuers that own or invest in such programs.
<PAGE> 132
MANAGEMENT
DIRECTORS AND OFFICERS
The principal occupations of the Directors and executive officers of the Company
for the past five years are listed below. Directors deemed to be "interested
persons" of the Company for purposes of the 1940 Act are indicated by an
asterisk.
POSITION WITH
NAME, ADDRESS AND AGE COMPANY PRINCIPAL OCCUPATION
Leslie H. Garner, Jr. Director President, Cornell College.
Cornell College
600 First Street West
Mount Vernon, IA 52314-1098
Age: 45
James H. Speed, Jr. Director Hardee's Food Systems,
1233 Hardee's Blvd. Inc. -- Vice President
Rocky Mount, NC 27802 Controller (1991-present);
Age: 43 Deloitte & Touche
-- Senior Audit Manager
(1979-1991).
Frederick E. Turnage Director Attorney.
149 North Franklin St.
Rocky Mount, NC 27628
Age: 60
*Lucy Hancock Bode Director Lobbyist.
P.O. Box 6338
Raleigh, NC 27628
Age: 44
*J. Franklin Martin Director President of LandCraft
LandCraft Properties Properties (1978-present).
227 W. Trade Street, Suite 2730
Charlotte, NC 28202
Age: 51
George R. Landreth President BISYS -- Senior Vice
Age: 56 President of Client
Services (1993-present).
Ellen Stoutamire(1) Secretary BISYS -- Registration and
Age: 48 Compliance Officer
(1995-present);
Attorney -- private
practice (1990-1995).
<PAGE> 133
POSITION WITH
NAME, ADDRESS AND AGE COMPANY PRINCIPAL OCCUPATION
Joel Engle(1) Assistant Treasurer BISYS -- Vice President-
Age: 33 Principal and Financial (1998-present); The
Northern Trust Company--
Vice President (1995-98);
previously, Ernst & Young
LLP Investment Company
Services Group - Audit
Manager.
(1) Address is 3435 Stelzer Road, Columbus, Ohio 43219.
Directors of the Company who are not directors, officers or employees of the
Adviser or the Administrator receive from the Company an annual retainer of
$3,000 (plus $750 for serving on the Board's Audit Committee) and a fee of $750
for each Board of Directors and Board committee meeting of the Company attended
and are reimbursed for all out-of-pocket expenses relating to attendance at such
meetings. Directors who are directors, officers or employees of the Adviser or
the Administrator do not receive compensation from the Company. The table below
sets forth the compensation received by each Director from the Company for the
fiscal year ended April 30, 1998.
<TABLE>
<CAPTION>
PENSION OR TOTAL
RETIREMENT COMPENSATION
AGGREGATE BENEFITS ACCRUED ESTIMATED ANNUAL FROM FUND AND
NAME OF PERSON, COMPENDATION AS A PART OF FUND BENEFITS UPON FUND CONMPLEX
POSITION FROM FUND EXPENSES RETIREMENT PAID TO DIRECTORS
- --------------- ------------ ----------------- --------------- -----------------
<S> <C> <C> <C> <C>
Leslie H. Garner, Jr $5,700 -0- -0- $5,700
James H. Speed, Jr. $5,200 -0- -0- $5,200
Frederick E. Turnage $5,700 -0- -0- $5,700
Lucy Hancock Bode $5,200 -0- -0- $5,200
J. Franklin Martin $5,200 -0- -0- $5,200
</TABLE>
As of July 30, 1998, the Officers and Directors of the Company, as a group, own
less than 1% of the outstanding shares of the Funds.
<PAGE> 134
As of July 30, 1998, the following individuals owned 5% or more of the Class C
shares of the Funds:
CENTURA MID CAP EQUITY FUND
SHARES OWNED PERCENTAGE OWNED
------------ ----------------
Centura Bank 3,196,665.113 29.16%*
Cash Account
Attn: Trust Operations
P.O. Box 1220
Rocky Mount, NC 27802-1220
Centura Bank 7,601,758.898 69.33%*
Reinvest Account
Attn: Trust Operations
P.O. Box 1220
Rocky Mount, NC 27802-1220
* Disclaims beneficial ownership.
CENTURA FEDERAL SECURITIES INCOME FUND
SHARES OWNED PERCENTAGE OWNED
------------ ----------------
Centura Bank 5,362,303.839 42.28%*
Cash Account
Attn: Trust Operations
P.O. Box 1220
Rocky Mount, NC 27802-1220
Centura Bank 7,241,229.712 57.09%*
Reinvest Account
Attn: Trust Operations
P.O. Box 1220
Rocky Mount, NC 27802-1220
* Disclaims beneficial ownership.
NORTH CAROLINA TAX-FREE BOND FUND
SHARES OWNED PERCENTAGE OWNED
------------ ----------------
Centura Bank 3,591,554.016 96.22%*
Cash Account
Attn: Trust Operations
P.O. Box 1220
Rocky Mount, NC 27802-1220
* Disclaims beneficial ownership.
CENTURA LARGE CAP EQUITY FUND
SHARES OWNED PERCENTAGE OWNED
------------ ----------------
Centura Bank 2,632,579.574 52.38%*
Reinvest Account
Attn: Trust Operations
P.O. Box 1220
Rocky Mount, NC 27802-1220
Centura Bank 2,362,841.710 47.01%*
Cash Account
Attn: Trust Operations
P.O. Box 1220
Rocky Mount, NC 27802-1220
* Disclaims beneficial ownership.
CENTURA SOUTHEAST EQUITY FUND
SHARES OWNED PERCENTAGE OWNED
------------ ----------------
Centura Bank 1,246,231.451 55.68%*
Reinvest Account
Attn: Trust Operations
P.O. Box 1220
Rocky Mount, NC 27802-1220
Centura Bank 968,934.981 43.29%*
Cash Account
Attn: Trust Operations
P.O. Box 1220
Rocky Mount, NC 27802-1220
* Disclaims beneficial ownership.
<PAGE> 135
CENTURA MONEY MARKET FUND
SHARES OWNED PERCENTAGE OWNED
------------ ----------------
Centura Bank 46,448,862.490 95.90%*
Cash Account
Attn: Trust Operations
P.O. Box 1220
Rocky Mount, NC 27802-1220
* Disclaims beneficial ownership.
INVESTMENT ADVISER
Centura Bank (the "Adviser") 131 North Church Street, Rocky Mountain, North
Carolina 27802, serves as investment adviser to the Funds. For these services,
the Adviser receives from each Fund a fee at an annual rate based on each Fund's
average daily net assets. The rates for each Fund are 0.70% for Centura Mid Cap
Equity Fund, 0.70% for Centura Large Cap Equity Fund, 0.30% for Centura Federal
Securities Income Fund, 0.35% for Centura North Carolina Tax-Free Bond Fund,
0.70% for Centura Southeast Equity Fund, 0.60% for Centura Quality Income Fund
and 0.30% for Centura Money Market Fund.
Under the terms of the Investment Advisory Agreement for the Funds between the
Company and the Adviser ("Agreement"), the investment advisory services of the
Adviser to the Funds are not exclusive. The Adviser is free to, and does, render
investment advisory services to others.
The Agreement will continue in effect with respect to each Fund for a period
more than two years from the date of its execution, only as long as such
continuance is approved at least annually (i) by vote of the holders of a
majority of the outstanding voting securities of each Fund or by the Board of
Directors and (ii) by a majority of the Directors who are not parties to the
Agreement or "interested persons" (as defined in the 1940 Act) of any such
party. With respect to all the Funds other than Centura Large Cap Equity Fund,
Centura Southeast Equity Fund, Centura Quality Income Fund and Centura Money
Market Fund, the Agreement was approved by the Board of Directors, including a
majority of the Directors who are not parties to the Agreement or interested
persons of any such parties, at a meeting called for the purpose of voting on
the Agreement, held on April 26, 1994, and by the sole shareholder of the Funds
on April 26, 1994.
With respect to Centura Large Cap Equity Fund, Centura Southeast Equity Fund,
Centura Quality Income Fund and Centura Money Market Fund, respectively, the
Agreement was approved by the Board of Directors, including a majority of the
Directors who are not parties to the Agreement or interested persons of any such
parties, at meetings called for such purpose held on July 24, 1996 (for Large
Cap Equity Fund), January 29, 1997 (for Southeast Equity Fund), January 27, 1999
(for Centura Quality Income Fund) and April 27, 1998 (for Centura Money Market
Fund) and by the sole shareholder of each such Fund on July 24, 1996 (for Large
<PAGE> 136
Cap Equity Fund), January 29, 1997 (for Southeast Equity Fund), January 27, 1999
(for Centura Quality Income Fund) and June 1, 1998 (for Centura Money Market
Fund). This Agreement, as it relates to all Centura Funds (except Centura Money
Market Fund), was re-approved at the April 27, 1998 Board of Directors Meeting.
The Agreement may be terminated at any time without penalty by vote of the
Directors (with respect to the Company or a Fund) or, with respect to any Fund,
by vote of the Directors or the shareholders of that fund, or by the Adviser, on
60 days written notice by either party to the Agreement and will terminate
automatically if assigned.
For the fiscal year ended April 30, 1998, the Adviser received Advisory fees in
the amount of $1,362,369, $442,170, $191,290, $382,159 and $140,332 from the Mid
Cap Equity Fund, Large Cap Equity Fund, Southeast Equity Fund, Federal
Securities Income Fund and the North Carolina Tax-Free Bond Fund, respectively.
For the year ended April 30, 1998, the Advisor waived fees in the amount of
$214,769, $25,157 and $100,237 for the Large Cap Equity Fund, Southeast Equity
Fund and the North Carolina Tax-Free Bond Fund, respectively. (As of the fiscal
year ended April 30, 1998, the Centura Quality Income Fund and Money Market Fund
had not yet commenced operations.) For the fiscal year ended April 30, 1997, the
Adviser received $1,127,435 from the Mid Cap Equity Fund and $358,174 from the
Federal Securities Income Fund in advisory fees. The Adviser was entitled to
$140,821 from the North Carolina Tax-Free Bond Fund and $217,106 from the Large
Cap Equity Fund, but waived $100,587 and $105,451, respectively. For the fiscal
year ended April 30, 1996, the Adviser received the following in advisory fees:
$802,888 from the Mid Cap Equity Fund, $312,098 from the Federal Securities
Income Fund and was entitled to $138,274 from the North Carolina Tax-Free Bond
Fund but waived $99,774.
SUB-ADVISER
Sovereign Advisers, 6302 Fairview Road, Suite 450, Charlotte, North Carolina
28210, serves as sub-adviser to Centura Quality Income Fund. For its services to
that Fund, it receives a fee from the Adviser at an annual rate of 0.30% based
on the Fund's average daily net assets. The Sub-Advisory Agreement contains
provisions similar to the Investment Advisory Agreement regarding
non-exclusivity and conditions for continuation and termination provided that
the Adviser may also terminate the Sub-Advisory Agreement. The Sub-Advisory
Agreement is effective as of May 3, 1999 and its continuation beyond May 3, 2001
is subject to conditions similar to those described above the Investment
Advisory Agreement.
DISTRIBUTION OF FUND SHARES
Centura Funds Distributor, Inc. (the "Distributor") serves as principal
underwriter for the shares of the Funds pursuant to a Distribution Contract. The
Distribution Contract provides that the Distributor will use its best efforts to
maintain a broad distribution of the Funds' shares among bona fide investors and
may enter into selling group agreements with responsible dealers and dealer
<PAGE> 137
managers as well as sell the Funds' shares to individual investors. The
Distributor is not obligated to sell any specific amount of shares.
Service and distribution plans (the "Plans") have been adopted by each of the
Funds for Class A shares and by each Fund (except Centura Money Market Fund) for
Class B shares providing for different rates of fee payment with respect to each
of those classes of shares, as described in the Prospectus. No Plan has been
adopted for Class C shares.
ADMINISTRATIVE SERVICES
BISYS Fund Services Limited Partnership d/b/a BISYS Fund Services ("BISYS") is
the Sponsor and Administrator of the Funds and provides administrative services
necessary for the operation of the Funds, including among other things, (i)
preparation of shareholder reports and communications, (ii) regulatory
compliance, such as reports to and filings with the Securities and Exchange
Commission ("SEC") and state securities commissions and (iii) general
supervision of the operation of the Funds, including coordination of the
services performed by the Funds' Adviser, Sub-Adviser, Distributor, custodians,
independent accountants, legal counsel and others. In addition, BISYS furnishes
office space and facilities required for conducting the business of the Funds
and pays the compensation of the Funds' officers, employees and Directors
affiliated with BISYS. For these services, BISYS receives from each Fund a fee,
payable monthly, at the annual rate of 0.15% of each Fund's average daily net
assets.
BISYS is a subsidiary of BISYS Group, Inc, which is headquartered in Little
Falls, New Jersey and supports more than 5,000 financial institutions and
corporate clients through two strategic business units. BISYS Information
Services Group provides image and data processing outsourcing, and pricing
analysis to more than 600 banks nationwide. BISYS Investment Services Group
designs, administers and distributes over 30 families of proprietary mutual
funds consisting of more than 365 portfolios, and provides 401(k) marketing
support, administration, and recordkeeping services in partnership with banking
institutions and investment management companies. At a meeting held on July 24,
1996, the Directors reviewed and approved an Administration Agreement with
BISYS, a Transfer Agency Agreement and a Fund Accounting Agreement with BISYS
Fund Services, Inc. Both BISYS companies have their principal place of business
at 3435 Stelzer Road, Columbus, Ohio 43219.
For fiscal year ended April 30, 1998, BISYS received administration fees of
$291,936, $94,751, $40,991, $191,079 and $60,117 for the Mid Cap Equity Fund,
the Large Cap Equity Fund, the Southeast Equity Fund, the Federal Securities
Income Fund and the North Carolina Tax-Free Bond Fund, respectively. For the
same period, BISYS waived fees of $40,456, $5,391 and $42,883 for the Large Cap
Equity Fund, the Southeast Equity Fund and the North Carolina Tax-Free Bond
Fund, respectively. (As of the fiscal year ended April 30, 1998, the Quality
Bond Fund and the Money Market Fund had not yet commenced operations.)
Prior to January 1, 1997, Furman Selz LLC ("Furman Selz") served as Sponsor and
Administrator of the Funds. For the fiscal year ended April 30, 1997, BISYS and
<PAGE> 138
Furman Selz received a total of $241,593 and $179,087 in administrative services
fees from the Mid Cap Equity Fund and the Federal Securities Income Fund,
respectively. For the fiscal year ended April 30, 1997, Furman Selz and BISYS
earned $60,352 in administrative services fees from the North Carolina Tax-Free
Bond Fund of which $43,051 was waived. For the period from October 1, 1996
(commencement of operations) through April 30, 1997, Furman Selz and BISYS
earned $46,523 in administrative services fees from the Large Cap Equity Fund of
which $23,882 was waived.
For the period ended April 30, 1996, Furman Selz, the Administrator for that
fiscal period, was entitled to the following administrative services fees:
FURMAN SELZ FURMAN SELZ
ENTITLED WAIVED
----------- -----------
Centura Mid Cap Equity Fund $172,047 $ 0
Centura Federal Securities Income Fund $156,049 $ 0
Centura North Carolina Tax-Free Bond Fund $59,260 $42,761
The Administration Agreement was approved by the Board of Directors, including a
majority of the Directors who are not parties to the Contract or interested
persons of such parties, at meetings held July 24, 1996, January 29, 1997 and
April 27, 1998. The Administration Agreement is terminable with respect to a
Fund or the Company without penalty, at any time, by vote of a majority of the
Directors or, with respect to a Fund, by vote of the holders of a majority of
the shares of the Fund, each upon not more than 60 days written notice to the
Administrator, and upon 60 days notice, by the Administrator.
DETERMINATION OF NET ASSET VALUE
The Funds value their portfolio securities in accordance with the procedures
described in the Prospectus.
PORTFOLIO TRANSACTIONS
Investment decisions for the Funds and for the other investment advisory clients
of the Adviser and Sub-Adviser are made with a view to achieving their
respective investment objectives. Investment decisions are the product of many
factors in addition to basic suitability for the particular client involved.
Thus, a particular security may be bought or sold for certain clients even
though it could have been bought or sold for other clients at the same time.
Likewise, a particular security may be bought for one or more clients when one
or more clients are selling the security. In some instances, one client may sell
a particular security to another client. It also sometimes happens that two or
more clients simultaneously purchase or sell the same security, in which event
each day's transactions in such security are, insofar as possible, averaged as
to price and allocated between such clients in a manner which in the Adviser's
or Sub-Adviser's opinion is equitable to each and in accordance with the amount
being purchased or sold by each. There may be circumstances when purchases or
sales of portfolio securities for one or more clients will have an adverse
effect on other clients.
<PAGE> 139
The Funds have no obligation to deal with any dealer or group of dealers in the
execution of transactions in portfolio securities. Subject to policies
established by the Company's Board of Directors, the Adviser (Sub-Adviser for
Centura Quality Income Fund) is primarily responsible for portfolio decisions
and the placing of portfolio transactions. In placing orders, it is the policy
of the Funds to obtain the best results taking into account the broker-dealer's
general execution and operational facilities, the type of transaction involved
and other factors such as the dealer's risk in positioning the securities.
While the Adviser and Sub-Adviser generally seek reasonably competitive spreads
or commissions, the Funds will not necessarily be paying the lowest spread or
commission available.
Purchases and sales of securities will often be principal transactions in the
case of debt securities and equity securities traded otherwise than on an
exchange. The purchase or sale of equity securities will frequently involve the
payment of a commission to a broker-dealer who effects the transaction on behalf
of a Fund. Debt securities normally will be purchased or sold from or to issuers
directly or to dealers serving as market makers for the securities at a net
price. Generally, money market securities are traded on a net basis and do not
involve brokerage commissions. Under the 1940 Act, persons affiliated with the
Funds, the Adviser, Sub-Adviser or BISYS are prohibited from dealing with the
Funds as a principal in the purchase and sale of securities unless a permissive
order allowing such transactions is obtained from the SEC.
The Adviser or Sub-Adviser may, in circumstances in which two or more
broker-dealers are in a position to offer comparable results, give preference to
a dealer that has provided statistical or other research services to the Adviser
or Sub-Adviser. By allocating transactions in this manner, the Adviser or
Sub-Adviser can supplement its research and analysis with the views and
information of securities firms. These items, which in some cases may also be
purchased for cash, include such matters as general economic and securities
market reviews, industry and company reviews, evaluations of securities and
recommendations as to the purchase and sale of securities. Some of these
services are of value to the Adviser or Sub-Adviser in advising various of its
clients (including the Funds), although not all of these services are
necessarily useful and of value in managing the Funds. The advisory fees paid by
the Funds are not reduced because the Adviser and Sub-Adviser and their
affiliates receive such services.
As permitted by Section 28(e) of the Securities Exchange Act of 1934 (the
"Act"), the Adviser or Sub-Adviser may cause a Fund to pay a broker-dealer that
provides "brokerage and research services" (as defined in the Act) to the
Adviser or Sub-Adviser an amount of disclosed commission for effecting a
securities transaction for the Fund in excess of the commission which another
broker-dealer would have charged for effecting that transaction.
Consistent with the Rules of Fair Practice of the National Association of
Securities Dealers, Inc. and subject to seeking the most favorable price and
<PAGE> 140
execution available and such other policies as the Directors may determine, the
Adviser or Sub-Adviser may consider sales of shares of the Funds as a factor in
the selection of broker-dealers to execute portfolio transactions for the Funds.
For the fiscal year ended April 30, 1998, the Mid Cap Equity Fund and the Large
Cap Equity Fund paid brokerage commissions of $388,152 and $94,016,
respectively. For the period from May 2, 1997 (commencement of operations)
through April 30, 1998, the Large Cap Equity Fund paid brokerage commissions of
$12,775. Of these amounts, none were paid to any affiliated brokers. For the
fiscal year ended April 30, 1997, $344,359 was paid in brokerage commissions by
the Mid Cap Equity Fund. For the period from October 1, 1996 (commencement of
operations) through April 30, 1997, $44,399 was paid in brokerage commissions by
the Large Cap Equity Fund. Of these amounts, none were paid to any affiliated
brokers. For the fiscal year ended April 30, 1996, $192,075 was paid in
brokerage commissions by the Mid Cap Equity Fund. Of this amount, none was paid
to any affiliated brokers. None of the other Funds paid any brokerage
commissions for such periods.
PORTFOLIO TURNOVER
Changes may be made in the portfolio consistent with the investment objectives
and policies of the Funds whenever such changes are believed to be in the best
interests of the Funds and their shareholders. It is anticipated that the annual
portfolio turnover rate for a Fund normally will not exceed 100%. The portfolio
turnover rate is calculated by dividing the lesser of purchases or sales of
portfolio securities by the average monthly value of the Fund's portfolio
securities. For purposes of this calculation, portfolio securities exclude all
securities having a maturity when purchased of one year or less. The portfolio
turnover rate for the fiscal year ended April 30, 1998 was 49%, 39%, 121% and
29% for the Mid Cap Equity Fund, the Large Cap Equity Fund, the Federal
Securities Income Fund and the North Carolina Tax-Free Bond Fund, respectively.
For the period from May 2, 1997 (commencement of operations) through April 30,
1998, the portfolio turnover rate was 71% for the Southeast Equity Fund. (As of
the fiscal year ended April 30, 1998, the Bond Fund and the Money Market Fund
had not yet commenced operations.) The portfolio turnover rate for the fiscal
year ended April 30, 1997 was 67%, 26%, and 34% for the Mid Cap Equity Fund, the
Federal Securities Income Fund and the North Carolina Tax-Free Bond Fund,
respectively. For the period from October 1, 1996 (commencement of operations)
through April 30, 1997, the portfolio turnover rate was 24% for the Large Cap
Equity Fund.
TAXATION
The Funds intend to qualify and elect annually to be treated as regulated
investment companies under Subchapter M of the Internal Revenue Code of 1986, as
amended (the "Code"). To qualify as a regulated investment company, a Fund must
for each taxable year (a) distribute to shareholders at least 90% of its
investment company taxable income (which includes, among other items, dividends,
taxable interest and the excess of net short-term capital gains over net
<PAGE> 141
long-term capital losses); (b) derive at least 90% of its gross income from
dividends, interest, payments with respect to securities loans and gains from
the sale or other disposition of stock, securities or foreign currencies or
other income derived with respect to its business of investing in such stock,
securities or currencies; and (c) diversify its holdings so that, at the end of
each quarter of the taxable year, (i) at least 50% of the market value of the
Fund's assets is represented by cash and cash items (including receivables),
U.S. Government securities, the securities of other regulated investment
companies and other securities, with such other securities of any one issuer
limited for the purposes of this calculation to an amount not greater than 5% of
the value of the Fund's total assets and not greater than 10% of the outstanding
voting securities of such issuer, and (ii) not more than 25% of the value of its
total assets is invested in the securities of any one issuer (other than U.S.
Government securities or the securities of other regulated investment
companies), or of two or more issuers which the Fund controls and which are
engaged in the same or similar or related trades or businesses. In addition, a
Fund earning tax-exempt interest must, in each year, distribute at least 90% of
its net tax-exempt income. By meeting these requirements, a Fund generally will
not be subject to Federal income tax on its investment company taxable income
and net capital gains which are distributed to shareholders. If the Funds do not
meet all of these Code requirements, they will be taxed as ordinary corporations
and their distributions will be taxed to shareholders as ordinary income.
Amounts, other than tax-exempt interest, not distributed on a timely basis in
accordance with a calendar year distribution requirement are subject to a
nondeductible 4% excise tax. To prevent imposition of the excise tax, each Fund
must distribute for each calendar year an amount equal to the sum of (1) at
least 98% of its ordinary income (excluding any capital gains or losses) for the
calendar year, (2) at least 98% of the excess of its capital gains over capital
losses (adjusted for certain ordinary losses) for the one-year period ending
October 31 of such year, and (3) all ordinary income and capital gain net income
(adjusted for certain ordinary losses) for previous years that were not
distributed during such years. A distribution, including an "exempt-interest
dividend," will be treated as paid on December 31 of a calendar year if it is
declared by a Fund during October, November or December of that year to
shareholders of record on a date in such a month and paid by the Fund during
January of the following year. Such distributions will be reportable by
shareholders in the calendar year in which the distributions are declared,
rather than the calendar year in which the distributions are received.
Distributions of investment company taxable income generally are taxable to
shareholders as ordinary income. Distributions from certain of the Funds may be
eligible for the dividends-received deduction available to corporations.
Distributions of net capital gains (the excess of net long-term capital gains
over short-term capital losses) if any, designated by a Fund as capital gain
dividends will generally be taxable to shareholders as long-term capital gain
regardless of how long a shareholder has held Fund shares. All distributions are
taxable to the shareholder in the same manner whether reinvested in additional
shares or received in cash. Shareholders will be notified annually as to the
Federal tax status of distributions.
<PAGE> 142
Distributions by a Fund reduce the net asset value of the Fund's shares. Should
a distribution reduce the net asset value below a stockholder's cost basis, such
distribution, nevertheless, would be taxable to the shareholder as ordinary
income or capital gain as described above, even though, from an investment
standpoint, it may constitute a partial return of capital. In particular,
investors should be careful to consider the tax implications of buying shares
just prior to a distribution by the Funds. The price of shares purchased at that
time includes the amount of the forthcoming distribution. Those purchasing just
prior to a distribution will receive a distribution which will nevertheless
generally be taxable to them.
Upon the taxable disposition (including a sale or redemption) of shares of a
Fund, a shareholder may realize a gain or loss depending upon his basis in his
shares. Such gain or loss generally will be treated as capital gain or loss if
the shares are capital assets in the shareholder's hands. Such gain or loss will
be long-term or short-term, generally depending upon the shareholder's holding
period for the shares. However, a loss realized by a shareholder on the
disposition of Fund shares with respect to which capital gain dividends have
been paid will, to the extent of such capital gain dividends, be treated as
long-term capital loss if such shares have been held by the shareholder for six
months or less. A loss realized on the redemption, sale or exchange of Fund
shares will be disallowed to the extent an exempt-interest dividend was received
with respect to those shares if the shares have been held by the shareholder for
six months or less. Further, a loss realized on a disposition will be disallowed
to the extent the shares disposed of are replaced (whether by reinvestment of
distributions or otherwise) within a period of 61 days beginning 30 days before
and ending 30 days after the shares are disposed of. In such a case, the basis
of the shares acquired will be adjusted to reflect the disallowed loss. In some
circumstances, basis adjustments are required in computing gains or loss on
dispositions of Fund shares within 90 days after their acquisition where new
shares of a regulated investment company are then acquired with a reduced sales
load. Shareholders receiving distributions in the form of additional shares will
have a cost basis for Federal tax purposes in each share received equal to the
net asset value of a share of the Funds on the reinvestment date.
Certain of the options, futures contracts, and forward foreign currency exchange
contracts that several of the Funds may invest in are so-called "section 1256
contracts." With certain exceptions, gains or losses on section 1256 contracts
generally are considered 60% long-term and 40% short-term capital gains or
losses ("60/40"). Also, section 1256 contracts held by a Fund at the end of each
taxable year (and, generally, for purposes of the 4% excise tax, on October 31
of each year) are "marked-to-market" with the result that unrealized gains or
losses are treated as though they were realized and the resulting gain or loss
is treated as 60/40 gain or loss.
Generally, the hedging transactions undertaken by a Fund may result in
"straddles" for Federal income tax purposes. The straddle rules may affect the
character of gains (or losses) realized by a Fund. In addition, losses realized
by a Fund on a position that is part of a straddle may be deferred under the
straddle rules, rather than being taken into account in calculating the taxable
income for the taxable year in which such losses are realized. Because only a
<PAGE> 143
few regulations implementing the straddle rules have been promulgated, the tax
consequences to a Fund of hedging transactions are not entirely clear. Hedging
transactions may increase the amount of short-term capital gain realized by a
Fund which is taxed as ordinary income when distributed to stockholders.
A Fund may make one or more of the elections available under the Code which are
applicable to straddles. If a Fund makes any of the elections, the amount,
character and timing of the recognition of gains or losses from the affected
straddle positions will be determined under rules that vary according to the
election(s) made. The rules applicable under certain of the elections may
operate to accelerate the recognition of gains or losses from the affected
straddle positions.
Because application of the straddle rules may affect the character of gains or
losses, defer losses and/or accelerate the recognition of gains or losses from
the affected straddle positions, the amount which must be distributed to
shareholders, and which will be taxed to shareholders as ordinary income or
long-term capital gain, may be increased or decreased substantially as compared
to a fund that did not engage in such hedging transactions.
Recently enacted rules may affect the timing and character of gain if a Fund
engages in transactions that reduce or eliminate its risk of loss with respect
to appreciated financial positions. If a Fund enters into certain transactions
in property while holding substantially identical property, the Fund would be
treated as if it had sold and immediately repurchased the property and would be
taxed on any gain (but not loss) from the constructive sale. The character of
gain from a constructive sale would depend upon the Fund's holding period in the
property. Loss from a constructive sale would be recognized when the property
was subsequently disposed of, and its character would depend on the Fund's
holding period and the application of various loss deferral provisions of the
Code.
Certain requirements that must be met under the Code in order for a Fund to
qualify as a regulated investment company may limit the extent to which a Fund
will be able to engage in transactions in options, futures, forward contracts
and similar instruments.
Certain of the debt securities acquired by a Fund may be treated as debt
securities that were originally issued at a discount. Original issue discount
can generally be defined as the difference between the price at which a security
was issued and its stated redemption price at maturity. Although no cash income
is actually received by the Fund, original issue discount on a taxable debt
security earned in a given year generally is treated for Federal income tax
purposes as interest and, therefore, such income would be subject to the
distribution requirements of the Code. Original issue discount on an obligation,
the interest from which is exempt from Federal income tax, generally will
constitute tax-exempt interest income.
Some of the debt securities may be purchased by a Fund at a discount which
exceeds the original issue discount on such debt securities, if any. This
additional discount represents market discount for Federal income tax purposes.
<PAGE> 144
The gain realized on the disposition of any debt security, including a
tax-exempt debt security, having market discount will be treated as taxable
income to the extent it does not exceed the accrued market discount on such debt
security. Generally, market discount accrues on a daily basis for each day the
debt security is held by the Fund at a constant rate over the time remaining to
the debt security's maturity or, at the election of the Fund, at a constant
yield to maturity which takes into account the semi-annual compounding of
interest.
Under the Code, gains or losses attributable to fluctuations in exchange rates
which occur between the time a Fund accrues income or other receivables or
accrues expenses or other liabilities denominated in a foreign currency, and the
time the Fund actually collects such receivables or pays such liabilities,
generally are treated as ordinary income or ordinary loss. Similarly, on
disposition of debt securities denominated in a foreign currency and on
disposition of certain options and forward and futures contracts, gains or
losses attributable to fluctuations in the value of foreign currency between the
date of acquisition of the security or contract and the date of disposition also
are treated as ordinary gain or loss. These gains or losses, referred to under
the Code as "section 988" gains or losses, may increase, decrease, or eliminate
the amount of a Fund's investment company taxable income to be distributed to
its shareholders as ordinary income.
Some Funds may invest in stocks of foreign companies that are classified under
the Code as passive foreign investment companies ("PFICs"). In general, a
foreign company is classified as a PFIC under the Code if at least one-half of
its assets constitute investment-type assets or 75% or more of its gross income
is investment-type income. Under the PFIC rules, an "excess distribution"
received with respect to PFIC stock is treated as having been realized ratably
over the period during which the Fund held the PFIC stock. A Fund itself will be
subject to tax on the portion, if any, of the excess distribution that is
allocated to the Fund's holding period in prior taxable years (and an interest
factor will be added to the tax, as if the tax had actually been payable in such
prior taxable years) even though the Fund distributes the corresponding income
to stockholders. Excess distributions include any gain from the sale of PFIC
stock as well as certain distributions from a PFIC. All excess distributions are
taxable as ordinary income.
A Fund may be able to elect alternative tax treatment with respect to PFIC
stock. Under an election that currently may be available, a Fund generally would
be required to include in its gross income its share of the earnings of a PFIC
on a current basis, regardless of whether any distributions are received from
the PFIC. If this election is made, the special rules, discussed above, relating
to the taxation of excess distributions, would not apply. In addition, another
election may be available that would involve marking to market the Funds' PFIC
shares at the end of each taxable year, with the result that unrealized gains
are treated as though they were realized and reported as ordinary income. Any
mark-to-market losses and any loss from an actual disposition of PFIC shares
would be deductible as ordinary losses to the extent of any net mark-to-market
gains included in income in prior years. If this election were made, tax at the
Fund level under the PFIC rules would generally be eliminated, but the Fund
<PAGE> 145
could, in limited circumstances, incur nondeductible interest charges. Under
recent tax legislation, the federal tax rates on long-term capital gain differ,
depending on the length of time the asset giving rise to the capital gain has
been held. Each Fund's intention to qualify annually as a regulated investment
company may limit its elections with respect to PFIC stock.
Income received by a Fund from sources within foreign countries may be subject
to withholding and other similar income taxes imposed by the foreign country. If
more than 50% of the value of a Fund's total assets at the close of its taxable
year consists of securities of foreign governments and corporations, the Fund
will be eligible and intends to elect to "pass-through" to its shareholders the
amount of such foreign taxes paid by the Fund. Pursuant to this election, a
shareholder would be required to include in gross income (in addition to taxable
dividends actually received) his pro rata share of the foreign taxes paid by a
Fund, and would be entitled either to deduct (as an itemized deduction) his pro
rata share of foreign taxes in computing his taxable income or to use it as a
foreign tax credit against his U.S. Federal income tax liability, subject to
limitations. No deduction for foreign taxes may be claimed by a shareholder who
does not itemize deductions, but such a shareholder may be eligible to claim the
foreign tax credit (see below). Each shareholder will be notified within 60 days
after the close of a Fund's taxable year whether the foreign taxes paid by a
Fund will "pass-through" for that year and, if so, such notification will
designate (a) the shareholder's portion of the foreign taxes paid to each such
country and (b) the portion of the dividend which represents income derived from
foreign sources.
Generally, a credit for foreign taxes is subject to the limitation that it may
not exceed the shareholder's U.S. tax attributable to his total foreign source
taxable income. For this purpose, if a Fund makes the election described in the
preceding paragraph, the source of the Fund's income flows through to its
shareholders. With respect to a Fund, gains from the sale of securities will be
treated as derived from U.S. sources and certain currency fluctuations gains,
including fluctuation gains from foreign currency-denominated debt securities,
receivables and payables, will be treated as ordinary income derived from U.S.
sources. The limitation on the foreign tax credit is applied separately to
foreign source passive income (as defined for purposes of the foreign tax
credit) including foreign source passive income of a Fund. The foreign tax
credit may offset only 90% of the alternative minimum tax imposed on
corporations and individuals, and foreign taxes generally may not be deducted in
computing alternative minimum taxable income. The ability to claim foreign tax
credits also is subject to holding period requirements.
The Funds are required to report to the Internal Revenue Service ("IRS") all
distributions except in the case of certain exempt shareholders. All such
distributions generally are subject to withholding of Federal income tax at a
rate of 31% ("backup withholding") in the case of non-exempt shareholders if (1)
the shareholder fails to furnish the Funds with and to certify the shareholder's
correct taxpayer identification number or social security number, (2) the IRS
notifies the Funds or a shareholder that the shareholder has failed to report
properly certain interest and dividend income to the IRS and to respond to
notices to that effect, or (3) when required to do so, the shareholder fails to
<PAGE> 146
certify that he is not subject to backup withholding. If the withholding
provisions are applicable, any such distributions, whether reinvested in
additional shares or taken in cash, will be reduced by the amounts required to
be withheld. Backup withholding is not an additional tax. Any amount withheld
may be credited against the shareholder's U.S. Federal income tax liability.
Investors may wish to consult their tax advisors about the applicability of the
backup withholding provisions.
The foregoing discussion relates only to Federal income tax law as applicable to
U.S. persons (i.e., U.S. citizens and residents and U.S. corporations,
partnerships, trusts and estates). Distributions by the Funds also may be
subject to state and local taxes and their treatment under state and local
income tax laws may differ from the Federal income tax treatment. Distributions
of a Fund which are derived from interest on obligations of the U.S. Government
and certain of its agencies and instrumentalities may be exempt from state and
local taxes in certain states. Shareholders should consult their tax advisors
with respect to particular questions of Federal, state and local taxation.
Shareholders who are not U.S. persons should consult their tax advisors
regarding U.S. and foreign tax consequences of ownership of shares of the Funds
including the likelihood that distributions to them would be subject to
withholding of U.S. tax at a rate of 30% (or at a lower rate under a tax
treaty).
CENTURA NORTH CAROLINA TAX-FREE BOND FUND. The Fund intends to manage its
portfolio so that it will be eligible to pay "exempt-interest dividends" to
shareholders. The Fund will so qualify if, at the close of each quarter of its
taxable year, at least 50% of the value of its total assets consists of state,
municipal, and certain other securities, the interest on which is exempt from
the regular Federal income tax. To the extent that the Fund's dividends
distributed to shareholders are derived from such interest income and are
designated as exempt-interest dividends by the Fund, they will be excludable
from a shareholder's gross income for Federal income tax purposes.
Exempt-interest dividends, however, must be taken into account by shareholders
in determining whether their total incomes are large enough to result in
taxation of up to one-half (85% for taxable years beginning after 1993) of their
social security benefits and certain railroad retirement benefits. The Fund will
inform shareholders annually as to the portion of the distributions from the
Fund which constitute exempt-interest dividends. In addition, for corporate
shareholders of the Fund, exempt-interest dividends may comprise part or all of
an adjustment to alternative minimum taxable income for purposes of the
alternative minimum tax and the environmental tax under sections 55 and 59A.
Exempt-interest dividends that are attributable to certain private activity
bonds, while not subject to the regular Federal income tax, may constitute an
item of tax preference for purposes of the alternative minimum tax.
To the extent that the Fund's dividends are derived from its investment company
taxable income (which includes interest on its temporary taxable investments and
the excess of net short-term capital gain over net long-term capital loss), they
are considered ordinary (taxable) income for Federal income tax purposes. Such
dividends will not qualify for the dividends-received deduction for
corporations. Distributions of net capital gains (the excess of net long-term
<PAGE> 147
capital gains over short-term capital losses), if any, designated by a Fund as
capital gain dividends will generally be taxable to shareholders as long-term
capital gains regardless of how long a shareholder has held Fund shares.
Upon redemption, sale or exchange of shares of the Fund, a shareholder will
realize a taxable gain or loss, depending on whether the gross proceeds are more
or less than the shareholder's tax basis for the shares. The discussion above
provides additional detail about the income tax consequences of disposing of
Fund shares.
Deductions for interest expense incurred to acquire or carry shares of the Fund
may be subject to limitations that reduce, defer, or eliminate such deductions.
This includes limitations on deducting interest on indebtedness properly
allocable to investment property (which may include shares of the Fund). In
addition, a shareholder may not deduct a portion of interest on indebtedness
incurred or continued to purchase or carry shares of an investment company (such
as this Fund) paying exempt-interest dividends. Such disallowance would be in an
amount which bears the same ratio to the total of such interest as the
exempt-interest dividends bear to the total dividends, excluding net capital
gain dividends received by the shareholder. Under rules issued by the IRS for
determining when borrowed funds are considered used for the purposes of
purchasing or carrying particular assets, the purchase of shares may be
considered to have been made with borrowed funds even though the borrowed funds
are not directly traceable to the purchase of shares.
North Carolina law exempts from income taxation dividends received from a
regulated investment company in proportion to the income of the regulated
investment company that is attributable to interest on bonds or securities of
the U.S. government or any agency or instrumentality thereof or on bonds of the
State of North Carolina or any county, municipality or political subdivision
thereof, including any agency, board, authority or commission of any of the
above.
Opinions relating to the validity of municipal securities and the exemption of
interest thereon from Federal income tax are rendered by bond counsel to the
issuers. The Fund, the Adviser and their affiliates, and the Fund's counsel make
no review of proceedings relating to the issuance of state or municipal
securities or the bases of such opinions.
Persons who may be "substantial users" (or "related persons" of substantial
users) of facilities financed by private activity bonds should consult their tax
advisers before purchasing shares of Centura North Carolina Tax-Free Bond Fund
since the acquisition of shares of the Fund may result in adverse tax
consequences to them. In addition, all shareholders of the Fund should consult
their tax advisers about the tax consequences to them of their investments in
the Fund.
Changes in the tax law, including provisions relating to tax-exempt income,
frequently come under consideration. If such changes are enacted, the tax
consequences arising from an investment in Centura North Carolina Tax-Free Bond
Fund may be affected. Since the Funds do not undertake to furnish tax advice, it
is important for shareholders to consult their tax advisers regularly about the
tax consequences to them of investing in one or more of the Funds.
<PAGE> 148
OTHER INFORMATION
CAPITALIZATION
The Company is a Maryland corporation established under Articles of
Incorporation dated March 1, 1994 and currently consists of seven separately
managed portfolios, each of which offers three classes of shares, except that
Centura Money Market Fund offers only two classes of shares. The capitalization
of the Company consists solely of one billion fifty million (1,050,000,000)
shares of common stock with a par value of $0.001 per share. The Board of
Directors may establish additional Funds (with different investment objectives
and fundamental policies), or additional classes of shares, at any time in the
future. Establishment and offering of additional Funds or classes will not alter
the rights of the Company's shareholders. When issued, shares are fully paid,
non-assessable, redeemable and freely transferable. Shares do not have
preemptive rights or subscription rights. In any liquidation of a Fund or class,
each shareholder is entitled to receive his pro rata share of the net assets of
that Fund or class.
VOTING RIGHTS
Under the Articles of Incorporation, the Company is not required to hold annual
meetings of each Fund's shareholders to elect Directors or for other purposes.
It is not anticipated that the Company will hold shareholders' meetings unless
required by law or the Articles of Incorporation. In this regard, the Company
will be required to hold a meeting to elect Directors to fill any existing
vacancies on the Board if, at any time, fewer than a majority of the Directors
have been elected by the shareholders of the Company. In addition, the Articles
of Incorporation provide that the holders of not less than a majority of the
outstanding shares of the Company may remove persons serving as Director.
Each Fund may vote separately on items affecting only that Fund, and each class
of shares of each Fund may vote separately on matters affecting only that class
or affecting that class differently from other classes.
The Company's shares do not have cumulative voting rights, so that the holders
of more than 50% of the outstanding shares may elect the entire Board of
Directors, in which case the holders of the remaining shares would not be able
to elect any Directors.
CUSTODIAN, TRANSFER AGENT AND DIVIDEND DISBURSING AGENT
Centura Bank, 131 North Church Street, Rocky Mount, North Carolina 27802, acts
as Custodian of the Company's assets. For the year ended April 30, 1998, Centura
Bank earned custodian fees and out-of-pocket expenses of $44,842, $15,560,
$26,313 and $11,932 for the Mid Cap Equity Fund, Large Cap Equity Fund, Federal
Securities Income Fund and North Carolina Tax-Free Bond Fund, respectively. For
<PAGE> 149
the period from May 2, 1997 (commencement of operations) to April 30, 1998,
custodian expenses incurred by the Southeast Equity Fund were $12,766. (As of
the fiscal year ended April 30, 1998, the Quality Bond Fund and the Money Market
Fund had not yet commenced operations.) For the periods ended April 30, 1996 and
April 30, 1997, respectively, the custodian earned fees of $28,109 and $59,019
for the Mid Cap Equity Fund; $24,580 and $31,324 for the Federal Securities
Income Fund; and $12,503 and $15,400 for the North Carolina Tax-Free Bond Fund,
respectively. For the period from October 1, 1996 (commencement of operations)
to April 30, 1997 the custodian earned fees of $23,036 for the Large Cap Equity
Fund.
BISYS Fund Services, Inc. ("BFSI") serves as the Company's transfer agent
pursuant to a Transfer Agency Agreement. For the fiscal year ended April 30,
1998 BFSI received fees for transfer agency services of $102,555, $10,165,
$16,220 and $10,627 for the Mid Cap Equity Fund, the Large Cap Equity Fund, the
Federal Securities Income Fund and the North Carolina Tax-Free Bond Fund,
respectively. (As of the fiscal year ended April 30, 1998, the Quality Bond Fund
and the Money Market Fund had not yet commenced operations.) For the period from
May 2, 1997 (commencement of operations) to April 30, 1998, BFSI received fees
for transfer agency services of $18,453 for the Southeast Equity Fund. For its
services rendered during the fiscal year ended April 30, 1997, BFSI and Furman
Selz LLC ("Furman Selz"), the Company's transfer agent prior to January 1, 1997,
earned $101,541, $13,117 and $11,109 in transfer agent fees for the Mid Cap
Equity Fund, the Federal Securities Income Fund and the North Carolina Tax-Free
Bond Fund, respectively. For the period from October 1, 1996 (commencement of
operations) through April 30, 1997, BFSI and Furman Selz earned $16,260 in
transfer agent fees for the Large Cap Equity Fund. For the fiscal year ended
April 30, 1996, the Company's prior transfer agent, Furman Selz, earned transfer
agent fees of $38,623 for the Mid Cap Equity Fund, $7,326 for the Federal
Securities Income Fund and $6,452 for the North Carolina Tax-Free Bond Fund.
Pursuant to a Fund Accounting Agreement, each Fund compensates BFSI $2,500 per
month for providing fund accounting services for the Funds. For the fiscal year
ended April 30, 1998 BFSI received fees for fund accounting services of $32,519,
$31,269, $38,031 and $35,374 for the Mid Cap Equity Fund, the Large Cap Equity
Fund, the Federal Securities Income Fund and the North Carolina Tax-Free Bond
Fund, respectively. For the period from May 2, 1997 (commencement of operations)
to April 30, 1998, BFSI received fees for fund accounting services of $34,581
for the Southeast Equity Fund. (As of the fiscal year ended April 30, 1998, the
Quality Bond Fund and the Money Market Fund had not yet commenced operations.)
For the fiscal year ended April 30, 1997, BFSI and Furman Selz, the Company's
prior fund accounting servicer, earned $28,792, $31,735 and $39,742 in fund
accounting fees for the Mid Cap Equity Fund, the Federal Securities Income Fund
and the North Carolina Tax-Free Bond Fund, respectively. For the period from
October 1, 1996 (commencement of operations) through April 30, 1997, BFSI and
Furman Selz earned $19,212 in fund accounting fees for the Large Cap Equity
Fund. For the fiscal year ended April 30, 1996, the Fund's prior accounting
agent, Furman Selz, earned the following fees for their fund accounting
services: $32,848 for the Mid Cap Equity Fund, $33,981 for the Federal
Securities Income Fund and $41,369 for the North Carolina Tax-Free Bond Fund.
<PAGE> 150
YIELD AND PERFORMANCE INFORMATION
The Funds may, from time to time, include their yield, effective yield, tax
equivalent yield and average annual total return in advertisements or reports to
shareholders or prospective investors.
CENTURA MONEY MARKET FUND
The current yield is the net annualized yield based on a specific 7
calendar-days calculated at simple interest rates. Current yield is calculated
by determining the net change, exclusive of capital changes, in the value of a
hypothetical pre-existing account having a balance of one share at the beginning
of the period and dividing such change by the value of the account at the
beginning of the base period to obtain the base-period return. The base-period
return is then annualized by multiplying it by 365/7; the resultant product
equals net annualized current yield. The current yield figure is stated to the
nearest hundredth of one percent.
The effective yield is the net annualized yield for a specified 7 calendar-days
assuming a reinvestment in Fund shares of all dividends during the period, i.e.,
compounding. Effective yield is calculated by using the same base-period return
used in the calculation of current yield except that the base-period return is
compounded by adding 1, raising the sum to a power equal to 365 divided by 7,
and subtracting 1 from the result according to the following formula:
Effective Yield -- [(Base Period Return+ 1)365/7] - 1.
As described above, current yield and effective yield are based on historical
earnings, show the performance of a hypothetical investment and are not intended
to indicate future performance. Current yield and effective yield will vary
based on changes in market conditions and the level of Fund expenses.
OTHER CENTURA FUNDS
Quotations of yield for each class of shares of the Funds will be based on the
investment income per share earned during a particular 30-day period, less
expenses accrued with respect to that class during a period ("net investment
income"), and will be computed by dividing net investment income for the class
by the maximum offering price per share of that class on the last day of the
period, according to the following formula:
YIELD = 2[(a-b + 1)#6-1]/cd
where a = dividends and interest earned during the period, b = expenses accrued
for the period (net of any reimbursements), c = the average daily number of
shares of the class outstanding during the period that were entitled to receive
dividends, and d = the maximum offering price per share of the class on the last
day of the period; the # indicates that the following single character is an
exponent.
<PAGE> 151
The 30-day yield for Class C shares for the period ended October 31, 1998 were
as follows: 4.67% for the Federal Securities Income Fund and 3.51% for the North
Carolina Tax Free Bond Fund.
Quotations of tax-equivalent yield for each class of shares of Centura North
Carolina Tax-Free Bond Fund will be calculated according to the following
formula:
TAX EQUIVALENT YIELD = (E)/l-p E = tax-exempt
yield p = stated income tax rate
Quotations of average annual total return will be expressed in terms of the
average annual compounded rate of return of a hypothetical investment in each
class of shares of a Fund over periods of 1, 5 and 10 years (up to the life of
the Fund), calculated pursuant to the following formula:
YIELD = 2[(a-b + 1)#6-1]/cd
(where P = a hypothetical initial payment of $1,000, T = the average annual
total return for the class, n = the number of years, and ERV = the ending
redeemable value of a hypothetical $1,000 payment made at the beginning of the
period). All total return figures will reflect the deduction of the maximum
sales charge and a proportional share of Fund and class-specific expenses (net
of certain reimbursed expenses) on an annual basis, and will assume that all
dividends and distributions are reinvested when paid; the # indicates that the
following single character is an exponent.
Quotations of yield and total return will reflect only the performance of a
hypothetical investment in a class of shares of the Funds during the particular
time period shown. Yield and total return for the Funds will vary based on
changes in the market conditions and the level of the Fund's (and classes')
expenses, and no reported performance figure should be considered an indication
of performance which may be expected in the future.
In connection with communicating its yields or total return to current or
prospective unit holders, the Funds also may compare these figures to the
performance of other mutual funds tracked by mutual fund rating services or to
other unmanaged indexes which may assume reinvestment of dividends but generally
do not reflect deductions for administrative and management costs.
<PAGE> 152
TOTAL RETURN SUMMARY
THE CENTURA FUNDS (C CLASS)
MONTH END: MAY 31, 1998
NO LOAD TOTAL RETURN
<TABLE>
<CAPTION>
AGGREGATE RETURNS AVERAGE ANNUAL RETURNS
------------------------ ----------------------------------
INCEPTION SINCE
FUND DATE YEAR TO DATE QUARTERLY MONTHLY INCEPTION 1 YEAR 2 YEAR 3 YEAR 5 YEAR 10 YEAR
---- --------- ------------ --------- ------- --------- ------ ------ ------ ------ -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Centura Mid Cap Equity Fund......... 12/31/90 9.16% 3.32% (0.78)% 19.84% 25.16% 23.19% 26.40% 19.13% NA
Centura Large Cap Equity Fund....... 12/31/90 3.73% 0.31% (1.30)% 16.20% 21.42% 22.07% 22.79% 16.75% NA
Centura Southeast Equity Fund....... 01/01/95 8.03% 3.18% (7.00)% 24.70% 33.67% 24.94% 24.38% -- --
Centura Federal Securities Fund..... 12/31/90 2.67% 1.46% 0.77 % 6.56% 8.44% 7.36% 6.11% 5.49% NA
Centura North Carolina Tax-Free
Fund.............................. 01/31/91 1.84% 1.04% 1.65 % 5.60% 8.04% 7.52% 5.91% 5.21% NA
</TABLE>
The performance data quoted represents past performance and is not an
indication of future results as yields fluctuate daily.
Centura Funds Distributor, Inc. is the Distributor for The Centura Group of
Funds.
NOTES ABOUT THE PERFORMANCE INFORMATION
(a) BACKGROUND OF THE FUNDS
From 1/1/91 to 5/31/94 (conversion date), Centura Mid Cap Equity Fund and
Centura Federal Securities Income Fund were bank collective trust funds
maintained and managed by Centura Bank, and from 2/1/91 to 5/31/94 (conversion
date), Centura North Carolina Tax-Free Bond Fund was a common trust fund
maintained and managed by Centura Bank. From 1/1/91 to 9/30/96 (conversion
date), Centura Large Cap Equity Fund was a common trust fund maintained and
managed by Centura Bank. From 1/1/95 to 4/30/97 (conversion date), Centura
Southeast Equity Fund was a bank common trust fund maintained and managed by
Centura Bank. Bank collective and common trust funds are not required to
register as investment companies under the Investment Company Act of 1940.
Accordingly, performance achieved by a Fund's predecessor collective or common
trust fund reflects performance prior to the Fund's commencement of operations
as a series of a registered investment company. The investment objectives,
strategies and policies of each of these Funds prior to its conversion from the
bank common or collective fund predecessor to a registered mutual fund were in
all material respects equivalent to those of its successor registered mutual
fund.
(b) HOW THE PERFORMANCE INFORMATION WAS CALCULATED
Investment performance for the Funds during their maintenance as common or
collective trust funds has been calculated on a monthly basis utilizing the Bank
Administration Institute's recommended time-weighted rate of return method to
compute the investment performance reflected in the above Schedule.
The performance figures assume the maximum sales load, reinvestment of
dividends and interest and include the cost of brokerage commissions. The
<PAGE> 153
investment performance excludes taxes an investor might have incurred as a
result of taxable ordinary income and capital gains realized by the accounts.
Bank common and collective trust funds are not subject to certain expenses
normally incurred by a mutual fund, such as advisory, administrative, transfer
and fund accounting agent and 12b-1 fees. Thus, the performance figures, for
periods prior to conversion to registered funds have been adjusted, on a monthly
basis, to reflect the impact of the higher contractual expense ratios for the
registered funds at the time of the conversion. It should be noted, however,
that the bank-maintained common and collective trust funds are not subject to
the same tax and regulatory requirements, including certain investment
restrictions, applicable to registered mutual funds. These regulatory and tax
requirements could have adversely affected performance of the Funds' collective
and common trust Fund predecessors.
Performance information for the Funds may be compared, in reports and
promotional literature, to: (i) the Standard & Poor's 500 Stock Index, Dow Jones
Industrial Average, or other unmanaged indices so that investors may compare the
Funds' results with those of a group of unmanaged securities widely regarded by
investors as representative of the securities markets in general; (ii) other
groups of mutual funds tracked by Lipper Analytical Services, a widely used
independent research firm which ranks mutual funds by overall performance,
investment objectives, and assets, or tracked by other services, companies,
publications, or persons who rank mutual funds on overall performance or other
criteria; and (iii) the Consumer Price Index (measure for inflation) to assess
the real rate of return from an investment in a Fund.
Investors who purchase and redeem shares of the Funds through a customer
account maintained at a Service Organization may be charged one or more of the
following types of fees as agreed upon by the Service Organization and the
investor, with respect to the customer services provided by the Service
Organization: account fees (a fixed amount per month or per year); transaction
fees (a fixed amount per transaction processed); compensating balance
requirements (a minimum dollar amount a customer must maintain in order to
obtain the services offered); or account maintenance fees (a periodic charge
based upon a percentage of the assets in the account or of the dividends paid on
those assets). Such fees will have the effect of reducing the yield and average
annual total return of the Funds for those investors.
INDEPENDENT ACCOUNTANTS
KPMG LLP serves as the independent accountants for the Company for the fiscal
year ending April 30, 1999. KPMG LLP provides audit services, tax return
preparation and assistance and consultation in connection with review of SEC
filings.
COUNSEL
Dechert Price & Rhoads, 1775 Eye Street, N.W., Washington, D.C., 20006, passes
upon certain legal matters in connection with the shares offered by the Company
and also acts as Counsel to the Company.
<PAGE> 154
REGISTRATION STATEMENT
This SAI and the Prospectus do not contain all the information included in the
Company's Registration Statement filed with the SEC under the Securities Act of
1933 with respect to the securities offered hereby, certain portions of which
have been omitted pursuant to the rules and regulations of the SEC. The
Registration Statement, including the exhibits filed therewith, may be examined
at the office of the SEC in Washington, D.C.
Statements contained herein and in the Prospectus as to the contents of any
contract or other documents referred to are not necessarily complete, and, in
each instance, reference is made to the copy of such contract or other documents
filed as an exhibit to the Registration Statement, each such statement being
qualified in all respects by such reference.
FINANCIAL STATEMENTS
The Report of Independent Accountants and financial statements of the Funds
included in their Annual Report for the period ended April 30, 1998 (the "Annual
Report") are incorporated herein by reference to such Report. Copies of such
Annual Report are available without charge upon request by writing to Centura
Funds, Inc., 3435 Stelzer Road, Columbus, Ohio 43219-8006 or telephoning (800)
442-3688. Also incorporated by reference herein are semi-annual financial
statements for the Funds (unaudited) for the period ended October 31, 1998.
The financial statements in the Annual Report incorporated by reference into
this Statement of Additional Information have been audited by McGladrey & Pullen
LLP, independent accountants, and have been so included and incorporated by
reference in reliance upon the report of said firm, which report is given upon
their authority as experts in auditing and accounting.
<PAGE> 155
CENTURA FUNDS, INC.
(THE "COMPANY")
3435 STELZER ROAD
COLUMBUS, OHIO 43219
GENERAL AND ACCOUNT INFORMATION: (800) 442-3688
CENTURA BANK
INVESTMENT ADVISER
SOVEREIGN ADVISERS
SUB-ADVISERS
BISYS FUND SERVICES
ADMINISTRATOR AND SPONSOR
CENTURA FUNDS DISTRIBUTOR, INC.
DISTRIBUTOR
