FFB
SHARES
FFB SHARES OF THE FIRST UNION
HIGH GRADE TAX FREE PORTFOLIO
(formerly, the First Union Insured Tax Free Portfolio)
A Portfolio of First Union Funds
(Class B Investment Shares)
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P R O S P E C T U S
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February 28, 1994
The FFB Shares (the "FFB Shares" or "Shares") offered by this prospectus
represent interests in the First Union High Grade Tax Free Portfolio (the
"Fund"), which is an investment portfolio in First Union Funds (the "Trust"),
an open-end, management investment company (a mutual fund). The FFB Shares
offered by this prospectus are the same as the Class B Investment Shares
("Class B Shares") of the Fund. The FFB Shares, however, are offered as a part
of an investment program exclusively to customers of First Fidelity Bank
("First Fidelity" or "FFB"). The Trust offers interests in the class to other
investors, who are not First Fidelity customers, pursuant to a separate
prospectus.
The Fund seeks a high level of federally tax free income that is
consistent with preservation of capital.
This prospectus relates only to FFB Shares of the Fund and contains the
information you should read and know before you invest in FFB Shares. Keep
this prospectus for future reference.
The Fund has also filed a Statement of Additional Information for the
Shares with the Securities and Exchange Commission, dated February 28, 1994.
The information contained in the Statement of Additional Information is
incorporated by reference into this prospectus. You may request the Statement
of Additional Information free of charge, obtain other information, or make
inquiries about the Fund by writing or calling First Fidelity at (800)
437-8790.
The Fund is sponsored and distributed by third parties independent of
First Fidelity, and is advised by First Union National Bank of North Carolina
("First Union" or the "Adviser"). The value of investment company shares
offered by this prospectus fluctuates daily.
The Shares offered by this prospectus are not deposits or obligations of
First Fidelity or First Union, are not endorsed or guaranteed by First
Fidelity or First Union, and are not insured by the Federal Deposit Insurance
Corporation, the Federal Reserve Board, or any other government agency.
Investment in the FFB Shares involves investment risks, including the possible
loss of principal.
For a description of the nature and limitations of municipal bond
insurance, see "Investment Objective and Policies--Municipal Bond Insurance,"
page 9.
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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.
SUMMARY
DESCRIPTION OF THE TRUST
The Trust is an open-end, management investment company, established as a
Massachusetts business trust under a Declaration of Trust dated August 30,
1984. The Trust currently consists of 15 portfolios, each representing a
different mutual fund. The Fund is divided into three classes of shares: Trust
Shares, Class B Shares, and Class C Investment Shares ("Class C Shares"). The
FFB Shares represent interests in the Class B Shares that are offered
exclusively to customers of First Fidelity, and are sold at net asset value
plus a sales charge which may be imposed at the time of purchase. This
prospectus relates only to the FFB Shares of the Fund. Investors who are not
customers of First Fidelity may purchase Class B Shares of the Fund pursuant
to a separate prospectus for Class B Shares. The FFB Shares and the Class B
Shares are subject to the same fees and expenses, and are identical, except
for certain exchange privileges and methods for investing and redeeming shares
in the Fund.
DESCRIPTION OF THE FUND
The Fund seeks a high level of federally tax free income that is
consistent with preservation of capital. The Fund is designed as a convenient
means of participating in a professionally managed, diversified portfolio of
municipal bonds that are covered by insurance guaranteeing the timely payment
of principal and interest. Insurance will not guarantee the market value of
the municipal bonds or the value of shares of the Fund.
INVESTMENT MANAGEMENT
The Fund is advised by First Union through its Capital Management Group.
First Union has responsibility for investment research and supervision of the
Fund in addition to the purchase or sale of portfolio instruments for which it
receives an annual fee.
PURCHASING AND REDEEMING SHARES
For information on purchasing Shares, please refer to the Shareholder
Guide section entitled "Purchase of Shares." Redemption information may be
found under "Redemption of Shares."
2
SUMMARY OF FUND EXPENSES
FFB (Class B) Shares
Shareholder Transaction Expenses
Maximum Sales Load Imposed on Purchases (as a percentage of offering price)..
.... 4.00%
Maximum Sales Load Imposed on Reinvested Dividends (as a percentage of
offering price)............................................................
............ None
Deferred Sales Load (as a percentage of original purchase price or redemption
proceeds, as applicable).................................................
..... None
Redemption Fees (as a percentage of amount redeemed, if applicable).........
..... None
Exchange Fees...............................................................
..... None
Annual FFB Shares Operating Expenses (as a percentage of average net assets)
Management Fees (after waivers) (1).........................................
..... 0.49%
12b-1 Fees (2).............................................................
...... 0.25
Total Other Expenses.......................................................
...... 0.32
Total FFB Shares Operating Expenses (3).....................................
....... 1.06%
(1) The management fee has been reduced to reflect the voluntary waiver by
the Adviser. The Adviser may terminate this voluntary waiver at any time
at its sole discretion. The maximum management fee is 0.50%.
(2) FFB Shares can pay up to 0.75% of FFB Shares' average daily net assets as
a 12b-1 fee. For the forseeable future, the Fund plans to limit the FFB
Shares 12b-1 payments to 0.25% of FFB Shares' average daily net assets.
(3) The annual FFB Shares operating expenses were 0.85% for the year ended
December 31, 1993. Total FFB Shares operating expenses, absent the
voluntary waiver of the management fee by the Adviser and waiver of the
12b-1 fee, was 1.07% for the year ending December 31, 1993. FFB Shares
are subject to identical fees and expenses as Class B Shares. Annual FFB
Shares operating expenses in the table above are based on expenses
expected during the fiscal year ending December 31, 1994. The total FFB
Shares expected operating expenses would be 1.07%, absent the voluntary
waiver described above in note 1.
THE PURPOSE OF THIS TABLE IS TO ASSIST AN INVESTOR IN UNDERSTANDING THE
VARIOUS COSTS AND EXPENSES THAT A SHAREHOLDER OF FFB SHARES OF THE FUND WILL
BEAR, EITHER DIRECTLY OR INDIRECTLY. FOR MORE COMPLETE DESCRIPTIONS OF THE
VARIOUS COSTS AND EXPENSES, SEE "FEES AND EXPENSES." WIRE-TRANSFERRED
REDEMPTIONS OF LESS THAN $5,000 MAY BE SUBJECT TO ADDITIONAL FEES.
Because of the asset-based sales charge, long-term shareholders may pay
more than the economic equivalent of the maximum front-end sales charges
permitted under the rules of the National Association of Securities Dealers,
Inc.
1 year 3 years 5 years 10 years
------ ------- ------- --------
Example
You would pay the following
expenses on a $1,000 investment,
assuming (1) a 5% annual return
and (2) redemption at the
end of each time period. As
noted in the table above, the
Fund charges no redemption fee
for FFB Shares:............ $ 50 $72 $96 $164
THE ABOVE EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR
FUTURE EXPENSES. ACTUAL EXPENSES MAY BE GREATER OR LESS THAN THOSE SHOWN.
The information set forth in the foregoing table and example relates only
to FFB Shares of the Fund. The Fund offers Class C Shares which bear a maximum
contingent deferred sales load of 4.00% and a 12b-1 fee of 0.75 of 1%. The
Fund also offers another class of shares called Trust Shares. Trust Shares are
subject to certain of the same expenses, except they bear no sales load or
12b-1 fee. See "Other Classes of Shares."
FINANCIAL HIGHLIGHTS
First Union High Grade Tax Free Portfolio
(formerly, First Union Insured Tax Free Portfolio)
FFB (Class B) Shares
Supplementary Information
(For a share outstanding throughout each period)
The following table has been audited by KPMG Peat Marwick, the Fund's
independent auditors. Their report, dated February 11, 1994, on the Fund's
Financial Statements for the year ended December 31, 1993, and on the
following table for each of the periods presented, is included in the Trust's
Annual Report, which is incorporated herein by reference. This table should be
read in conjunction with the Fund's Financial Statements and notes thereto,
contained in the Annual Report, which may be obtained from the Fund.
Class B
Investment Shares(c)
----------------------------------------
Year Ended Period Ended
December 31, 1993 December 31, 1992*
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Net asset value, beginning
of period..................... $ 10.42 $ 10.00
Income from investment operations
Net investment
income........................ 0.54 0.51
Net realized and unrealized gain
on investments........ 0.81 0.42
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Total from investment
operations....................... 1.35 0.93
Less distributions
Dividends to shareholders
from net investment income... (0.54) (0.51)
Distributions to shareholders
from net realized gain on
investment transactions........ (0.07) --
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Total distributions..........
.......................... (0.61) (0.51)
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Net asset value, end of
period........................... $ 11.16 $ 10.42
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Total return**.................. 13.25% 9.37%
Ratios to Average Net Assets
Expenses...................... 0.85% 0.49%(a)
Net investment income......... 4.99% 5.79%(a)
Expense waiver/reimbursement
(b)....................... 0.22% 0.62%(a)
Supplemental Data
Net assets, end of period
(000 omitted)................ $ 101,352 $ 90,738
Portfolio turnover rate..... 14% 7%
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* Reflects operations for the period from February 21, 1992 (commencement of
operations) to December 31, 1992.
** Based on net asset value, which does not reflect the sales load or
contingent deferred sales charge, if applicable.
(a) Computed on an annualized basis.
(b) This voluntary expense decrease is reflected in both the expense and net
investment income ratios shown above.
(c) Trust Shares were not being offered as of December 31, 1993. Accordingly,
there are no Financial Highlights for such Shares. The Financial
Highlights presented above are historical information for Class B
Investment Shares of the Fund.
Further information about the Fund's performance is contained in the Trust's
Annual Report dated December 31, 1993, which can be obtained free of charge.
FINANCIAL HIGHLIGHTS
First Union High Grade Tax Free Portfolio
(formerly, First Union Insured Tax Free Portfolio)
Class C Shares
Supplementary Information
(For a share outstanding throughout each period)
The following table has been audited by KPMG Peat Marwick, the Fund's
independent auditors. Their report, dated February 11, 1994, on the Fund's
Financial Statements for the year ended December 31, 1993, and on the
following table for the period presented, is included in the Trust's Annual
Report, which is incorporated herein by reference. This table should be read
in conjunction with the Fund's Financial Statements and notes thereto,
contained in the Annual Report, which may be obtained from the Fund.
Class C
Investment Shares (c)
---------------------
Period Ended
December 31, 1993*
---------------------
Net asset value, beginning
of period............................... $ 10.42
Income from investment operations
Net investment income................. 0.47
Net realized and unrealized gain on
investments...................... 0.81
----------
Total from investment operations....... 1.28
Less distributions
Dividends to shareholders from net
investment income...................... (0.47)
Distributions to shareholders from net
realized gain on investment transactions (0.07)
----------
Total distributions.................... (0.54)
----------
----------
Net asset value, end of period............. $ 11.16
----------
----------
Total return**............................. 12.41%
Ratios to Average Net Assets
Expenses................................. 1.35%(a)
Net investment income.................... 4.44%(a)
Expense waiver/reimbursement (b)......... 0.22%(a)
Supplemental Data
Net assets, end of period (000 omitted)..... $41,030
Portfolio turnover rate................... 14%
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* Reflects operations for the period from January 11, 1993 (commencement of
operations) to December 31, 1993.
** Based on net asset value, which does not reflect the sales load or
contingent deferred sales charge, if applicable.
(a) Computed on an annualized basis.
(b) This voluntary expense decrease is reflected in both the expense and net
investment income ratios shown above.
(c) Trust Shares were not being offered as of December 31, 1993. Accordingly,
there are no Financial Highlights for such Shares. The Financial
Highlights presented above are historical information for Class C
Investment Shares of the Fund.
Further information about the Fund's performance is contained in the Trust's
Annual Report dated December 31, 1993, which can be obtained free of charge.
INVESTMENT OBJECTIVE AND POLICIES
The Fund's investment objective cannot be changed without approval of
shareholders. While there is no assurance that the Fund will achieve its
investment objective, it endeavors to do so by following the investment
policies described in this prospectus. Unless otherwise indicated, the
investment policies may be changed by the Trust's Board of Trustees
("Trustees") without the approval of shareholders. Shareholders will be
notified before any material change in these policies becomes effective.
Objective: High level of federally tax free income that is consistent
with preservation of capital.
Invests in: Insured municipal bonds.
Suitable for: Investors seeking high tax free monthly income and greater
liquidity.
Key Benefit: Greater diversification and liquidity than purchasing
municipal bonds directly. Pays monthly dividends for those
who need current income.
Description of the Fund
The Fund seeks a high level of federally tax free income that is
consistent with preservation of capital. The Fund pursues this objective by
investing primarily in a portfolio of insured municipal bonds. At least 65% of
the value of its total assets will be invested in insured obligations. The
insurance guarantees the timely payment of principal and interest but not the
value of the municipal bonds or shares of the Fund.
As a matter of investment policy, which cannot be changed without the
approval of shareholders, the Fund will normally invest its assets so that at
least 80% of its annual interest income is exempt from federal income taxes
(including the alternative minimum tax). The interest income retains its tax
free status when distributed to the Fund's shareholders.
Types of Investments
Municipal bonds are the primary investment of the Fund. Municipal bonds
are debt obligations issued by or on behalf of states, territories, and
possessions of the United States, including the District of Columbia, and
their political subdivisions, agencies, and instrumentalities, the interest
from which is exempt from federal income tax. It is likely that shareholders
who are subject to the alternative minimum tax will be required to include
interest from a portion of the municipal securities owned by the Fund in
calculating the federal individual alternative minimum tax or the federal
alternative minimum tax for corporations.
The municipal bonds in which the Fund may invest are subject to one or
more of the following quality standards: rated A or better by Moody's
Investors Service, Inc. ("Moody's") or Standard & Poor's Corporation ("S&P"),
or, if unrated, determined by the Adviser to be of comparable quality to such
rated bonds; or insured by a municipal bond insurance company which is rated
Aaa by Moody's or AAA by S&P. A description of the rating categories is
contained in the Appendix of the Fund's Statement of Additional Information.
If a security invested in by the Fund loses its rating or has its rating
reduced after the Fund has purchased it, the Fund is not required to sell or
otherwise dispose of the security, but will consider doing so.
Temporary Investments
During periods when, in the Adviser's opinion, a temporary defensive
position in the market is appropriate, the Fund may temporarily invest in
short-term tax exempt or taxable investments. These temporary investments
include: notes issued by or on behalf of municipal or corporate issuers;
obligations issued or guaranteed by the U.S. government, its agencies, or
instrumentalities; other debt securities; commercial paper; bank certificates
of deposit; and repurchase agreements. There are no rating requirements
applicable to temporary investments. However, the Adviser will limit temporary
investments to those it considers to be of comparable quality to the
acceptable investments of the Fund.
Although the Fund is permitted to make taxable, temporary investments,
there is no current intention of generating income subject to federal income
tax.
The Fund may also purchase investments having variable rates of interest.
One example is variable amount demand master notes. These notes represent a
borrowing arrangement between a commercial paper issuer (borrower) and an
institutional lender such as the Fund (lender) and are payable upon demand.
The underlying amount of the loan may vary during the course of the contract,
as may the interest on the outstanding amount, dependent on a stated
short-term interest rate index.
Municipal Bonds
Municipal bonds are debt obligations issued by a state or local entity.
The funds raised may support a government's general financial needs or special
projects, such as housing projects or sewer works.
The two principal classifications of municipal bonds are "general
obligation" and "revenue" bonds. General obligation bonds are secured by the
issuer's pledge of its full faith and credit and taxing power for the payment
of principal and interest. Revenue bonds are paid off only with the revenue
generated by the project financed by the bonds or other specified sources of
revenue. For example, in the case of a bridge project, proceeds from the tolls
would go directly to retiring the bond issue. Thus, unlike general obligation
bonds, revenue bonds do not represent a pledge of credit or create any debt of
or charge against the general revenues of a municipality or public authority.
The Fund may invest more than 25% of its total assets in industrial
development bonds as long as they are not from the same facility or similar
types of facilities.
Risk Factors
Bond yields are dependent on several factors, including market
conditions, the size of an offering, the maturity of the bond, ratings of the
bond and the ability of issuers to meet their obligations. The purpose of
municipal bond insurance is to guarantee the timely payment of principal at
maturity and interest.
Municipal Bond Insurance
At least 65% of the Fund's total assets will be invested in municipal
securities which are insured for timely payment of principal at maturity and
interest. The Fund will require insurance when purchasing municipal securities
which would not otherwise meet the Fund's quality standards. The Fund may also
require insurance when, in the opinion of the Adviser, such insurance would
benefit the Fund, for example, through improvement of portfolio quality or
increased liquidity of certain securities.
Securities in the portfolio may be insured in one of two ways: (1) by a
policy applicable to a specific security, obtained by the issuer of the
security or by a third party ("Issuer-Obtained Insurance") or (2) under master
insurance policies issued by municipal bond insurers, purchased by the Fund
(the "Policies"). If a security's coverage is Issuer-Obtained, then that
security does not need to be covered in the Policies.
The Fund may purchase Policies from Municipal Bond Investors Assurance
Corp., AMBAC Indemnity Corporation, and Financial Guaranty Insurance Company,
or any other municipal bond insurer which is rated Aaa by Moody's or AAA by
S&P. A more detailed description of these insurers may be found in the Fund's
Statement of Additional Information.
Annual premiums for these Policies are paid by the Fund and are estimated
to range from 0.10% to 0.25% of the value of the municipal securities covered
under the Policies, with an average annual premium rate of approximately
0.175%. While the insurance feature reduces financial risk, the cost thereof
and the restrictions on investments imposed by the guidelines in the insurance
policies reduce the yield to shareholders.
OTHER INVESTMENT POLICIES
The Fund has adopted the following practices for specific types of
investments.
Repurchase Agreements
The Fund may invest in repurchase agreements. Repurchase agreements are
agreements by which the Fund purchases a security (usually U.S. government
securities) for cash and obtains a simultaneous commitment from the seller
(usually a bank or broker/dealer) to repurchase the security at an agreed-upon
price and specified future date. The repurchase price reflects an agreed-upon
interest rate for the time period of the agreement. The Fund's risk is the
inability of the seller to pay the agreed-upon price on delivery date.
However, this risk is tempered by the ability of the Fund to sell the security
in the open market in the case of a default. In such a case, the Fund may
incur costs in disposing of the security which would increase Fund expenses.
The Adviser will monitor creditworthiness of the firms with which the Fund
enters into repurchase agreements. The Fund will only invest in repurchase
agreements as a temporary investment.
When-issued and Delayed Delivery Transactions
The Fund may purchase portfolio securities on a when-issued or delayed
delivery basis. In such cases, the Fund commits to purchase a security which
will be delivered and paid for at a future date.
The Fund relies on the seller to deliver and risks missing an advantageous
price or yield if the seller does not deliver the security as promised.
Lending of Portfolio Securities
In order to generate additional income, the Fund may lend its portfolio
securities on a short-term or long-term basis to broker/dealers, banks, or
other institutional borrowers of securities. The Fund will only enter into
loan arrangements with creditworthy borrowers and will receive collateral in
the form of cash or U.S. government securities equal to at least 100% of the
value of the securities loaned. As a matter of fundamental policy which cannot
be changed without shareholder approval, the Fund will not lend any of its
assets except portfolio securities up to 15% of the value of its total assets.
Investing in Securities of Other Investment Companies
The Fund may invest in the securities of other investment companies that
have investment objectives and policies similar to its own. This is a
short-term measure to invest cash which has not yet been invested in other
portfolio instruments and is subject to the following limitations: (1) the
Fund will not own more than 3% of the total outstanding voting stock of any
one investment company, (2) the Fund may not invest more than 5% of its total
assets in any one investment company and (3) the Fund may not invest more than
10% of its total assets in investment companies in general. The Adviser will
waive its investment advisory fee on assets invested in securities of other
open-end investment companies.
The following investment limitations cannot be changed without
shareholder approval.
Borrowing Money
The Fund will not borrow money directly or through reverse repurchase
agreements or pledge securities, except under certain circumstances, the Fund
may borrow up to one-third of the value of its total assets and pledge up to
15% of the value of those assets to secure such borrowings.
Restricted and Illiquid Securities
The Fund may not invest more than 10% of its total assets in securities
which are subject to restrictions on resale under federal securities law. The
Fund may not invest more than 10% of its net assets in illiquid securities
including repurchase agreements providing for settlement in more than seven
days after notice and certain restricted securities.
Diversification
With respect to 75% of the value of its total assets, the Fund may invest
no more than 5% of its total assets in securities of one issuer (except cash,
cash items, U.S. government obligations, and repurchase agreements
collateralized by U.S. government obligations) or own more than 10% of the
outstanding voting securities of one issuer.
Although not a fundamental restriction or policy requiring a
shareholders' vote to change, the Fund has undertaken to a state securities
authority that so long as the state authority requires and shares of the Fund
are registered for sale in that state, the Fund will not invest in the
following:
"Non-active" Securities
The Fund will not invest more than 10% of its net assets in securities
for which an active and substantial market does not exist along with
investments in illiquid securities, restricted securities, securities for
which market quotations are not readily available, and repurchase agreements
maturing in more than seven days.
Warrants
The Fund may not invest more than 5% of its net assets in warrants. No
more than 2% of this 5% may be in warrants which are not listed on the New
York or American Stock Exchanges.
SHAREHOLDER GUIDE
Share Price Calculation
The net asset value equals the market value of all of the Fund's
portfolio securities divided by the total Shares outstanding. It is also the
bid price. The offering price is quoted after adding a sales charge to the net
asset value.
Purchases, redemptions and exchanges are all based on net asset value.
(The purchase price of FFB Shares adds an applicable sales charge.) The net
asset value is determined at 4:00 p.m. (Eastern time), Monday through Friday,
except on: (i) days on which there are not sufficient changes in the value of
the Fund's portfolio securities that its net asset value might be materially
affected; (ii) days during which no Shares are tendered for redemption and no
orders to purchase Shares are received; and (iii) the following holidays: New
Year's Day, Martin Luther King Day, Presidents' Day, Good Friday, Memorial
Day, Independence Day, Labor Day, Columbus Day, Veterans' Day, Thanksgiving
Day and Christmas Day. The net asset value is computed by adding cash and
other assets to the closing market value of all securities owned, subtracting
liabilities and dividing the result by the number of outstanding shares. The
net asset value will vary each day depending on purchases and redemptions.
Expenses and fees, including the management fee, are accrued daily and taken
into account for the purpose of determining net asset value.
The net asset value of Trust Shares of the Fund may differ slightly from
that of FFB (Class B) Shares and Class C Shares due to the variability in
daily net income resulting from different distribution charges for each class
of shares. The net asset value will fluctuate for all three classes.
Performance Information
The Fund's performance may be quoted in terms of total return, yield, or
tax equivalent yield. Performance information is historical and is not
intended to indicate future results.
From time to time the Fund may make available certain information about
the performance of the FFB (Class B) Shares. It is generally reported using
total return, yield and tax equivalent yield.
Total return takes into account both income (dividends) and changes in
the Fund's Share price (appreciation or depreciation). It is based on the
overall dollar or percentage change in value of an investment assuming
reinvestment of all dividends and capital gains during a specified period.
Total return is measured by comparing the value of an investment at the
beginning of a specified period to the redemption value at the end of the same
period, assuming reinvestment of dividends or capital gains distributions.
Yield shows how much income an investment generates. It refers to the
Fund's income over a 30-day period expressed as a percentage of the Fund's
Share price. The yield of FFB (Class B) Shares is calculated by dividing the
sum of all interest and dividend income (less Fund expenses) over a 30-day
period, by the offering price per Share on the last day of the period. The
number is then annualized using semi-annual compounding.
The Fund may advertise the tax equivalent yield, which is calculated like
the yield described above, except that for any given tax bracket, net
investment income will be calculated as the sum of any taxable income and the
tax exempt income divided by the difference between 1 and the federal tax
rates for taxpayers in that tax bracket.
The yield and tax equivalent yield do not necessarily reflect income
actually earned by FFB (Class B) Shares of the Fund and, therefore, may not
correlate to the dividends or other distributions paid to shareholders.
Performance information for the FFB (Class B) Shares reflects the effect
of a sales charge which, if excluded, would increase the total return, yield,
and tax equivalent yield.
Total return, yield, and tax equivalent yield will be calculated
separately for FFB (Class B) Shares, Class C Shares, and Trust Shares of the
Fund. Because FFB (Class B) Shares and Class C Shares are subject to 12b-1
fees, the yield and tax equivalent yield will be lower than that of Trust
Shares. The sales load applicable to FFB (Class B) Shares also contributes to
a lower total return for FFB (Class B) Shares. Class C Shares are subject to
similar non-recurring charges, such as a contingent deferred sales charge,
which, if excluded, would increase the total return for Class C Shares.
From time to time, the Fund may advertise its performance using certain
rankings published in financial publications and/or compare its performance to
certain indices.
PURCHASE OF SHARES
Shares of the Fund are offered by Federated Securities Corp. (the
"Distributor" or "FSC") as an investment vehicle for institutions,
corporations, fiduciaries and individuals. Orders for purchase of shares of
the Fund will be executed at the net asset value per share plus any applicable
sales charge (the "public offering price") next determined after an order has
become effective. The sales charge for purchases of shares of the Fund may
range from 0.25% to 4.00% of the public offering price (which is equal to
0.25% to 4.17% of the net amount invested), with the amount of the sales
charge varying with the size of the purchase made, according to the following
schedule:
Sales Charge as Sales Charge as a
a Percentage of Percentage of Net
Amount of Transaction Public Offering Price Amount Invested
- ------------------------------- --------------------- -----------------
$ 0-$ 99,999........ 4.00% 4.17%
$ 100,000-$ 249,999.......... 3.50% 3.63%
$ 250,000-$ 499,999.......... 2.50% 2.56%
$ 500,000-$ 749,999.......... 1.50% 1.52%
$ 750,000-$ 999,999.......... 1.00% 1.01%
$1,000,000-$2,499,999........ 0.50% 0.50%
$2,500,000+.................. 0.25% 0.25%
Sales charges may be reduced in some cases. An investor may be entitled
to a reduction if: (1) the investor makes a single large purchase, (2) the
investor, the investor's spouse and/or children (under 21 years) make Fund
purchases on the same day, (3) the investor makes an additional purchase to
add to an existing account, or (4) the investor reinvests in the Fund within
30 days of redemption. In all of these cases, an investor must notify the
Distributor of the investor's intentions in writing in order to qualify for a
sales charge reduction. For more information, consult the Statement of
Additional Information or the Distributor.
For sales of shares of the Fund, a dealer will normally receive up to 85%
of the applicable sales charge. Any portion of the sales charge which is not
paid to a dealer will be retained by the Distributor. The sales charge for
Shares sold other than through registered broker/dealers will be retained by
FSC. FSC may pay fees to banks out of the sales charge in exchange for sales
and/or administrative services performed on behalf of the bank's customers in
connection with the initiation of customer accounts and purchases of Shares.
The Distributor may establish special promotional programs with First Fidelity
Securities Group.
Minimum Investment
The minimum initial investment requirement for shares of the Fund is
$1,000. The minimum subsequent investment requirement for the Fund is $100.
There are no minimum investment requirements with respect to investments
effected through certain automatic purchase arrangements on behalf of customer
accounts maintained at Participating Organizations (as hereinafter defined).
The minimum investment requirements may be waived or lowered for investments
effected on a group basis by certain other institutions and their employees.
All funds will be invested in full and fractional shares. The Fund reserves
the right to reject any purchase order.
Orders for shares will be executed at the net asset value per share, plus
any applicable sales charge, next determined after an order has become
effective. Orders will become effective when
Federal funds (money available to the Fund through a Federal Reserve Bank wire
transfer) are available to the Fund's custodian for investment. If payment is
transmitted by wire, the order will become effective upon receipt of Federal
funds. Federal Reserve wire transmissions may be subject to delays of up to
several hours, in which case execution of an order will be delayed for a
period of time. Payments transmitted by a bank wire other than the Federal
Reserve Wire System may take longer to be converted into Federal funds. Banks
may charge a service fee for transfers by wire. Checks must be payable in
United States dollars and will be accepted subject to collection at full face
value. Share certificates will not be issued to any investor.
Prospective investors who wish to obtain additional information
concerning investment procedures should contact FFB Funds Distributor, Inc. at
(800) 437-8790. As described later in the prospectus, FFB Funds Distributor,
Inc. is a Participating Organization.
Direct Purchase through FFB Funds Distributor, Inc.
Purchase by Wire
1. Telephone: (800) 437-8790. State that the funds are to be invested in
the FFB Shares of the First Union High Grade Tax Free Portfolio. Give the
name(s) in which the Fund Shares are to be registered, address, social
security or tax identification number (where applicable), dividend payment
election, amount to be wired, name of the wiring bank and name and telephone
number of the person to be contacted in connection with the order. An account
number will be assigned.
2. Instruct the wiring bank to transmit the specified amount in Federal
funds ($1,000 or more) to:
Investors Fiduciary Trust Company ("IFTC")
Kansas City, MO 64105
ABA Routing No. 101003621
ACCT. No 7512996
FBO FFB Shares of the First Union High Grade Tax Free Portfolio
Account Name(s) (in which to be registered)
Account Number (as assigned by telephone)
3. Complete a Purchase Application indicating the services to be used
and mail to:
FFB Funds Distributor, Inc.
PO Box 4490
Grand Central Station
New York, New York 10164-2294
A completed Purchase Application must be received by FFB Funds
Distributor, Inc. before the Expedited Redemption or Check Redemption Services
can be used.
Purchase by Mail
1. Complete a Purchase Application. Indicate the services to be used.
2. Mail the Purchase Application and a check for $1,000 or more, payable
to FFB Shares of the High Grade Tax Free Portfolio, to FFB Funds Distributor,
Inc.
Additional Purchase by Wire and Mail
Additional purchases of shares may be made by wire by contacting the Fund
at (800) 437-8790 and then instructing the wire bank to transmit the amount
($100 or more) of any additional purchase, in Federal funds, to IFTC along
with your account name and number. Additional purchases may also be made by
mail by making a check ($100 or more) payable to the Fund indicating your fund
account number on the check and mailing it to FFB Funds Distributor, Inc.
Automatic Investment Plan
The Fund provides a convenient method by which a shareholder can have
amounts transferred directly from his or her checking account for investment
in the Fund. The minimum initial/subsequent investment pursuant to this
program is $100, invested on a monthly or quarterly basis.
REDEMPTION OF SHARES
Upon receipt by FFB Funds Distributor, Inc. of a redemption request in
proper form, shares of the Fund will be redeemed at their next determined net
asset value. See "Share Price Calculation." For the shareholder's convenience,
the Fund has established several different direct redemption procedures. No
redemption of shares purchased by check will be permitted until the check has
cleared, which may take up to 15 days after those shares have been credited to
the shareholder's account.
For Federal tax purposes, a redemption of shares of the Fund is
considered to be a sale of such shares, and may result in a taxable gain or
loss depending on the application of certain special tax rules.
Direct Redemption Through FFB Funds Distributor, Inc.
Redemption By Mail
1. Write a letter of instruction. Indicate the dollar amount or number
of shares to be redeemed. Refer to the shareholder's Fund account number.
2. Sign the letter in exactly the same way the account is registered. If
there is more than one owner of the shares, all must sign.
3. If the shares to be redeemed have a value of $25,000 or more, the
signature(s) must be guaranteed by a commercial bank that is a member of the
Federal Deposit Insurance Corporation, a trust company, a member firm of a
domestic stock exchange or a foreign branch of any of the foregoing or an
approved savings bank or savings and loan association. A signature guarantee
by a non-approved savings bank or a notary public is not acceptable. Further
documentation, such as copies of corporate resolutions and instruments of
authority, may be requested from corporations, administrators, executors,
personal representatives, trustees or custodians to evidence the authority of
the person or entity making the redemption request.
4. Mail the letter to FFB Funds Distributor, Inc. at the address set
forth under "Purchase of Shares."
Checks for redemption proceeds (net of any withholding required under
Federal income tax laws) will normally be mailed within seven business days to
the shareholder's address of record or to the payee indicated on the validated
redemption request.
Upon request, the proceeds of a redemption amounting to $1,000 or more
(net of any withholding required under Federal income tax laws) will be sent
by wire to the shareholder's pre-designated bank account. When proceeds of a
redemption are to be paid to someone other than the shareholder of record,
either by wire or check, the signature(s) on the letter of instructions must
be guaranteed, regardless of the amount of the redemption.
Redemption by Expedited Redemption Service
If the Expedited Redemption Service has been elected on the Purchase
Application on file with FFB Funds Distributor, Inc., redemption of shares may
be requested on any day the Fund is open for business, by telephone or letter.
(See "Share Price Calculation" for days the Fund is open for business). A
signature guarantee is not required.
1. Telephone the request to FFB Funds Distributor, Inc. at (800)
437-8790; or
2. Mail the request to FFB Funds Distributor, Inc. at the address set
forth under "Purchase of Shares."
Proceeds of Expedited Redemptions of $1,000 or more (net of any
withholding required under Federal income tax laws) will be wired to the
shareholder's bank as indicated in the Purchase Application. Redemptions will
be effected and the proceeds will be transmitted on the next day on which the
Fund is open for business. If a shareholder requests a check or if the
proceeds of the redemption are in an amount of less than $1,000, a check will
be mailed to the shareholder's address of record.
FFB Funds Distributor, Inc. employs reasonable procedures to confirm that
the instructions communicated by telephone are genuine. If FFB Funds
Distributor, Inc. fails to employ such reasonable procedures, it may be liable
for any loss, damage or expense arising out of any telephone transactions
purporting to be on a shareholder's behalf. In order to assure the accuracy of
instructions received by telephone, FFB Funds Distributor, Inc. requires some
form of personal identification prior to acting upon instructions received by
telephone, records telephone instructions and provides a written confirmation
to investors of each transaction.
Redemptions by Check Redemption Service
If the Check Redemption Service has been elected on the Purchase
Application, a shareholder will be sent a Check Redemption Signature Card to
be completed. Once the Signature Card is on file with FFB Funds Distributor,
Inc., redemptions of shares of the Fund may be made by using redemption checks
provided by the Fund. There is no charge for this service. Checks must be
written for amounts of $500 or more, may be payable to anyone and negotiated
in the normal way. If more than one shareholder owns the shares in the Fund
account, all must sign the check, unless an election has been made to require
only one signature on checks and that election has been filed with FFB Funds
Distributor, Inc.
Shares represented by a redemption check will continue to earn daily
income until the check clears the banking system. When honoring a redemption
check, FFB Funds Distributor, Inc. will cause the Fund to redeem exactly
enough full and fractional shares from a Fund account to cover the amount of
the check. The Check Redemption Service may be terminated at any time by FFB
Funds Distributor, Inc. or the Fund.
Systematic Withdrawal Plan
An owner of $12,000 or more of shares in the Fund may elect to have
periodic redemptions from the shareholder's account to be paid on a monthly,
quarterly or annual basis. The maximum payment per year is 12% of the account
value at the time of the election. The minimum periodic payment is $100. A
sufficient number of shares of the Fund to make the scheduled redemption will
normally be redeemed on the 25th day of each month. 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 pre-designated 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. The Fund
reserves the right to amend the Systematic Withdrawal Plan on 30 days' notice.
The Systematic Withdrawal Plan may be terminated at any time by the
shareholder. It should be noted that it may be to a shareholder's disadvantage
to buy shares of the Fund with a sales charge while concurrently making
systematic redemptions under the Systematic Withdrawal Plan.
Exchange Privilege
Shareholders who have held all or part of their shares in the Fund for at
least 15 days may exchange shares for the Fund for shares (at their next
determined relative net asset value) of other investment companies for which
FFB Funds Distributor, Inc. serves as a Participating Organization.
Shareholders should call or write FFB Funds Distributor, Inc. for additional
information about exchanges and a copy of the prospectus for any additional
investment company with which they wish to make an exchange before investing.
Exchanges may be made by writing FFB Funds Distributor, Inc. or through
another Participating Organization. For shareholders to whom the minimum
investment restrictions apply, the minimum amount which may be exchanged into
another investment company in which shares are not held is $1,000; no partial
exchange may be made if, as a result, such shareholder's interest in the Fund
would be reduced to less than $1,000. There is no charge for exchanges. Before
effecting an exchange, shareholders should review the prospectus (and, if
applicable, the prospectus for any other investment company).
An exchange of shares is taxable as a redemption on which a gain or loss
may be recognized for Federal income tax purposes. In the case of transactions
subject to a sales charge, the 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. The exchange privilege may be modified or terminated upon 60
days' written notice.
Account Services
All transactions in shares of the Fund will be reflected in a statement
for each shareholder, which will be mailed at least once each month. In those
cases where a Participating Organization or its nominee is shareholder of
record for the shares of the Fund purchased for its customer, the Fund has
been advised that the statement may be transmitted to the customer in the
discretion of the Participating Organization. Individual transactions will not
be separately reported. Shareholders can write or call FFB Funds Distributor,
Inc. at (800) 437-8790 (or their Participating Organization, as the case may
be) with any questions relating to their investments in shares of the Fund.
Participating Organizations or their nominees may be the shareholders of
record as nominees for their customers, and may maintain sub-accounts for
those customers. Any such customer may becomethe shareholder of record
upon written request to the Participating Organization or to FFB Funds
Distributor, Inc.
FFB Funds Distributor, Inc. transmits promptly to each of its customers
for whom it processes purchases and redemptions of shares and to each
Participating Organization copies of all reports to shareholders, proxy
statements and other Fund communications. The Fund's arrangements with FFB
Funds Distributor, Inc. and the sub-accounting agent arrangements require
Participating Organizations to grant investors who purchase shares in the Fund
through customer accounts the opportunity to vote their shares by proxy at all
shareholder meetings of the Fund. In certain cases, a customer of a
Participating Organization may have given his or her Participating
Organization the power to vote shares of the Fund on his or her behalf.
Customers with accounts at Participating Organizations should consult their
Participating Organization for information concerning their rights to vote
shares of the Fund.
MANAGEMENT OF THE TRUST
Responsibility for the overall management of the Trust rests with its
Trustees and officers. Other service providers include the Fund's Distributor,
Investment Adviser, Custodian, Transfer Agent, Legal Counsel, and Independent
Auditors.
Investment Adviser
Professional investment supervision for the Fund is provided by the
investment adviser, the Capital Management Group of First Union.
First Union is a subsidiary of First Union Corporation, a bank holding
company headquartered in Charlotte, North Carolina, with $70.8 billion in
total consolidated assets as of December 31, 1993. Through offices in 36
states and one foreign country, First Union Corporation and its subsidiaries
provide a broad range of financial services to individuals and businesses.
First Union's Capital Management Group employs an experienced staff of
professional investment analysts, portfolio managers, and traders, and uses
several proprietary computer-based systems in conjunction with fundamental
analysis to identify investment opportunities. The Capital Management Group
has been managing trust assets for over 50 years and currently oversees assets
of more than $43.0 billion. In addition, the Capital Management Group has
advised the Trust since its inception in 1984.
The Fund's portfolio manager is Robert S. Drye. Mr. Drye is a Vice
President of First Union National Bank of North Carolina, N.A., and has been
with First Union since 1968. Since 1989, Mr. Drye has served as a portfolio
manager for several of the First Union Funds and for certain common trust
funds. Prior to 1989, Mr. Drye worked as a marketing specialist with First
Union Brokerage Services, Inc. Mr. Drye has managed the Fund since its
inception in February 1992.
Distribution of Shares
FSC, a subsidiary of Federated Investors, is the principal distributor
for the Trust. It is a Pennsylvania corporation organized on November 14,
1969, and is the principal distributor for a number of investment companies.
The Fund has adopted a plan for distribution of FFB (Class B) Shares
permitted by Rule 12b-1 under the Investment Company Act of 1940 (the "Plan"),
whereby the Fund has authorized a daily expense ("Rule 12b-1 fee") at an
annual rate of 0.75% of the average daily net asset value of the Fund to
finance the sale of FFB (Class B) Shares. It is currently intended that
annual Rule 12b-1 fees will be limited for the foreseeable future to
payments to the Distributor equal to 0.25% for Class B Shares and FFB Shares
of the Fund's average daily net asset value.
The Distributor may pay all or a portion of the Rule 12b-1 fee to
compensate selected brokers and financial institutions for selling Shares or
for administrative services rendered in connection with the FFB Shares. (Such
brokers and institutions, including FFB Funds Distributor, Inc., are referred
to in the prospectus as "Participating Organizations.")
The Fund makes no payments in connection with the sale of Shares other
than the Rule 12b-1 fees paid to the Distributor. With respect to FFB (Class
B) Shares, the Fund does not pay for unreimbursed expenses of the Distributor.
Since the Fund's Plan is a "compensation" type plan, however, future Rule
12b-1 fees may permit recovery of such amounts or may result in a profit to
FSC.
The Fund has also adopted a plan for distribution of Class C Investment
Shares permitted by Rule 12b-1 under the Investment Company Act of 1940.
FSC, from time to time, may pay brokers additional sums of cash or
promotional incentives based upon the amount of Shares sold. Such payments, if
made, will be in addition to amounts paid under the Plan and will not be an
expense of the Fund.
Fund Administration
Federated Administrative Services ("FAS"), a subsidiary of Federated
Investors, provides the Fund with administrative personnel and services
necessary to operate the Fund, such as legal and accounting services, for a
specified fee which is detailed below.
State Street Bank and Trust Company of Boston, Massachusetts ("State
Street Bank") serves as custodian and transfer agent, providing dividend
disbursement and other shareholder services for the Trust. Legal counsel to
those Trustees who are not "interested persons" of the Trust as defined in the
Investment Company Act of 1940, is provided by Sullivan & Worcester,
Washington, D.C., and legal counsel to the Trust is provided by Houston,
Houston & Donnelly, Pittsburgh, Pennsylvania.
The independent auditors for the Trust are KPMG Peat Marwick, Pittsburgh,
Pennsylvania.
FEES AND EXPENSES
The Fund pays annual advisory and administrative fees and certain
expenses.
Advisory and Administrative Fees
For managing its investment and business affairs, the Fund pays an annual
fee to First Union. The Adviser receives an annual investment advisory fee
equal to .50 of 1% of the Fund's average daily net assets. The Adviser may
voluntarily choose to waive a portion of its fee or reimburse the Fund for
certain operating expenses.
The Trust also pays a fee for administrative services. FAS provides these
at an annual rate as specified below:
Maximum Average Aggregate Daily
Administrative Fee Net Assets of the Trust
----------------------------------- ------------------------------------
.150 of 1%......................... on the first $250 million
.125 of 1%......................... on the next $250 million
.100 of 1%......................... on the next $250 million
.075 of 1%......................... on assets in excess of $750 million
Unless waived, the administrative fee received during any fiscal year by
FAS for services furnished to the Fund shall aggregate at least $50,000.
Expenses of the Fund and Shares
Holders of Shares pay their allocable portion of Trust and Fund expenses.
The Trust expenses for which holders of Shares pay their allocable portion
include, but are not limited to: the cost of organizing the Trust and
continuing its existence; the cost of registering the Trust; Trustees' fees;
auditors' fees; the cost of meetings of Trustees; legal fees of the Trust;
association membership dues and such non-recurring and extraordinary items as
may arise.
The Fund expenses for which holders of Shares pay their allocable portion
based on average daily net assets include, but are not limited to: registering
the Fund and Shares of the Fund; investment advisory services; taxes and
commissions; custodian fees; insurance premiums; auditors' fees; and such
non-recurring and extraordinary items as may arise.
The Fund's expenses under the Rule 12b-1 Plans are incurred solely by FFB
(Class B) and Class C Shares. The Trustees reserve the right to allocate
certain expenses to holders of Shares as they deem appropriate ("Class
Expenses"). In any case, Class Expenses would be limited to: Rule 12b-1 fees;
transfer agent fees; printing and postage expenses; registration fees; and
administrative, legal and Trustees' fees. Presently, all Fund expenses, other
than Rule 12b-1 fees, are allocated based upon the average daily net assets of
each class.
SHAREHOLDER RIGHTS AND PRIVILEGES
Voting Rights
Each share of the Fund is entitled to one vote in Trustee elections and
other voting matters submitted to shareholders. All shares of all classes of
each portfolio in the Trust have equal voting rights, except that in matters
affecting only a particular portfolio or class, only shares of that portfolio
or class are entitled to vote.
As a Massachusetts business trust, the Trust is not required to hold
annual shareholder meetings. Shareholder approval will be sought only for
certain changes in the Trust or the Fund's operation and for the election of
Trustees under certain circumstances.
Trustees may be removed by a two-thirds vote of the number of Trustees
prior to such removal or by a two-thirds vote of the shareholders at a special
meeting. A special meeting of shareholders shall be called by the Trustees
upon the written request of shareholders owning at least 10% of the Trust's
outstanding shares of all series entitled to vote.
Massachusetts Partnership Law
Under certain circumstances, shareholders may be held personally liable
under Massachusetts law for acts or obligations of the Trust. To protect
shareholders, the Trust has filed legal documents with Massachusetts that
expressly disclaim the liability of shareholders for such acts or obligations
of the Trust. These documents require notice of this disclaimer to be given in
each agreement, obligation, or instrument the Trust or its Trustees enter into
or sign.
In the unlikely event a shareholder is held personally liable for the
Trust's obligations, the Trust is required, by the Declaration of Trust, to
use the property of the Trust to protect or compensate the shareholder. On
request, the Trust will defend any claim made and pay any judgment against a
shareholder for any act or obligation of the Trust. Therefore, financial loss
resulting from liability as a shareholder will occur only if the Trust cannot
meet its obligations to indemnify shareholders and pay judgments against them
from its assets.
Effect of Banking Laws
The Glass-Steagall Act and other banking laws and regulations presently
prohibit banks or nonbank affiliates of member banks of the Federal Reserve
System from sponsoring, organizing, controlling or distributing the shares of
a registered, open-end investment company continuously engaged in the issuance
of its shares. Further, they prohibit banks from issuing, underwriting, or
distributing securities in general. Such laws and regulations do not prohibit
such a holding company or affiliate from acting as investment adviser,
transfer agent, or custodian to such an investment company or from purchasing
shares of such a company as agent for and upon the order of their customer.
The Adviser is subject to and in compliance with such banking laws and
regulations.
Sullivan & Cromwell has advised the Adviser that it may perform the
services for the Fund set forth in the investment advisory agreement, this
prospectus, and the Statement of Additional Information without violation of
the Glass-Steagall Act or other applicable federal banking laws or
regulations. Such counsel has pointed out, however, that changes in federal
statutes and regulations relating to the permissible activities of banks, as
well as further judicial or administrative decisions or interpretations of
such statutes and regulations, could prevent the Adviser from continuing to
perform such services for the Fund or from continuing to purchase Shares for
the accounts of its customers. If the Adviser were prohibited from acting as
investment adviser to the Fund, it is expected that the Trustees would
recommend to the Fund's shareholders that they approve a new investment
adviser selected by the Trustees. It is not expected that the Fund's
shareholders would suffer any adverse financial consequences (if another
adviser with equivalent abilities to the current Adviser is found) as a result
of any of these occurrences.
DISTRIBUTIONS AND TAXES
The Fund pays out as dividends substantially all of its net investment
income (dividends and interest on its investments) and net realized short-term
gains.
Dividends
Dividends are declared daily and paid monthly for the Fund. Dividends are
declared just prior to determining net asset value. Any distributions will be
automatically reinvested in additional Shares on payment dates at the
ex-dividend date net asset value without a sales charge unless a shareholder
otherwise instructs the Fund or FFB Funds Distributor, Inc. in writing.
Capital Gains
Any net long-term capital gains realized by the Fund will be distributed
at least once every 12 months.
TAX INFORMATION
Income dividends and capital gains distributions are taxable as described
below.
Federal Income Tax
The Fund pays no federal income tax if it meets the requirements of the
Internal Revenue Code applicable to regulated investment companies and will
receive the special tax treatment afforded to such companies.
Each portfolio of the Trust is treated as a single, separate entity for
federal income tax purposes so that income (including capital gains) and
losses realized by one portfolio will not be combined for tax purposes with
those realized by other portfolios in the Trust.
Shareholders of the Fund are not required to pay the federal regular
income tax on any dividends received from the Fund that represent net interest
on tax-exempt municipal bonds. However, under the Tax Reform Act of 1986,
dividends representing net interest earned on some municipal bonds may be
included in calculating the federal individual alternative minimum tax or the
federal alternative minimum tax for corporations.
The alternative minimum tax, up to 28% of alternative minimum taxable
income for individuals and 20% for corporations, applies when it exceeds the
regular tax for the taxable year. Alternative minimum taxable income is equal
to the adjusted income of the taxpayer increased by certain "tax preference"
items not included in regular taxable income and reduced by only a portion of
the deductions allowed in the calculation of the regular tax.
The Tax Reform Act of 1986 treats interest on certain "private activity"
bonds issued after August 7, 1986, as a tax preference item. Unlike
traditional governmental purpose municipal bonds, which finance roads,
schools, libraries, prisons, and other public facilities, private activity
bonds provide benefits to private parties. The Fund may purchase all types of
municipal bonds, including "private activity" bonds. Thus, should it purchase
any such bonds, a portion of the Fund's dividends may be treated as a tax
preference item.
In addition, in the case of a corporate shareholder, dividends of the
Fund which represent interest on municipal bonds may be subject to the 20%
corporate alternative minimum tax because the dividends are included in a
corporation's "adjusted current earnings." The corporate alternative minimum
tax treats 75% of the excess of a taxpayer's pre-tax "adjusted current
earnings" over the taxpayer's alternative minimum taxable income as a tax
preference item. "Adjusted current earnings" is based upon the concept of a
corporation's "earnings and profits." Since "earnings and profits" generally
includes the full amount of any Fund dividend, and alternative minimum taxable
income does not include the portion of the Fund's dividend attributable to
municipal bonds which are not private activity bonds, the difference will be
included in the calculation of the corporation's alternative minimum tax.
Shareholders are urged to consult their own tax advisers to determine
whether they are subject to alternative minimum tax or the corporate
alternative minimum tax and, if so, the tax treatment of dividends paid by the
Fund.
Dividends of the Fund representing net interest income earned on some
temporary investments and any realized net short-term gains are taxed as
ordinary income. Distributions representing net long-term capital gains
realized by the Fund, if any, will be taxable as long-term capital gains
regardless of the length of time shareholders have held their Shares.
These tax consequences apply whether dividends are received in cash or as
additional Shares. Information on the tax status of dividends and
distributions is provided annually.
OTHER CLASSES OF SHARES
The Fund has the ability to offer three classes of shares: FFB (Class B)
Shares and Class C Shares for individuals and other customers of First Union
or other financial institutions, and Trust Shares for institutional investors.
Trust Shares are sold to accounts for which First Union or other
financial institutions act in a fiduciary or agency capacity at net asset
value without a sales charge at a minimum investment of $1,000. Trust Shares
are not sold pursuant to a Rule 12b-1 plan.
Class C Shares are sold to customers of First Union and others at net
asset value plus a maximum contingent deferred sales charge of 4.00% at a
minimum investment of $1,000. Class C Shares are distributed pursuant to a
Rule 12b-1 Plan adopted by the Trust, whereby the Distributor is paid a fee of
.75 of 1%.
The stated advisory fee is the same for all classes of the Fund.
Financial institutions and brokers providing sales and/or administrative
services may receive different compensation with respect to one class of
shares than with respect to another class of shares of the Fund.
The amount of dividends payable to FFB (Class B) Shares and Class C
Shares will be less than those payable to Trust Shares by the difference
between distribution expenses borne by the shares of each respective class.
- ---------------------------------------------------------
- ---------------------------------------------------------
FFB SHARES
237 Park Avenue
New York, New York 10017
FIRST UNION HIGH GRADE
TAX FREE PORTFOLIO
Federated Investors Tower
Pittsburgh, Pennsylvania 15222-3779
DISTRIBUTOR
Federated Securities Corp.
Federated Investors Tower
Pittsburgh, Pennsylvania 15222-3779
INVESTMENT ADVISER
First Union National Bank of North Carolina
One First Union Center
301 S. College Street
Charlotte, North Carolina 28288
CUSTODIAN, TRANSFER AGENT, AND
DIVIDEND DISBURSING AGENT
State Street Bank and Trust Company
P.O. Box 8609
Boston, Massachusetts 02266-8609
LEGAL COUNSEL TO
THE INDEPENDENT TRUSTEES
Sullivan & Worcester
1025 Connecticut Ave., N.W.
Washington, D.C. 20036
LEGAL COUNSEL TO THE TRUST
Houston, Houston & Donnelly
2510 Centre City Tower
Pittsburgh, Pennsylvania 15222
INDEPENDENT AUDITORS
KPMG Peat Marwick
One Mellon Bank Center
Pittsburgh, Pennsylvania 15219
FOR SHAREHOLDER INQUIRIES:
FFB Funds Distributor, Inc.
P.O. Box 4490
Grand Central Station
New York, New York 10164-2294
- ------------------------------------------------
TABLE OF CONTENTS
Summary...................................... 2
Summary of Fund Expenses..................... 3
Financial Highlights......................... 5
Investment Objective and Policies............ 7
Other Investment Policies.................... 9
Shareholder Guide............................ 11
Purchase of Shares........................... 13
Redemption of Shares......................... 15
Management of the Trust...................... 18
Fees and Expenses............................ 19
Shareholder Rights and Privileges............ 20
Distributions and Taxes...................... 21
Tax Information.............................. 22
Other Classes of Shares...................... 23
---------------------------------------
FFB
---------------------------------------
SHARES
---------------------------------------
FFB SHARES
OF THE
FIRST UNION
HIGH GRADE
TAX FREE
PORTFOLIO
PROSPECTUS
February 28, 1994
FFB SHARES OF THE FIRST UNION HIGH GRADE TAX FREE PORTFOLIO
(FORMERLY, THE FIRST UNION INSURED TAX FREE PORTFOLIO)
A PORTFOLIO OF FIRST UNION FUNDS
(CLASS B INVESTMENT SHARES)
STATEMENT OF ADDITIONAL INFORMATION
This Statement of Additional Information should be read with the
prospectus of FFB Shares of the First Union High Grade Tax Free
Portfolio, dated February 28, 1994. This Statement is not a prospectus
itself. To receive a copy of the prospectus, write FFB Funds
Distributor Inc., P.O. Box 4490, Grand Central Station, New York, New
York 10164-2294 or call (800) 437-8790.
FEDERATED INVESTORS TOWER
PITTSBURGH, PENNSYLVANIA 15222-3779
Statement dated February 28, 1994
[LOGO] FEDERATED SECURITIES CORP.
---------------------------------------------------------
Distributor
A subsidiary of FEDERATED INVESTORS
TABLE OF CONTENTS
- --------------------------------------------------------------------------------
GENERAL INFORMATION ABOUT THE FUND 1
- ---------------------------------------------------------------
INVESTMENT OBJECTIVE AND POLICIES 1
- ---------------------------------------------------------------
Acceptable Investments 1
When-Issued and Delayed Delivery
Transactions 1
Temporary Investments 1
Lending of Portfolio Securities 2
Portfolio Turnover 2
Municipal Bond Insurance 2
Municipal Bond Insurers 3
Investment Limitations 4
TRUST MANAGEMENT 6
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Officers and Trustees 6
Fund Ownership 7
Trustee Liability 7
INVESTMENT ADVISORY SERVICES 7
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Adviser to the Fund 7
Advisory Fees 8
BROKERAGE TRANSACTIONS 8
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ADMINISTRATIVE SERVICES 8
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PURCHASING SHARES 8
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Distribution Plan 9
DETERMINING NET ASSET VALUE 10
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Determining Market Value of Securities 10
Valuing Municipal Bonds 10
REDEEMING SHARES 10
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Redemption in Kind 10
TAX STATUS 11
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The Fund's Tax Status 11
TOTAL RETURN 11
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YIELD 11
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TAX EQUIVALENT YIELD 12
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Tax Equivalency Table 12
PERFORMANCE COMPARISONS 12
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FINANCIAL STATEMENTS 13
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APPENDIX 14
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GENERAL INFORMATION ABOUT THE FUND
- --------------------------------------------------------------------------------
First Union High Grade Tax Free Portfolio (the "Fund") is a portfolio in First
Union Funds (the "Trust"). The Trust was established as a Massachusetts business
trust under a Declaration of Trust dated August 30,1984. The name of the Fund
was changed from "First Union Insured Tax Free Portfolio" to "First Union High
Grade Tax Free Portfolio" effective February 28, 1994. On January 4, 1993, the
name of the Trust was changed from "The Salem Funds" to "First Union Funds."
Prior to that, the Fund had changed its name from "The Salem Tax Free Portfolio"
to "The Salem Insured Tax Free Portfolio" on January 9, 1992.
Shares of the Fund are offered in three classes: Trust Shares, Class B
Investment Shares and Class C Investment Shares (individually and collectively
referred to as ``Shares''). FFB Shares represent interests in the Class B
Shares. This Statement of Additional Information relates only to FFB Shares of
the Fund.
INVESTMENT OBJECTIVE AND POLICIES
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The Fund's investment objective is to provide a high level of federally tax free
income that is consistent with preservation of capital. The objective cannot be
changed without approval of shareholders.
ACCEPTABLE INVESTMENTS
The Fund invests primarily in municipal bonds that are covered by insurance
guaranteeing the timely payment of principal and interest.
CHARACTERISTICS
The municipal bonds in which the Fund invests have the characteristics
set forth in the prospectus.
If ratings made by Moody's Investors Service, Inc. ("Moody's") or
Standard & Poor's Corporation ("S&P") change because of changes in those
organizations or in their rating systems, the Fund will try to use
comparable ratings as standards in accordance with the investment
policies described in the prospectus.
WHEN-ISSUED AND DELAYED DELIVERY TRANSACTIONS
The Fund engages in when-issued and delayed delivery transactions only for
the purpose of acquiring portfolio securities consistent with the Fund's
investment objective and policies, not for investment leverage.
These transactions are made to secure what is considered to be an advantageous
price and yield for the Fund. Settlement dates may be a month or more after
entering into these transactions, and the market values of the securities
purchased may vary from the purchase prices.
No fees or expenses, other than normal transaction costs, are incurred. However,
liquid assets of the Fund sufficient to make payment for the securities to be
purchased are segregated on the Fund's records at the trade date. These
securities are marked to market daily and maintained until the transaction is
settled.
The Fund may engage in these transactions to an extent that would cause the
segregation of an amount up to 20% of the total value of its assets.
TEMPORARY INVESTMENTS
The Fund may also invest in temporary investments from time to time for
defensive purposes.
The Fund might invest in temporary investments:
as a reaction to market conditions;
while waiting to invest proceeds of sales of Shares or portfolio securities,
although generally proceeds from sales of Shares will be invested in municipal
bonds as quickly as possible; or
in anticipation of redemption requests.
The Fund will not purchase temporary investments (other than securities of the
U.S. government, its agencies, or instrumentalities) if, as a result of the
purchase, more than 25% of the value of its total assets would be invested in
any one industry. However, the Fund may, for temporary defensive purposes,
invest more than 25% of the value of its assets in cash or cash items (including
bank time and demand deposits, such as certificates of deposit), U.S. Treasury
bills, or securities issued or guaranteed by the U.S. government, its agencies,
or instrumentalities, or instruments secured by these money market instruments,
such as repurchase agreements.
REPURCHASE AGREEMENTS
Repurchase agreements are arrangements in which banks, broker/dealers,
and other recognized financial institutions sell U.S. government
securities or certificates of deposit to the Fund and agree at the time
of sale to repurchase them at a mutually agreed upon time and price
within one year from the date of acquisition. The Fund or its custodian
will take possession of the securities subject to repurchase agreements.
To the extent that the original seller does not repurchase the securities
from the Fund, the Fund could receive less than the repurchase price on
any sale of such securities. In the event that such a defaulting seller
filed for bankruptcy or became insolvent, disposition of such securities
by the Fund might be delayed pending court action. The Fund believes that
under the regular procedures normally in effect for custody of the Fund's
portfolio securities subject to repurchase agreements, a court of
competent jurisdiction would rule in favor of the Fund and allow
retention or disposition of such securities. The Fund may only enter into
repurchase agreements with banks and other recognized financial
institutions, such as broker/dealers, which are found by the Fund's
adviser to be creditworthy pursuant to guidelines established by the
Board of Trustees ("Trustees").
From time to time, such as when suitable municipal bonds are not
available, the Fund may invest a portion of its assets in cash. Any
portion of the Fund's assets maintained in cash will reduce the amount of
assets in municipal bonds and thereby reduce the Fund's yield.
REVERSE REPURCHASE AGREEMENTS
The Fund may also enter into reverse repurchase agreements. This
transaction is similar to borrowing cash. In a reverse repurchase
agreement, the Fund transfers possession of a portfolio instrument to
another person, such as a financial institution, broker, or dealer, in
return for a percentage of the instrument's market value in cash, and
agrees that on a stipulated date in the future the Fund will repurchase
the portfolio instrument by remitting the original consideration plus
interest at an agreed upon rate. The use of reverse repurchase agreements
may enable the Fund to avoid selling portfolio instruments at a time when
a sale may be deemed to be disadvantageous, but the ability to enter into
reverse repurchase agreements does not ensure that the Fund will be able
to avoid selling portfolio instruments at a disadvantageous time.
When effecting reverse repurchase agreements, liquid assets of the Fund,
in a dollar amount sufficient to make payment for the obligations to be
purchased, are segregated at the trade date. These securities are marked
to market daily and maintained until the transaction is settled.
LENDING OF PORTFOLIO SECURITIES
The collateral received when the Fund lends portfolio securities must be valued
daily and, should the market value of the loaned securities increase, the
borrower must furnish additional collateral to the Fund. During the time
portfolio securities are on loan, the borrower pays the Fund any dividends or
interest paid on such securities. Loans are subject to termination at the option
of the Fund or the borrower. The Fund may pay reasonable administrative and
custodial fees in connection with a loan and may pay a negotiated portion of the
interest earned on the cash or equivalent collateral to the borrower or placing
broker. The Fund does not have the right to vote securities on loan, but would
terminate the loan and regain the right to vote if that were considered
important with respect to the investment.
PORTFOLIO TURNOVER
The Fund will not attempt to set or meet a portfolio turnover rate, since any
turnover would be incidental to transactions undertaken in an attempt to achieve
the Fund's investment objective. The portfolio turnover rates for the fiscal
year ended December 31, 1993 and the period ended December 31, 1992 were 14% and
7%, respectively.
MUNICIPAL BOND INSURANCE
The Fund may purchase two types of municipal bond insurance policies
("Policies") issued by municipal bond insurers. One type of Policy covers
certain municipal securities only during the period in which they are in the
Fund's portfolio. In the event that a municipal security covered by such a
Policy is sold from the Fund, the insurer of the relevant Policy will be liable
only for those payments of interest and principal which are then due and owing
at the time of sale.
The other type of policy covers municipal securities not only while they remain
in the Fund's portfolio but also until their final maturity, even if they are
sold out of the Fund's portfolio, so that the coverage may benefit all
subsequent holders of those municipal securities. The Fund will obtain insurance
which covers municipal securities until final maturity even after they are sold
out of the Fund's portfolio only if, in the judgment of the adviser, the Fund
would receive net proceeds from the sale of those securities, after deducting
the cost of such permanent insurance and related fees, significantly in excess
of the proceeds it would receive if such municipal securities were sold without
insurance. Payments received from municipal bond insurers may not be tax-exempt
income to shareholders of the Fund.
Depending upon the characteristics of the municipal security held by the Fund,
the annual premiums for the Policies are estimated to range from 0.10% to 0.25%
of the value of the municipal securities covered under the Policies, with an
average annual premium rate of approximately 0.175%.
The Fund may purchase Policies from Municipal Bond Investors Assurance Corp.
("MBIA"), AMBAC Indemnity Corporation ("AMBAC"), Financial Guaranty Insurance
Company ("FGIC"), each as described under "Municipal Bond Insurers," or any
other municipal bond insurer which is rated Aaa by Moody's or AAA by S&P. Each
Policy
guarantees the payment of principal and interest on those municipal securities
it insures. The Policies will have the same general characteristics and
features. A municipal security will be eligible for coverage if it meets certain
requirements set forth in a Policy. In the event interest or principal on an
insured municipal security is not paid when due, the insurer covering the
security will be obligated under its Policy to make such payment not later than
30 days after it has been notified by the Fund that such non-payment has
occurred.
MBIA, AMBAC, and FGIC will not have the right to withdraw coverage on securities
insured by their Policies so long as such securities remain in the Fund's
portfolio, nor may MBIA, AMBAC, or FGIC cancel their Policies for any reason
except failure to pay premiums when due. MBIA, AMBAC, and FGIC will reserve the
right at any time upon 90 days' written notice to the Fund to refuse to insure
any additional municipal securities purchased by the Fund after the effective
date of such notice. The Trustees will reserve the right to terminate any of the
Policies if it determines that the benefits to the Fund of having its portfolio
insured under such Policy are not justified by the expense involved.
Additionally, the Trustees reserve the right to enter into contracts with
insurance carriers other than MBIA, AMBAC, or FGIC, if such carriers are rated
Aaa by Moody's or AAA by S&P.
Under the Policies, municipal bond insurers unconditionally guarantee to the
Fund the timely payment of principal and interest on the insured municipal
securities when and as such payments shall become due but shall not be paid by
the issuer, except that in the event of any acceleration of the due date of the
principal by reason of mandatory or optional redemption (other than acceleration
by reason of mandatory sinking fund payments), default or otherwise, the
payments guaranteed will be made in such amounts and at such times as payments
of principal would have been due had there not been such acceleration. The
municipal bond insurers will be responsible for such payments less any amounts
received by the Fund from any trustee for the municipal bond holders or from any
other source. The Policies do not guarantee payment on an accelerated basis, the
payment of any redemption premium, the value for the Shares of the Fund, or
payments of any tender purchase price upon the tender of the municipal
securities. The Policies also do not insure against nonpayment of principal of
or interest on the securities resulting from the insolvency, negligence or any
other act or omission of the trustee or other paying agent for the securities.
However, with respect to small issue industrial development municipal bonds and
pollution control revenue municipal bonds covered by the Policies, the municipal
bond insurers guarantee the full and complete payments required to be made by or
on behalf of an issuer of such municipal securities if there occurs any change
in the tax-exempt status of interest on such municipal securities, including
principal, interest or premium payments, if any, as and when required to be made
by or on behalf of the issuer pursuant to the terms of such municipal
securities. A when-issued municipal security will be covered under the Policies
upon the settlement date of the original issue of such when-issued municipal
securities. In determining whether to insure municipal securities held by the
Fund, each municipal bond insurer has applied its own standard, which
corresponds generally to the standards it has established for determining the
insurability of new issues of municipal securities. This insurance is intended
to reduce financial risk, but the cost thereof and compliance with investment
restrictions imposed under the Policies and these guidelines will reduce the
yield to shareholders of the Fund.
If a Policy terminates as to municipal securities sold by the Fund on the date
of sale, in which event municipal bond insurers will be liable only for those
payments of principal and interest that are then due and owing, the provision
for insurance will not enhance the marketability of securities held by the Fund,
whether or not the securities are in default or subject to significant risk of
default, unless the option to obtain permanent insurance is exercised. On the
other hand, since issuer-obtained insurance will remain in effect as long as the
insured municipal securities are outstanding, such insurance may enhance the
marketability of municipal securities covered thereby, but the exact effect, if
any, on marketability cannot be estimated. The Fund generally intends to retain
any securities that are in default or subject to significant risk of default and
to place a value on the insurance, which ordinarily will be the difference
between the market value of the defaulted security and the market value of
similar securities of minimum high grade (i.e., rated A by Moody's or S&P) that
are not in default. To the extent that the Fund holds defaulted securities, it
may be limited in its ability to manage its investment and to purchase other
municipal securities. Except as described above with respect to securities that
are in default or subject to significant risk of default, the Fund will not
place any value on the insurance in valuing the municipal securities that it
holds.
MUNICIPAL BOND INSURERS
Municipal bond insurance may be provided by one or more of the following
insurers or any other municipal bond insurer which is rated Aaa by Moody's or
AAA by S&P.
MUNICIPAL BOND INVESTORS ASSURANCE CORP.
Municipal Bond Investors Assurance Corp. is a wholly-owned subsidiary of
MBIA, Inc., a Connecticut insurance company, which is owned by AEtna Life
and Casualty, Credit Local DeFrance CAECL, S.A., The Fund American
Companies, and the public. The investors of MBIA, Inc., are not obligated
to pay the obligations of MBIA. MBIA, domiciled in New York, is regulated
by the New York State Insurance Department and licensed to do business in
various states. The address of MBIA is 113 King Street, Armonk, New York,
10504, and its telephone number is (914) 273-4345. S&P has rated the
claims-paying ability of MBIA AAA.
AMBAC INDEMNITY CORPORATION
AMBAC Indemnity Corporation is a Wisconsin-domiciled stock insurance
company, regulated by the Insurance Department of Wisconsin, and licensed
to do business in various states. AMBAC is a wholly-owned subsidiary of
AMBAC, Inc., a financial holding company which is owned by the public.
Copies of certain statutorily required filings of AMBAC can be obtained
from AMBAC. The address of AMBAC's administrative offices is One State
Street Plaza, 17th Floor, New York, New York 10004, and its telephone
number is (212) 668-0340. S&P has rated the claims-paying ability of
AMBAC AAA.
FINANCIAL GUARANTY INSURANCE COMPANY
Financial Guaranty Insurance Company is a wholly-owned subsidiary of FGIC
Corporation, a Delaware holding company. FGIC Corporation is wholly-owned
by General Electric Capital Corporation. The investors of FGIC
Corporation are not obligated to pay the debts of or the claims against
Financial Guaranty. Financial Guaranty is subject to regulation by the
state of New York Insurance Department and is licensed to do business in
various states. The address of Financial Guaranty is 115 Broadway, New
York, New York 10006, and its telephone number is (212) 312-3000. S&P has
rated the claims-paying ability of Financial Guaranty AAA.
INVESTMENT LIMITATIONS
BUYING ON MARGIN
The Fund will not purchase any securities on margin, but may obtain such
short-term credits as may be necessary for the clearance of purchases and
sales of securities.
SELLING SHORT
The Fund will not make short sales of securities or maintain a short
position, unless at all times when a short position is open it owns an
equal amount of such securities or of securities which, without payment
of any further consideration, are convertible into or exchangeable for
securities of the same issue as, and equal in amount to, the securities
sold short.
The use of short sales will allow the Fund to retain certain bonds in its
portfolio longer than it would without such sales. To the extent the Fund
receives the current income produced by such bonds for a longer period
than it might otherwise, the Fund's investment objective of current
income is furthered.
ISSUING SENIOR SECURITIES AND BORROWING MONEY
The Fund will not issue senior securities, except that the Fund may
borrow money directly or through reverse repurchase agreements as a
temporary measure for extraordinary or emergency purposes in an amount up
to one-third of the value of its total assets, including the amount
borrowed, in order to meet redemption requests without immediately
selling portfolio instruments. Any such borrowings need not be
collateralized. The Fund will not purchase any securities while
borrowings in excess of 5% of the value of its total assets are
outstanding.
The Fund will not borrow money or engage in reverse repurchase agreements
for investment leverage purposes.
PLEDGING ASSETS
The Fund will not mortgage, pledge, or hypothecate any assets except to
secure permitted borrowings. In those cases, it may pledge assets having
a market value not exceeding the lesser of the dollar amounts borrowed or
15% of the value of total assets at the time of the borrowing.
INVESTING IN REAL ESTATE
The Fund will not buy or sell real estate, although it may invest in the
securities of companies whose business involves the purchase or sale of
real estate or in securities which are secured by real estate or
interests in real estate.
INVESTING IN COMMODITIES
The Fund will not purchase or sell commodities or commodity contracts.
RESTRICTED SECURITIES
The Fund will not invest more than 10% of its total assets in securities
subject to restrictions on resale under the federal securities laws.
UNDERWRITING
The Fund will not underwrite any issue of securities, except as it may be
deemed to be an underwriter under the Securities Act of 1933 in
connection with the sale of securities in accordance with its investment
objective, policies, and limitations.
LENDING CASH OR SECURITIES
The Fund will not lend any of its assets except that it may purchase or
hold money market instruments, including repurchase agreements and
variable amount demand master notes, in accordance with its investment
objective, policies and limitations and lend portfolio securities valued
at not more than 15% of its total assets to broker/dealers.
CONCENTRATION OF INVESTMENTS
The Fund will not invest more than 25% of the value of its total assets
in any one industry; except that it may invest more than 25% of its total
assets in securities issued or guaranteed by the U.S. government, its
agencies or instrumentalities and in industrial development bonds, as
long as they are not from the same facility or similar types of
facilities.
DIVERSIFICATION OF INVESTMENTS
With respect to 75% of the value of its total assets, the Fund will not
purchase securities of any one issuer (other than cash, cash items or
securities issued or guaranteed by the U.S. government, its agencies or
instrumentalities) if as a result more than 5% of the value of its total
assets would be invested in the securities of that issuer.
Under this limitation, each governmental subdivision, including states
and the District of Columbia, territories, possessions of the United
States, or their political subdivisions, agencies, authorities,
instrumentalities, or similar entities, will be considered a separate
issuer if its assets and revenues are separate from those of the
governmental body creating it and the security is backed only by its own
assets and revenues.
Industrial development bonds, backed only by the assets and revenues of a
nongovernmental issuer, are considered to be issued solely by that
issuer. If, in the case of an industrial development bond or
governmental-issued security, a governmental or other entity guarantees
the security, such guarantee would be considered a separate security
issued by the guarantor as well as the other issuer, subject to limited
exclusions allowed by the Investment Company Act of 1940.
INVESTING IN SECURITIES OF OTHER INVESTMENT COMPANIES
The Fund will purchase securities of investment companies only in
open-market transactions involving customary broker's commissions.
However, these limitations are not applicable if the securities are
acquired in a merger, consolidation, or acquisition of assets. It should
be noted that investment companies incur certain expenses, such as
management fees, and therefore, any investment by a Fund in shares of
another investment company would be subject to such duplicate expenses.
INVESTING IN ILLIQUID SECURITIES
The Fund will not invest more than 15% of its net assets in illiquid
securities, including repurchase agreements providing for settlement in
more than seven days after notice, and certain restricted securities not
determined by the Trustees to be liquid.
The above investment limitations cannot be changed without shareholder approval.
The following investment limitations, however, may be changed by the Trustees
without shareholder approval. Shareholders will be notified before any material
change in these policies becomes effective.
INVESTING IN ISSUERS WHOSE SECURITIES ARE OWNED BY OFFICERS AND TRUSTEES OF
THE TRUST
The Fund will not purchase or retain the securities of any issuer if the
officers and Trustees of the Trust or its investment adviser owning
individually more than 1/2 of 1% of the issuer's securities together own
more than 5% of the issuer's securities.
INVESTING IN NEW ISSUERS
The Fund will not invest more than 5% of its total assets in industrial
development bonds or other municipal securities where the principal and
interest are the responsibility of companies (or guarantors, where
applicable) with less than three years of continuous operations,
including the operation of any predecessor.
Although not fundamental restrictions or policies requiring a shareholder vote,
the Fund has also undertaken to comply with the following limitation to a state
securities authority for as long as the state authority requires and shares of
the Fund are registered for sale in that state.
INVESTING IN MINERALS
The Fund will not purchase interests in oil, gas, or other mineral
exploration or development programs or leases, although it may purchase
the securities of issuers which invest in or sponsor such programs.
Except with respect to borrowing money, if a percentage limitation is adhered to
at the time of investment, a later increase or decrease in percentage resulting
from any change in value or net assets will not result in a violation of such
restriction.
The Fund did not borrow money in excess of 5% of the value of its net assets in
the last fiscal year and has no present intent to do so in the coming fiscal
year.
For purposes of its policies and limitations, the Fund considers certificates of
deposit and demand and time deposits issued by a U.S. branch of a domestic bank
or savings and loan having capital, surplus, and undivided profits in excess of
$100,000,000 at the time of investment to be "cash items".
In addition, the Fund does not expect to invest more than 5% of its net assets
in the securities of other investment companies during the coming year.
TRUST MANAGEMENT
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OFFICERS AND TRUSTEES
Officers and Trustees of the Trust are listed with their address, principal
occupations, and present positions, including any affiliation with First Union
National Bank of North Carolina ("First Union"), Federated Investors, Federated
Securities Corp., or Federated Administrative Services.
<TABLE>
<CAPTION>
POSITIONS WITH PRINCIPAL OCCUPATIONS
NAME THE TRUST DURING PAST FIVE YEARS
<S> <C> <C>
James S. Howell Chairman of Retired Vice President of Lance Inc. (food manufacturing).
the Board and
Trustee
Gerald M. McDonnell Trustee Sales Representative with Nucor-Yamoto, Inc. (steel producer) (since
1988); formerly with Northwestern Steel & Wire Company (1986-1988).
Thomas L. McVerry Trustee Business and management adviser (since 1990); formerly, Vice President
(1989-1990) and member of the Board of Directors (1988-1990), Rexham
Industries, Inc. (diverse manufacturer); and Vice President, Finance and
Resources, Rexham Corporation (1979-1990).
William Walt Pettit* Trustee Principal in the law firm Holcomb and Pettit, P.A. (since 1988);
formerly with Clontz and Clontz (1980-1988).
Russell A. Salton, III, M.D. Trustee Chairman and Medical Director, and formerly, President (1990-1993),
Primary PhysicianCare, Inc.; formerly, President, Metrolina Family
Practice Group, P.A. (1982-1989).
Michael S. Scofield Trustee Attorney; formerly, Partner with Wardlow, Knox, Knox, Freeman & Scofield
(attorneys) (1982-1986).
Edward C. Gonzales* President, Vice President, Treasurer and Trustee, Federated Investors; Vice
Treasurer, President and Treasurer, Federated Advisers, Federated Management, and
and Trustee Federated Research; Executive Vice President, Treasurer, and Director,
Federated Securities Corp.; Chairman, Treasurer, and Trustee, Federated
Administrative Services; Vice President, Treasurer, and Trustee of
certain investment companies advised or distributed by affiliates of
Federated Investors.
Joseph S. Machi Vice President and Vice President, Federated Administrative Services; Director, Private
Assistant Treasurer Label Management, Federated Investors; Vice President and Assistant
Treasurer of certain investment companies for which Federated Securities
Corp. is the principal
distributor.
Peter J. Germain Secretary Corporate Counsel, Federated Investors.
</TABLE>
*This Trustee is deemed to be an "interested person" of the Trust as
defined in the Investment Company Act of 1940.
The address of the officers and Trustees of the Trust is Federated Investors
Tower, Pittsburgh, Pennsylvania 15222-3779.
FUND OWNERSHIP
Officers and Trustees own less than 1% of the Fund's outstanding Shares.
As of February 4, 1994, Trust Shares of the Fund were not being offered.
As of February 4, 1994, no shareholders of record owned 5% or more of the
outstanding Class B Investment Shares of the Fund.
As of February 4, 1994, no shareholders of record owned 5% or more of the
outstanding Class C Investment Shares of the Fund.
TRUSTEE LIABILITY
The Trust's Declaration of Trust provides that a Trustee will only be liable for
his own wilful defaults, but shall not be liable for errors of judgment or
mistakes of fact or law. If reasonable care has been exercised in the selection
of officers, agents, employees, or investment advisers, a Trustee shall not be
liable for any neglect or wrongdoing of any such person. However, a Trustee is
not protected against any liability to which he would otherwise be subject by
reason of wilful misfeasance, bad faith, gross negligence, or reckless disregard
of the duties involved in the conduct of his office.
INVESTMENT ADVISORY SERVICES
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ADVISER TO THE FUND
The Fund's investment adviser (the "Adviser") is First Union National Bank of
North Carolina. It provides investment advisory services through its Capital
Management Group. First Union is a subsidiary of First Union Corporation, a bank
holding company headquartered in Charlotte, North Carolina.
The Adviser shall not be liable to the Trust, the Fund or any shareholder of the
Fund for any losses that may be sustained in the purchase, holding, or sale of
any security, or for anything done or omitted by it, except acts or omissions
involving wilful misfeasance, bad faith, gross negligence, or reckless disregard
of the duties imposed upon it by its contract with the Trust.
ADVISORY FEES
For its advisory services, the Adviser receives an annual investment advisory
fee as described in the prospectus.
For the fiscal year ended December 31, 1993 and for the period from February 21,
1992 (commencement of operations) to December 31, 1992, the Adviser earned
advisory fees of $643,946 and $356,258, of which $280,300 and $269,964 were
voluntarily waived, respectively.
STATE EXPENSE LIMITATIONS
The Adviser has undertaken to comply with the expense limitations
established by certain states for investment companies whose shares are
registered for sale in those states. If the Fund's normal operating
expenses (including the investment advisory fee, but not including
brokerage commissions, interest, taxes, and extraordinary expenses)
exceed 2-1/2% per year of the first $30 million of average net assets, 2%
per year of the next $70 million of average net assets, and 1-1/2% per
year of the remaining average net assets, the Adviser will reimburse the
Fund for its expenses over the limitation.
If the Fund's monthly projected operating expenses exceed this
limitation, the investment advisory fee paid will be reduced by the
amount of the excess, subject to an annual adjustment. If the expense
limitation is exceeded, the amount to be reimbursed by the Adviser will
be limited, in any single fiscal year, by the amount of the investment
advisory fee.
This arrangement is not part of the advisory contract and may be amended
or rescinded in the future.
BROKERAGE TRANSACTIONS
- --------------------------------------------------------------------------------
When selecting brokers and dealers to handle the purchase and sale of portfolio
instruments, the Adviser looks for prompt execution of the order at a favorable
price. In working with dealers, the Adviser will generally utilize those who are
recognized dealers in specific portfolio instruments, except when a better price
and execution of the order can be obtained elsewhere. The Adviser may, from time
to time, use brokers affiliated with the Trust, Federated Securities Corp., or
their affiliates. The Adviser makes decisions on portfolio transactions and
selects brokers and dealers subject to review by the Trustees.
The Adviser may select brokers and dealers who offer brokerage and research
services. These services may be furnished directly to the Fund or to the Adviser
and may include:
advice as to the advisability of investing in securities;
security analysis and reports;
economic studies;
industry studies;
receipt of quotations for portfolio evaluations; and
similar services.
The Adviser and its affiliates exercise reasonable business judgment in
selecting brokers who offer brokerage and research services to execute
securities transactions. They determine in good faith that commissions charged
by such persons are reasonable in relationship to the value of the brokerage and
research services provided.
Research services provided by brokers and dealers may be used by the Adviser in
advising the Fund and other accounts. To the extent that receipt of these
services may supplant services for which the Adviser or its affiliates might
otherwise have paid, it would tend to reduce their expenses.
ADMINISTRATIVE SERVICES
- --------------------------------------------------------------------------------
Federated Administrative Services, a subsidiary of Federated Investors, provides
administrative personnel and services to the Fund for a fee as described in the
prospectus.
For the fiscal year ended December 31, 1993 and for the period from February 21,
1992 (commencement of operations) to December 31, 1992, the Fund incurred
$112,663 and $65,451 in administrative service costs, of which $0 and $25,395
were waived, respectively.
PURCHASING SHARES
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Shares are sold at their net asset value, plus a sales charge, if applicable, on
days the New York Stock Exchange and the Federal Reserve Wire System are open
for business. The procedure for purchasing FFB Shares is explained in the
prospectus under "Purchase of Shares."
REDUCING THE SALES CHARGE
The sales charge can be reduced on the purchase of FFB Shares through:
quantity discounts and accumulated purchases;
using the reinvestment privilege; or
concurrent purchases.
QUANTITY DISCOUNTS AND ACCUMULATED PURCHASES
Larger purchases reduce the sales charge paid. The Fund will combine
purchases of Shares made on the same day by the investor, his spouse, and
his children under age 21 when it calculates the sales charge.
If an additional purchase of Shares is made, the Fund will consider the
previous purchases still invested in the Fund. For example, if a
shareholder already owns Shares having a current value at the public
offering price of $90,000, and then purchases $10,000 more at the current
public offering price, the sales charge on the additional purchase
according to the schedule now in effect would be 3.50%, not 4.00%.
To receive the sales charge reduction, Federated Securities Corp. ("FSC")
must be notified by the shareholder in writing at the time the purchase
is made that Shares are already owned or that purchases are being
combined. The Fund will reduce the sales charge after it confirms the
purchases.
REINVESTMENT PRIVILEGE
If Shares in the Fund have been redeemed, the shareholder has a one-time
right, within 30 days, to reinvest the redemption proceeds at the
next-determined net asset value without any sales charge. FSC must be
notified by the shareholder in writing or by his financial institution of
the reinvestment in order to eliminate a sales charge. If the shareholder
redeems his Shares in the Fund, there may be tax consequences.
CONCURRENT PURCHASES
For purposes of qualifying for a sales charge reduction, a shareholder
has the privilege of combining concurrent purchases of two or more Funds
in the Trust, the purchase price of which includes a sales charge. For
example, if a shareholder concurrently invested $30,000 in shares of one
of the other Funds with a sales charge, and $70,000 in Shares of this
Fund, the sales charge would be reduced.
To receive this sales charge reduction, FSC must be notified by the
shareholder in writing or by his financial institution at the time the
concurrent purchases are made. The Fund will reduce the sales charge
after it confirms the purchases.
DISTRIBUTION PLAN
The Trust has adopted a distribution plan (the "Plan") pursuant to Rule
12b-1 which was promulgated by the Securities and Exchange Commission ("SEC")
pursuant to the Investment Company Act of 1940. The Plan permits the payment of
fees to brokers for distribution and administrative services and to
administrators for administrative services as to FFB (Class B) Shares. The Plan
is designed to (i) stimulate brokers to provide distribution and administrative
support services to the Fund and holders of FFB (Class B) Shares and (ii)
stimulate administrators to render administrative support services to the Fund
and holders of FFB (Class B) Shares. The administrative services are provided
by a representative who has knowledge of the shareholder's particular
circumstances and goals, and include, but are not limited to: providing office
space, equipment, telephone facilities, and various personnel, including
clerical, supervisory, and computer, as necessary or beneficial to establish
and maintain shareholder accounts and records; processing purchase and
redemption transactions and automatic investments of client account cash
balances; answering routine client inquiries regarding FFB (Class B) Shares;
assisting clients in changing dividend options, account designations, and
addresses; and providing such other services as the Fund reasonably requests
for its FFB (Class B) Shares.
By adopting the Plan, the Trustees expect that the Fund will be able to achieve
a more predictable flow of cash for investment purposes and to meet redemptions.
This will facilitate more efficient portfolio management and assist the Fund in
seeking to achieve its investment objectives. By identifying potential investors
whose needs are served by the Fund's objectives, and properly servicing these
accounts, the Fund may be able to curb sharp fluctuations in rates of
redemptions and sales.
Other benefits which the Trust hopes to achieve through the Plan include, but
are not limited to, the following: (1) an efficient and effective administrative
system; (2) a more efficient use of shareholder assets by having them rapidly
invested in the Fund, through an automatic transfer of funds from a demand
deposit account to an investment account, with a minimum of delay and
administrative detail; and (3) an efficient and reliable shareholder records
system with prompt responses to shareholders' requests and inquiries concerning
their accounts.
State securities laws governing the ability of depository institutions to act as
underwriters or distributors of securities may differ from interpretations given
to the Glass-Steagall Act and, therefore, banks and financial institutions may
be required to register as dealers pursuant to state law.
Although state securities laws differ, administrators in some states may be
required to register as brokers and dealers pursuant to state law.
For the fiscal year ended December 31, 1993, and for the period from February
21, 1992 (commencement of operations) to December 31, 1992, brokers and
administrators (financial institutions) received fees in the amount of $456,290
and $178,122, of which $2,256 and $149,539, were waived, respectively, pursuant
to the Plan.
ADMINISTRATIVE ARRANGEMENTS
FSC may also pay financial institutions a fee based upon the average net
asset value of Shares of their customers for providing administrative
services. This fee is in addition to the amounts paid under the Plan for
administrative services, and if paid, will be reimbursed by the Adviser
and not the Fund.
DETERMINING NET ASSET VALUE
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Net asset value of Shares generally changes each day. The days on which net
asset value of Shares is calculated by the Fund are described in the prospectus.
DETERMINING MARKET VALUE OF SECURITIES
Market values of the Fund's portfolio securities are determined as follows:
according to the last sale price on a national securities exchange, if
available;
in the absence of recorded sales for equity securities, according to the mean
between the current closing bid and asked prices and for bonds and other fixed
income securities as determined by an independent pricing service;
for short-term obligations, according to the mean between bid and asked prices,
as furnished by an independent pricing service, or for short-term obligations
with remaining maturities of less than 60 days at the time of purchase, at
amortized cost unless the Trustees determines this is not fair value; or
at fair value as determined in good faith by the Trustees.
Prices provided by independent pricing services may be determined without
relying exclusively on quoted prices. Pricing services may consider:
yield;
quality;
coupon rate;
maturity;
type of issue;
trading characteristics; and
other market data.
VALUING MUNICIPAL BONDS
The Trustees use an independent pricing service to value municipal bonds. The
independent pricing service takes into consideration yield, stability, risk,
quality, coupon rate, maturity, type of issue, trading characteristics, special
circumstances of a security or trading market, and any other factors or market
data it considers relevant in determining valuations for normal institutional
size trading units of debt securities, and does not rely exclusively on quoted
prices.
REDEEMING SHARES
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The Fund redeems Shares at the next computed net asset value after the Fund
receives the redemption request. Redemptions will be made on days on which the
Fund computes its net asset values. Redemption requests cannot be executed on
days on which the New York Stock Exchange is closed or on federal holidays when
wire transfers are restricted. Redemption procedures are explained in the
prospectus under "Redemption of Shares."
REDEMPTION IN KIND
The Trust has elected to be governed by Rule 18f-1 of the Investment Company Act
of 1940, under which the Fund is obligated to redeem Shares for any one
shareholder in cash only up to the lesser of $250,000 or 1% of the respective
class' net asset value during any 90-day period.
Any redemption beyond this amount will also be in cash unless the Trustees
determine that payments should be in kind. In such a case, the Fund will pay all
or a portion of the remainder of the redemption in portfolio instruments, valued
in the same way as the Fund determines net asset value. The portfolio
instruments will be selected in a manner that the Trustees deem fair and
equitable.
Redemption in kind is not as liquid as a cash redemption. If redemption is made
in kind, shareholders receiving their securities and selling them before their
maturity could receive less than the redemption value of their securities and
could incur certain transaction costs.
TAX STATUS
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THE FUND'S TAX STATUS
The Fund will pay no federal income tax because it expects to meet the
requirements of Subchapter M of the Internal Revenue Code, as amended,
applicable to regulated investment companies and to receive the special tax
treatment afforded to such companies. To qualify for this treatment, the Fund
must, among other requirements:
derive at least 90% of its gross income from dividends, interest, and gains from
the sale of securities;
derive less than 30% of its gross income from the sale of securities held less
than three months;
invest in securities within certain statutory limits; and
distribute to its shareholders at least 90% of its net income earned during the
year.
TOTAL RETURN
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The Fund's average annual total returns for Class B Investment Shares (FFB
Shares) for the one-year period ended December 31, 1993 and for the period from
February 25, 1992 (start of performance) to December 31, 1993 were 8.76% and
9.82%, respectively.
The Fund's cumulative total return for Class C Investment Shares for the period
from January 12, 1993 (start of performance) to December 31, 1993 was 8.20%.
Trust Shares were not being offered during the period ended December 31, 1993.
The average annual total return for all classes of Shares of the Fund is the
average compounded rate of return for a given period that would equate a $1,000
initial investment to the ending redeemable value of that investment. The ending
redeemable value is computed by multiplying the number of shares owned at the
end of the period by the net asset value per share at the end of the period. The
number of shares owned at the end of the period is based on the number of shares
purchased at the beginning of the period with $1,000 less any applicable sales
load, adjusted over the period by any additional shares, assuming the monthly
reinvestment of all dividends and distributions.
Cumulative total return reflects the Class C Investment Shares' total
performance over a specific period of time. This total return assumes and is
reduced by the payment of the maximum sales load, if applicable. The Class C
Investment Shares' total return is representative of only 11.5 months of
investment activity since the commencement of operations.
YIELD
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The Fund's yield for Class B Investment Shares (FFB Shares) for the thirty-day
period ended December 31, 1993 was 4.23%. The Fund's yield for Class C
Investment Shares for the thirty-day period ended December 31, 1993 was 3.92%.
Trust Shares were not being offered during the period ended December 31, 1993.
The yield for all classes of Shares of the Fund is determined by dividing the
net investment income per share (as defined by the SEC) earned by each class of
Shares over a thirty-day period by the maximum offering price per share of each
class on the last day of the period. This value is annualized using semi-annual
compounding. This means that the amount of income generated during the
thirty-day period is assumed to be generated each month over a twelve-month
period and is reinvested every six months. The yield does not necessarily
reflect income actually earned by each class because of certain adjustments
required by the SEC and therefore, may not correlate to the dividends or other
distributions paid to shareholders.
To the extent that financial institutions and brokers/dealers charge fees in
connection with services provided in conjunction with an investment in all
classes of Shares, the performance will be reduced for those shareholders paying
those fees.
TAX EQUIVALENT YIELD
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The Fund's tax equivalent yield for Class B Investment Shares (FFB Shares) for
the thirty-day period ended December 31, 1993 was 5.88%. The Fund's tax
equivalent yield for Class C Investment Shares for the thirty-day period ended
December 31, 1993 was 5.44%. Trust Shares were not being offered during the
period ended December 31, 1993.
The tax equivalent yield for all classes of Shares is calculated similarly to
the yield, but is adjusted to reflect the taxable yield that any class would
have had to earn to equal its actual yield, assuming a 28% federal tax rate and
assuming that income is 100% tax-exempt on a federal, state, and local basis.
TAX-EQUIVALENCY TABLE
Each class of Shares may also use a tax equivalency table in advertising and
sales literature. The interest earned by the municipal bonds in the portfolio
generally remains free from federal regular income tax,* and is often free from
state and local taxes as well. As the table below indicates, a "tax free"
investment is an attractive choice for investors, particularly in times of
narrow spreads between tax-free and taxable yields.
<TABLE>
<S> <C> <C> <C> <C> <C>
TAXABLE YIELD EQUIVALENT FOR 1994
FEDERAL INCOME TAX BRACKET:
15.00% 28.00% 31.00% 36.00% 39.60%
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JOINT $1- $38,001- $91,851- $140,001- Over
RETURN: 38,000 91,850 140,000 250,000 $ 250,000
SINGLE $1- $22,751- $55,101- $115,001- Over
RETURN: 22,750 55,100 115,000 250,000 $ 250,000
- ---------------------------------------------------------------------------------
TAX-EXEMPT YIELD TAXABLE YIELD EQUIVALENT
- ---------------------------------------------------------------------------------
2.00% 2.35% 2.78% 2.90% 3.13% 3.31%
2.50 2.94 3.47 3.62 3.91 4.14
3.00 3.53 4.17 4.35 4.69 4.97
3.50 4.12 4.86 5.07 5.47 5.79
4.00 4.71 5.56 5.80 6.25 6.62
4.50 5.29 6.25 6.52 7.03 7.45
5.00 5.88 6.94 7.25 7.81 8.28
5.50 6.47 7.64 7.97 8.59 9.11
6.00 7.06 8.33 8.70 9.38 9.93
6.50 7.65 9.03 9.42 10.16 10.76
7.00 8.24 9.72 10.14 10.94 11.59
7.50 8.82 10.42 10.87 11.72 12.42
8.00 9.41 11.11 11.59 12.50 13.25
</TABLE>
Note: The maximum marginal tax rate for each bracket was used in calculating the
taxable yield equivalent.
The chart above is for illustrative purposes only. It is not an indicator of
past or future performance of any class of Shares.
*Some portion of each class' income may be subject to the federal alternative
minimum tax and state and local taxes.
PERFORMANCE COMPARISONS
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The performance of all classes of Shares depends upon such variables as:
portfolio quality;
average portfolio maturity;
type of instruments in which the portfolio is invested;
changes in interest rates and market value of portfolio securities;
changes in the Fund's or any class of Shares' expenses; and
various other factors.
Each class of shares' performance fluctuates on a daily basis largely because
net earnings and offering price per Share fluctuate daily. Both net earnings and
offering price per Share are factors in the computation of yield and total
return.
Investors may use financial publications and/or indices to obtain a more
complete view of the Fund's performance. When comparing performance, investors
should consider all relevant factors such as the composition of any index used,
prevailing market conditions, portfolio compositions of other funds, and methods
used to value portfolio securities and compute offering price. The financial
publications and/or indices which the Fund uses in advertising may include:
LIPPER ANALYTICAL SERVICES, INC. ranks funds in various fund categories by
making comparative calculations using total return. Total return assumes the
reinvestment of all income dividends and capital gains distributions, if any.
From time to time, the Fund will quote its Lipper ranking in the "general
municipal bond funds" category in advertising and sales literature.
_MORNINGSTAR, INC., an independent rating service, is the publisher of the
bi-weekly Mutual Fund Values. Mutual Fund Values rates more than 1,000
NASDAQ-listed mutual funds of all types, according to their risk-adjusted
returns. The maximum rating is five stars, and ratings are effective for two
weeks.
_LEHMAN BROTHERS INSURED BOND INDEX reflects total performance of the Insured
Bond sector of the Lehman Municipal Bond Index. The index includes all bond
insurers with Aaa/AAA ratings.
Advertisements and other sales literature for all classes of Shares may quote
total returns which are calculated on non-standardized base periods. These total
returns represent the historic change in the value of an investment in any class
of Shares based on the monthly reinvestment of dividends over a specified period
of time. In addition, advertisements and sales literature for the Fund may
include charts and other illustrations which depict the hypothetical growth of
an investment in a systematic investment plan.
Advertisements may quote performance information which does not reflect the
effect of the sales load.
FINANCIAL STATEMENTS
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The financial statements for the First Union High Grade Tax Free Portfolio
for the fiscal year ended December 31, 1993 are incorporated herein by
reference from the Trust's Annual Report, dated December 31, 1993 (File Nos.
2-94560 and 811-4154). A copy of the Annual Report may be obtained without
charge by contacting the Fund at the address located on the back cover of the
prospectus.
APPENDIX
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STANDARD & POOR'S CORPORATION BOND RATING DEFINITIONS
AAA--Debt rated AAA has the highest rating assigned by Standard & Poor's
Corporation. Capacity to pay interest and repay principal is extremely strong.
AA--Debt rated AA has a very strong capacity to pay interest and repay
principal and differs from the higher rated issues only in small degree.
A--Debt rated A has a strong capacity to pay interest and repay principal,
although it is somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions than debt in higher rated categories.
MOODY'S INVESTORS SERVICE, INC. BOND RATING DEFINITIONS
Aaa--Bonds which are rated Aaa are judged to be of the best quality. They carry
the smallest degree of investment risk and are generally referred to as "gilt
edged." Interest payments are protected by a large or by an exceptionally stable
margin and principal is secure. While the various protective elements are likely
to change, such changes as can be visualized are most unlikely to impair the
fundamentally strong position of such issues.
Aa--Bonds which are rated Aa are judged to be of high quality by all standards.
Together with the Aaa group, they comprise what are generally known as high
grade bonds. They are rated lower than the best bonds because margins of
protection may not be as large as in Aaa securities or fluctuation of protective
elements may be of greater amplitude or there may be other elements present
which make the long-term risks appear somewhat larger than in Aaa securities.
A--Bonds which are rated A possess many favorable investment attributes and are
to be considered as upper medium grade obligations. Factors giving security to
principal and interest are considered adequate but elements may be present which
suggest a susceptibility to impairment sometime in the future.
3031002B (2/94)
